How to Properly Insure Your Real Estate Assets with Oleg Kotov

How to Properly Insure Your Real Estate Assets with Oleg Kotov

[00:00:00] Hey everyone, and welcome to another episode of the everything real estate investing show with Sean Pan. Today, we have Oleg Kotov. Oleg is an insurance agent and today, he’s going to be telling us everything we need to know about insurance. We’ll cover common questions like how much coverage do we need? What types of coverage do we need? And why an insurance policy can be more effective than getting a single-member LLC. If you enjoy this episode, subscribe to the show and leave us a five-star review. We release episodes every Wednesday and Sunday. Enjoy!

Sean: [00:00:46] Thank you so much for coming on my show today. I was super impressed by hearing your presentation that Saturday couple weeks ago and I really want to bring you on the show to you know learn some more about insurance policies. Before we get started, go ahead and introduce yourself and let us know who you are and tell us what you do.

Oleg: [00:01:02] Hi Sean and thank you very much for having me on your show. My name is Oleg Kotov and I’m a partner with the Hughes Insurance Agency located in Los Altos, California. I have Masters in architecture and after spending about 17 years in construction field and about 12 years working in Global Security operations for greatest tech companies of bay area. In 2012, I decided to switch my interest to insurance industry to help ordinary people and businesses, protect their assets and I have been enjoying doing so since.

Sean: [00:01:42] Very cool. We’re gonna start with a very unique question. What’s the difference between getting insurance and just getting like a single-member LLC for your asset protection?

Oleg: [00:01:51] Thank you for this question and actually this question is very interesting and very important. I would do my job and answer as an insurance professional. Because this question, definitely related to legal fields to attorneys, but I would tell it as I understand from my perspective. It’s obviously two well-known ways to defend your assets, real estate assets specifically. So some people commonly do just create an LLC, you hoping that it would be enough to defend because they kind of hanging behind, the limited liability corporation. But in fact, in case if it’s a single-member LLC, I don’t believe that it protects you well and as much as I know from my friends who are lawyers, any person who is trying to hide behind this LLC is easily traceable. So it’s always a personal signature. It’s always a persona behind, so it’s easy to crack. Creating of LLC has a course behind. So say in California unless it would cost you about $800 and taxes annually. In different states like Delaware or New York, it would be different price so it’s always balancing them between three hundreds and sometimes would be really expensive like in state of New York, it could be up to $4500 a year. So this is one way we can defend our assets.

Another way is insurance approach and insurance offers definitely less expensive options. I would say that general liability would always do the job and if common policy does not assume much liability, so it could be up to two million if we’re talking about commercial policy or it could be a one mil and if we’re talking about personal lines so it could not be enough and for all purpose for all cases. In this case we can always use umbrella policy which provides us with unlimited numbers to protect. So from my perspective is significantly more painless way and the cheaper way to defend any real estate investor.

Sean: [00:04:19] So you’re saying that if I’m a single person buying real estate, it’s better off to just get a high umbrella insurance policy than create a single-member LLC.

Oleg: [00:04:28] I would put it this way if I would be in your shoes and I would ask myself what I would do, yes, I would purchase certainly umbrella policy versus creating LLC.

Sean: [00:04:40] Yeah, I know you’re an expert LLCs but you’re saying that in Delaware the fees are cheaper. But if you live in California and you do business in California don’t you have to pay that $800 dollar tax anyways?

Oleg: [00:04:51] Yes.

Sean: [00:04:52] Yeah, so there’s no real point in doing a Delaware LLC.

Oleg: [00:04:55] Absolutely as I know it’s not, again, I cannot give legal advice because I’m not an attorney. As much as I know, yes, you still would have to pay taxes in California even if your LLC is Delaware.

Sean: [00:05:11] And for reference like if we spent $800 on an umbrella insurance policy instead of an LLC, what do you think we can get for that policy? Is that like a $2,000,000 policy per year or?

Oleg: [00:05:24] First of all if you have an umbrella which cost the same amount $800 you would be probably able to approach something close to I would say around $3,000,000 legal protection and you know what the beauty of umbrella that you are technically protected no matter what? So if you are not doing something against the law, life happens right? So then you’re protected against any potential litigation whatever it is versus you have LLC and you’re paying for creating an LLC and maintaining an LLC, but you can still be chased, so people can go after you’re even if you have this LLC, then what? So then you don’t have anything and you have to spend your money to hire a lawyer.

