New Law Carries Implications For Roofing and Insurance—Here's What Investors Need to Know

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As if homeowner’s insurance weren’t expensive enough, a new federal rule has quietly moved the responsibility to pay for roof damage claims off the insurers’ shoulders and onto property owners. This means that after storm damage, investors must foot the cost for damage to their roofs—if they opt to pay less for their insurance—which could result in five-figure bills for landlords, eliminating hard-won cash flow in one fell swoop.

The Specifics of the New Rule

According to MarketWatch, the Federal Housing Finance Agency (FHFA) announced in March that Fannie Mae and Freddie Mac will now accept homeowner’s insurance policies that provide only actual cash value (ACV) coverage for roofs, rather than requiring full replacement cost coverage as they did previously.

This means that when investors buy new insurance, if they have mortgages covered by Fannie and Freddie, they no longer have to maintain insurance that covers what it costs to fully replace a roof after a storm—only the depreciated value, taking into account the roof’s age and condition.

The change is not mandated—i.e., it is not a strict requirement that landlords “must” buy ACV insurance. They still have the option of paying more for their insurance to cover the full replacement, so long as the insurer offers it in their area and the roof qualifies.

Although the new policy is touted as offering property owners a less expensive insurance option, under ACV, the insurer can deduct depreciation and the cost of a new roof. It means that older roofs can generate smaller compensation checks for the same amount of physical damage, with property owners needing to make up the shortfall.

If the policyholder is “not prepared and they get a hailstorm or tornado, they are going to be in for the surprise of their life when they get that bill from the roofer saying, ‘Hey, your insurance is only covering $9,000, you owe another $9,000 to put a new roof on,’” Lindsay Frangie, a Georgia-based branch partner at the lending firm Alcova Mortgage, told MarketWatch.

Government officials couched the new policy as a win for property owners. FHFA director William J. Pulte said in a press release:

“Thanks to President Trump’s landslide victory, we are replacing a disruptive and expensive Biden insurance mandate with common-sense policies for today’s market. Lower insurance costs and mortgage rates shrink the monthly payment of a new mortgage, giving new homebuyers confidence that they can afford the American dream.”

How Much Could Investors Save?

ACV premiums are generally 10% to 20% lower than replacement cost, according to estimates cited in the MarketWatch article. However, investors need to be wary of trying to save money in the short term—only to get clobbered in the long term by an expensive repair they have to pay out of pocket.

“I think it’s a Band-Aid on a bullet wound,” Frangie said.

Read the Fine Print

Some insurance agents might be tempted to “brush off the details,” Amy Bach, director of consumer advocacy group United Policyholders, told MarketWatch, in order to make a sale. “The amount of commission [agents] would earn by recommending more coverage is not worth it to them against the risk of them losing you as a customer because of the price point,” she said.

Many insurance companies have nuanced policies that might benefit the homeowner. Insurance agency Insurify offers the following advice:

“Even if your home is insured on an ACV basis, some insurers offer a guaranteed replacement cost coverage endorsement for roof replacement. If your roof is damaged by a covered loss, the insurer will pay the full replacement cost without subtracting depreciation. Some policies mix coverage types, such as replacement cost for the dwelling and ACV for personal property. Review your declarations page and clarify with your insurance agent to understand which parts of your policy include depreciation.”

According to the Wall Street Journal, the five biggest home insurers didn’t pay out on more than 44% of claims resolved last year, up from 36% a decade ago. The Journal reported that State Farm is being sued by hundreds of Oklahoma residents, who allege that the company uses vague definitions in its coverage policies to allegedly mislead policyholders.

One of the lawsuits against State Farm alleges that the definition is “absent from the four corners of the policy and hidden from the insured” until their claim is denied. Jeff Marr, the lawyer for the plaintiffs, told the Journal that earlier State Farm settlements had revealed its “secret playbook” to replace fewer roofs. “They have weaponized their claims department,” he said.

Don’t Sacrifice Insurance for Cash Flow

Housing affordability is a key political issue. Investors need to be particularly careful, especially those in areas prone to extreme weather. While it’s tempting to think only about the cash flow, skimping on insurance, even if the option to do so is there, is a dangerous game.

Final Thoughts

While the new Fannie/Freddie policy is targeted primarily to homeowners, it can also apply to investors. In the crunch to lower expenses, there is understandably a temptation to roll the dice with lower insurance costs to boost cash flow and hope for the best. It’s not a wise move.

Rather than navigate the insurance minefield on your own, consulting with a broker, particularly if you have a larger portfolio, could be a savvy move to find property and liability insurance customized to your needs.

Roofs are a particular concern for insurers, as they are a main casualty in extreme weather. “Recent disasters—whether they be hurricanes, fires, storm surges—are unprecedented,” said Al Brooks, vice chair of commercial banking at J.P. Morgan, on the company’s website. “And the losses suffered by the insurance industry are unprecedented.”

In addition to shopping around for a broker, Brooks recommends ensuring repairs are up to date. “If you have a leak from the roof, do not go up there and throw a tarp over it until you get someone to fix it—get it fixed immediately,” Brooks said. Many insurance companies use drones to monitor properties. “If they drone your property and see the tarps, you’re probably getting dropped.”

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