Sean: [00:06:18] Did you want to talk about how an umbrella policy actually works?

Oleg: [00:06:20] Many people ask me sometimes would umbrella cover my loss in case of major events in catastrophic event. Like, you know, my house got in fire and it just does not exist anymore, right? So umbrella is definitely not for this purpose. So if you if you’re losing anything tangible, umbrella is not working for this, umbrella is just to cover liability as this. They a name for this policy, is excess liability policy, we call it underlying policies, so you have home policy, landlord policy and something happened and liability on this policy say is $1,000,000, but your actual liability came to be higher than this number, right? So $1,000,000 but say $1,300,000, so you kind of own $300,000. And in this case, umbrella, if it exists just kicks up and help you to defend it, so it pays for legal expenses.

Sean: [00:07:29] Got it. So only for legal stuff and like penalties against someone else. Like if you hit somebody with a car, okay, you owe them $2,000,000, while your insurance policy only goes up to $500,000, then umbrella kicks in and then helps you with the rest of it?

Oleg: [00:07:44] Correct, correct.

Sean: [00:07:45] But like you’re saying, if your house burns down and it cost you $700,000 to rebuild it, but you only have $500 worth of insurance then too bad.

Oleg: [00:07:55] Yeah, umbrella would not work for this purpose.

Sean: [00:07:59] Got it. So what are the kinds of insurance policies that Real Estate investors should be buying?

Oleg: [00:08:04] By default, there is no best type of the policies in abstract matter. So I cannot suggest someone that pushes this because this is the best policy or buy another one because this is something better, right? Each case is individual and we have to design a correct policy for a certain reason for certain scenario. I would have to say probably that any investors should understand that there are two possible lines of insurance. So it could be personal lines and will be commercial lines. If you invest in something what is up to four residential units, we can do it as personal lines of business. And in this case, it should be personal umbrella, consider it on the top of liability on that policy. If we have real estate objects which are higher than 4 units, definitely would be falling to commercial lines of business, so it’s not possible to do as personal, umbrella policy should be commercial in this case as well.

For anyone who is investing needs to understand that typical home policy would not work for the purpose of landlording. So it should be landlord’s policy in any case if you’re renting your property to other people. Landlord and again could be a long-term and short-term. You have to design proper policy for a proper case. So if you’re using it for basically giving away for a family who lives years and years and years in your property, this is long-term. But if you’re doing something like very popular right now, Airbnb, short term, it would be absolutely different type of the policy and you should not make a mistake and approach this matter correctly.

Sean: [00:10:03] Yeah, because if you get a policy that’s incorrect and then something happens, then you get denied, right? And then what’s the whole point of getting insurance in the first place.

Oleg: [00:10:12] Absolutely, Sean. Yeah, so unfortunately those cases happening. In my practice when people come into me, I mean it’s not my clients, but they come in, and you know, after something happened and claim was declined just because the type of policy they used was not correct.

Sean: [00:10:34] So do you work with lenders a lot? Like I’m sure your clients they’re buying a house and they refer to you, talk to the lender and then lender says here the requirements we have, so I would say instead of the question I had before where was like, what are the best insurance policies for real estate investors? What are the kind of policies that lenders are forcing these buyers to get?

Oleg: [00:10:53] The answer is yes. I work a lot with lenders because without proper insurance, you technically cannot get any money from the bank, from the lender and in normal cases. If this is the case, lender requires specific type of the policy. So if it’s typical home insurance, it would be insurance requirements. If it’s landlord protection, the bank would sell you they need landlords policy plus it depends from the zone and zoning when the property locates. It could be a requirement for flood insurance as well. So I never recall anything like bank requires earthquake insurance. This is not something I know but typical landlord policy in some cases flood is enforced, yeah, they dictate it.

Sean: [00:11:48] And what can I goes into like a regular hazard policy is the only protection against fire? Maybe some rain comes through your roof. What else is covered?

Oleg: [00:11:57] Interesting question because if rain comes through your roof because your roof was not maintained properly, it’s not insurable case. But yeah, but if something happened to this roof because of wind, so first it should be forcible damage, I would say if three branch which fly, you know fly through your roof and punch it and then the rain water goes down, yes, it’s an insurable case and typical fire insurance covers it as anything else like thefts, could be any possible damage which caused by say electricity, plumbing system inside of your house. If plumbing pipe would burst, it will be a coverable case. If it would be electrical shorts and your property will get in fire, it would be a coverable case.

Sean: [00:12:54] And what about landlord policy? I don’t think I’ve heard that one before.

Oleg: [00:12:57] In very simple terms, home policy is designed to cover your residency. If you live in your house, the policy should be home insurance because you’re occupying it, right? But in cases when the same property is rented to other people, you have to insure it as landlord protector because of other people living there and you have legal responsibility in front of them and you probably heard a lot about cases like wrongful eviction. You decided to you don’t like these people for any reason. You ask them to vacant the property but specifically in California, this is really not smart way to do things if attorneys are not involved and you can be easily sued for wrongdoing. Landlord policy covers specifically those actions of landlords if they somehow in dissonance with the law, of course, the property itself is covered because there are three major points we have to address. First is liability, in liability, you always should assume market value of the property. If your real estate cost $2,000,000, it should be at least $2,000,000 in covered liability. And when we’re talking about property itself, we have to define market value and reconstruction cost because the construction cost is always the different number and reconstruction cost should be covered as part of the policy to rebuild your policy in case of loss.

Sean: [00:14:47] Basically to summarize, you’re just saying you don’t want to get a regular hazard policy that covers your market value because if your house is worth $2,000,000 but only cost you $700,000 to rebuild it, then you’re not gonna get $2,000,000 matter what?

Oleg: [00:15:01] Correct, correct.

Sean: [00:15:02] So you should only be covered $700,000, but you want $2,000,000 for liability because someone could sue you and take your home away for $2,000,000.

Oleg: [00:15:10] You are exactly right. So this is the concept, so you have to defend market value using liability parts of the policy and you have to defend actually real estate as a tangible matter and we call it reconstruction concept.

Sean: [00:15:28] Now, when you’re talking about banks getting you, like they’re forcing you a landlord policy, hazard policy and flood policy or flood insurance policy, are those all like separate things or can they all be combined to one policy for you?

Oleg: [00:15:40] There is no way to wrap it in one policy. So flood insurance is always separate policy versus typical landlord protector or home policy. And earthquake policy would never be assumed by a regular home or landlord policy, so it’s not possible to wrap it in the one product and you always have to deal with possibly three different policies. So if it’s required, you would have your regular landlord protector and then you would have, if it’s required, sometimes it’s required by the lender, you would have flood policy, and again, it’s most likely up to you to have earthquake policy or not because I never heard in my practice that lenders are asking for that.

Sean: [00:16:35] And landlord protection is not hazard, right? It’s [00:16:39] separate.

Oleg: [00:16:39] Landlord protection is technically it’s a term, so it’s a hazard insurance.

Sean: [00:16:46] Oh it is hazard insurance, but for rental property?

Oleg: [00:16:49] Correct.

Sean: [00:16:50] Got it, because I said I have rental properties. I’ve never been demanded for landlord protection.

Oleg: [00:16:55] Yeah.

Sean: [00:16:55] But I guess that’s what it is.

Oleg: [00:16:57] Yeah, yeah, and sometimes we’re probably using terminology which is not a common language. So landlord protector in a very general sense is hazard insurance.

Sean: [00:17:11] Okay, that makes sense. What is the ballpark order of magnitude of the cost for these policies? So if you kind of ballpark a $1,000,000 property in let’s say San Jose, what are they expected to pay for hazard insurance?

Oleg: [00:17:26] It really the depends from the location and from the size of the property.

Sean: [00:17:30] I’m asking for ballpark number, so let’s say 1,500 square feet $1,000,000 property in San Jose and you know order of magnitude is going to be in a $1,000, $800?

Oleg: [00:17:41] I would say that San Jose would be about $1,200 in annual expense.

Sean: [00:17:48] Okay.

Oleg: [00:17:49] But why this question is not so straight and simple to answer because it really depends from the fire limit zone. And if it’s not San Jose but say Lafayette or Moraga, it would be absolutely different approach and such policies for the same size of property would cost you up to probably $4,500 to $5,000 sometimes a year.

Sean: [00:18:17] Whoa, let’s go back and talk about that. Why is it like three to four times more expensive?

Oleg: [00:18:22] If risks to lose the property are due to wildfire and we all know who lived who live in California, we all know what happened 2017 and 2018, huge losses, right? Mother Nature is unstoppable. So if chances that your location is really exposed to this kind of threat, well, you have to pay more to have a confidence that you would be reimbursed in case of loss.

Sean: [00:18:54] That make sense. I think for the most part at least though, our listeners don’t have properties in those areas and they mostly investing in like say Sunnyvale and like San Jose.

Oleg: [00:19:03] Yeah. So in this case, I have to say that average landlord policy would be up to $2,000 in annual expense.

Sean: [00:19:13] So an extra $800 because you don’t live there? It’s like a rental property.

Oleg: [00:19:17] Yeah.

Sean: [00:19:18] Okay, and what if it was a short-term rental like Airbnb policy?

Oleg: [00:19:22] I would assume them to expect probably 25 to 30% higher costs. Again, it depends from the ZIP code, depends from the size of the property, but it certainly would be more expensive and I believe it’s obvious why. Because short-term rentals, you don’t know all those people who you have in your space, you know, sometimes for a week or maybe just a couple of days. So your exposure to liability to something unknown is higher and this is why the policy cost more.

Sean: [00:19:59] Make sense. And what about let’s say flood insurance, order of magnitude for prices around that.

Oleg: [00:20:04] So a flood insurance would really depend from the history of floods and there is a flood map well known to any professional which maps the history of floods, right? So how often this place is really flooded? And some zones could be literal purple while the other ones would be just yellow because flood insurance would literally depends from zoning. If your property is in a zone where it’s close to 100%, it would be flooded.

Sean: [00:20:40] Every year.

Oleg: [00:20:41] Yes, so you have to pay the price. So I would suggest to anyone who is thinking about purchasing real estate to check on those factors first because you know what, sometimes it’s happening and people are really disappointed.

Sean: [00:20:59] Because I mean for flood insurance is a lot of money. Honestly, it’s sometimes double your regular hazard insurance. So that’s why I kind of want to get a ballpark just like just guesstimate, go from yellow to purple.

Oleg: [00:21:10] Let’s talk about our assumption. We have a property which land lord protector itself costs about $2,000 and it’s in the purple zone. I would suggest that you should be ready to create something like maybe $4,000 to $5,000 bucks for flood policy.

Sean: [00:21:28] That’s a lot of money.

Oleg: [00:21:30] Good advice for anyone would be just doing proper due diligence and understands what you purchase and before you did it.

Sean: [00:21:38] And then let’s say it was like a yellow zone.

Oleg: [00:21:40] I know policies which would cost below $1,000 a year.

Sean: [00:21:46] Okay.

Oleg: [00:21:46] But flat is still expensive. I mean, it’s not such a policy like $400 for investment property. So maybe for a personal house for place where you leave yourself something around $600-$700 is possible. But if it’s two units, duplex/triplets, most likely not, it would be more expensive.

Sean: [00:22:13] And how about the earthquake insurance?

Oleg: [00:22:15] Earthquake, I would say from $1,800 to infinity. So it really depends how much you have to defend.

Sean: [00:22:24] Your talking about how before that if you just have enough insurance, you don’t need an LLC, but you also mentioned during your seminar that some assets are untouchable to protect you from lawsuits and potentially bankruptcy. So I was wondering what kind of assets are protected in California?

Oleg: [00:22:40] Again, this question probably is better to address to your attorney and I would suggest based on what I know. And what I do with my practice that pension plans I rise whatever is tax-deferred is untouchable. You cannot touch someone’s pension money, but everything what is liquid in your brokerage accounts is very easily attachable.

Sean: [00:23:07] Even your personal residence probably huh?

Oleg: [00:23:09] Correct. And this is exactly the reason why you should properly address coverage for your liability. Because if you have real estate plus liquid assets, you always have to do a correct math yourself or with help of a professional and understand how much general liability or a personal liability should be covered. So I would I would give you an example, if say a person has a house in Santa Clara which was 1.2 million and house in Oakland which cost $800,000. We have 2 million altogether in real estate assets and these the same personal, these the same family say have like $200,000 in liquid in some brokerage account. The family faces reality which requires 2.2 million in cabinet liability.

Sean: [00:24:07] Right. Have you heard of any horror stories from your clients? I think a lot of people are underinsured just like we mentioned before. They think that things don’t happen to them but these things happen all the time. Tell some stories to scare some people.

Oleg: [00:24:21] All right. I would go probably with the two-story say I really recall is something with still seeds on my mind, right? One story happened in Los Altos where my office is located. Of course I’m not calling people by names, right? But it was the family who recently moved into California and they were planning to purchase real estates and at the time the story happened, they were renting. They had auto policy, which was on the edge of needed liability probably for their case. So they have $100,000 in cabinet liability. And unfortunately, during the process of closing of Escrow, the lady hits bicyclist on the streets of Los Altos. Yeah, the guy eventually saw the guy was drunk, right? So it was not even her fault.

Sean: [00:25:22] Wait. The biker was drunk?

Oleg: [00:25:24] Yes. So it was not even this lady’s fault because you cannot predict, you cannot control actions of a drunk person who is biking.

Sean: [00:25:34] Yeah.

Oleg: [00:25:35] However from legal points, she was at fault because bicyclist is always one more honorable than person who is driving the car. And it was a potential litigation. Thank God it happen that its costs are less than out of liability, which was covered it. But imagine this situation if she would be sued for more money than insurance policy could provide, and then litigators would go against the policy which is in the process of closing. So it’s kind of scary story. You really have to consider, you know, how much protection you need because auto policy and home policy are always in some way connected. If it’s not enough covered liability on the auto policy and something really bad happen, you should really know that lawyers would go after your property.

Another story, it was few years ago, couple years ago, and I believe it was January 2. Nobody was really in the working mode after New Year and one of clients of mine called me to tell me I don’t know what’s going on but property management called me and it’s a lot of water coming from my loft downstairs to the office. It came out to very interesting event. It was a toilet hose which basically goes to the toilet and it just burst but it was nothing to stop the water and water is pressurized. So all this water just flooded completely 1,200 square feet loft. And after it was collected on the floor, it just went down as a waterfall to the office damaging everything what was in the office; computers, office furniture. The damage was significant. I remember this case because for me, it was a case study how different insurance companies are covering it. Because it was very interesting situation, who should really pay for what happened? Manufacturer of this hose? The owner of the loft? The commercial policy of the office who was underneath of this waterfall? Or homeowners association policy where this loft was located? So it was interesting case study and most significant impact was for homeowners association master policy in that case. So the owner of the loft and my clients technically paid nothing.

Sean: [00:28:34] Okay, cool. So at the end of the day, the homeowners association had to pay for it?

Oleg: [00:28:38] Yes.

Sean: [00:28:40] Why?

Oleg: [00:28:41] It’s question to people who we call adjusters. But they legally decided on who is basically more at fault. So the client was not able to stop water because it was no way to stop pressure and water valves are in hands of association.

Sean: [00:29:04] Okay, got it.

Oleg: [00:29:04] Right? And then after everything happened, besides your property, your ownership, I mean the ceiling of office which was beneath does not belong to you. So if water goes from the concrete slab, which does not belong to you, you cannot be responsible.

Sean: [00:29:27] That’s right.

Oleg: [00:29:27] And this is how those decisions. So this case demonstrates actually how tough sometimes is the way to discover who is really at fault and who would be paying for that and whose insurance would be involved and how you know, this game would be rolled out. In many cases, it’s not simple solution. It’s not easy.

Sean: [00:29:51] Got it. I know a lot of people want to know how can you lower your insurance payments?

Oleg: [00:29:56] First, try to stay clear of claims. Just know that any claim would possibly increase cost of insurance for you even if you purchased at a different location. So the history of claims goes after real estate itself and real estate owners, right. What does it mean? If you made a claim in a property which locates and again, Santa Clara. And then you decided to purchase something in Oakland, but it would be associated with your name. Most likely your Oakland policy would be higher because you have history of claims. So first thing, try to claim only when it’s necessary. When financial impact for you is significant and you simply cannot avoid tapping insurance money. And second way to have reduced cost of insurance is having your deductible amount increased. The higher deductible you agreed to pay would be the cheaper of your policy would be.

Sean: [00:31:07] And what do you think is that fine line between low deductible, the more expensive policy or high deductible and less expensive policy?

Oleg: [00:31:14] Good question because I know landlords who for some reason is keeping on and forcing tenants to have rentals policy. Because rentals policy that your tenant has is the first line of defense between you and potential damage to your property. So in case if you’re settling everything up correctly and you have first line of defense like your tenants renters policy because they have liability in case they flooded so they did something would damage your property. If this part has been done correctly, then you may raise your deductible up to I say $5,000, $10,000 instantly because you protect it already. I mean it should be happened something really crazy which would cause a total loss of your property. But then $10,000 would look like nothing comparing to the cost of loss potential. So I always encourage real estate owners if the landlords to have as higher as possible deductible to lower your insurance expense.

Sean: [00:32:27] Cool. And one last question, do you have insurance policies for vacant homes? Like let’s say we’re doing a flip project, how do you insure proper like that?

Oleg: [00:32:36] No insurance provider in very general sense likes that kind of property for obvious reason, right? Because homeless people could leave their, God knows what could happen when human eyes not seen what’s going on a daily basis, but renovation or flipping is a common activity. And of course the industry is trying to address it and insure those pieces which are unattended sometimes for days, maybe weeks or maybe month. For this reason, so-called a course of construction policy has been created. So it would assume protection of real estates as is [00:33:18] but it would be definitely not the same protection for personal property because personal property assumed to not be present at this place when contractors are working on it, right? So there is a way to insure but I would say that the client should be always honest and honestly tell to insurance professional what is going on with this property. For some people trying to pay less and then of course of construction policies are kind of extensive, not crazy expensive but more expensive. And I would like to encourage our listeners never try, you know, to hide something. In reality, you need the policy when you need it. You need the policy when something really happen. This very moment when you need it most, you could be declined because you just lied at the points of policy activation.

I would say just tell truth and this house is vacant or is undergoing construction. You better tell this because it would not be forever and when it’s done, when it’s finish, you can insure it with regular policy significantly cheaper.  But you know at least it would be covered in case of something happen.

Sean: [00:34:35] So do you have any advice for any new investors who are just getting to the field who don’t know anything about insurance policies?

Oleg: [00:34:41] First of all, find a good professional who would help you to do proper due diligence and to recognize numbers and needed correct approaches to what you trying to do. I would suggest that due diligence not only the insurance always make sense because it’s just a financial tool to bring you to idea could your business be profitable or not, but from insurance perspective, it’s always good to ask a good professional. Okay, would you please check how much this property would cost me in expense for insurance? Is it in the flood zone or not? Is earthquake policy possibly needed or not? Because I have answers for this question, you know, in some cases is probably not financially reasonable. In some cases it does. Find a good professional. Talk to colleague. Talk to someone else who you entrust. Go from that point further.

Sean: [00:35:44] Awesome, so how can people get in contact with you?

Oleg: [00:35:46] It’s really simple. My email address is kotov.agency@gmail.com or you can simply give me a phone at my cell phone number at 650-762-6837 and I would always welcome your phone calls, emails and always answer to any questions and it would cost you nothing. So my advice is always free.

Sean: [00:36:19] Thank you so much for being on the show today. It was really helpful for you giving us all those information about insurance policies as well as a horror stories that can happen if you’re not properly insured.

Oleg: [00:36:28] Thank you Sean. Thank you for having me on your show.

Sean: [00:36:31] Absolutely. Take care.

Here are some of the key takeaways I got for speaking with Oleg. Single-member LLCs aren’t useful for my liability protection point of view. If it is just you and the LLC, it’s pretty easy to find out who you are and peers that corporate veil. On the other hand, if you spent the same amount of money on an umbrella insurance policy, you could be covered from millions of dollars. You need to know your numbers. Get enough hazard insurance to cover your reconstruction costs. If a home is worth 2 million dollars, but only cost $500,000 to rebuild, then you only need hazard insurance for $500,000, but you need to get liability insurance for 2 million. Olev recommends us to get policies with high deductibles and low premiums. Remember, you only need insurance when something happens and there’s no default policy that works for everyone so make sure you’re covered appropriately. Talk to an insurance professional to see what insurance is appropriate for your situation. Hope you learned a lot. Thanks and have a great day!