Tiny Houses Can Be Insured

Tiny Houses Can Be Insured

Did you know tiny houses can be insured?

My wife and I live in a 4,065 square foot home with attached three-car garage. When our five children were young, having a large home made sense. Like others of our generation, we saw consumer-wants change. In 1970, according to HUD data, the average family had 3.1 members. By 2005, that number had dropped to an average of 2.6 people per housing unit in the United States. In contrast, in 1973, 5.3% of the housing units in the U.S. had two rooms or less, by 2005 that had dropped to 1.8%. Families were getting smaller, but houses were becoming larger. Further, in 1985 15% of the houses were under 1,000 square feet. Over the next twenty years, that dropped to 9%. The average sized house is now 2,400 square feet. The cost per square foot goes down as the size of the home goes up. People are being romanced by relatively cheap space they don’t necessarily need. Small homes were becoming much less fashionable.

As empty-nesters, we’ve looked at houses with floor plans that more closely meet our current needs. Having a home with about half as much space would still be more than necessary. Since we’ve started shopping for a new house, we became aware of the small home movement. Tiny House Nation on the FYI cable channel and Tiny Home Builders on HGTV are some of the most recent breakout shows which reflect the popularity of this movement.. We’ve watched with interest as families downgrade from two to three thousand square feet houses, to homes with under 400 square feet or less. In most instances, the changes require lifestyle revamping that include discarding a majority of their personal belongings.

There is a great deal about tiny house living that is attractive. Given the time my wife and I spend painting, cleaning, and generally maintaining our home, and the three acres it sits upon, a smaller home and yard would be welcome. We’re aware of our carbon footprint and would like to make a change.

Financially, our home has served us well, but going forward it is an anchor. When we bought our first home, the rule of thumb was 25% of monthly income should be the maximum spent on a mortgage, with total debt pegged at 40% of income. Now the standards appear to be 28% and 36%. I have to wonder how people are staying under these limits with the large amounts being accumulated in college loans. Tiny houses seem to fit the world we live in, and they aren’t just for the retired and the adventure-seekers.

Our life is frittered away by detail . . . simplify, simplify.” – Henry David Thoreau

Every time we watch one of these shows, two things happen:

1.) We make a decision whether or not we could live within that amount of square footage of the house they featured in that program. (About 650 square feet seems to be our tolerance, which some in the Tiny House movement would call a “tiny mansion.”).

2.) I look at my wife and say, “How do they find an insurance company to accept their insurance?”

Is a Tiny House Insurable?

From what I’ve read online, many owners of Tiny Houses are frustrated and have all but given up trying to purchase insurance. I’m not sure why this has happened.

I checked with the marketing department of a large specialty company, and they indicated that they write insurance on tiny houses. If the tiny house is on wheels, it goes into their manufactured home program, and if it is on a foundation, it will be placed in the dwelling program. That company has licensed many hundreds of agents throughout the United States.

I suggest that you contact:

Dave Fleming

General Manager  |  dave@rvainsurance.com

CA License #0D07629

800.400.0186 ext. 1206 | f. 888-296-7123

685 Cochran St #150A Simi Valley, CA 93065

He told me that his firm is licensed in most states. I’m familiar with the company he uses, having toured their home office and claims training center in Ohio, in June of 2014. I’m also familiar with his agency, which is a well-known name in the insurance industry.

You might also want to think about flood insurance and earthquake insurance on standalone policies.

For more about insuring mobile homes. >

Is Self-Insurance an Option?

Tiny_House_no_wheelsSome tiny house owners have stated that they have made the decision to bank the money they’re saving with their new lifestyle, and that savings account will be their insurance.

To me, basic risk management guidelines would suggest that the transfer of risk to an insurance company is preferable in most instances. However, if a person does not have a mortgage and is not required to have insurance placed through a company, self-insurance is an option. (I created one of the largest self-insurance pools in the nation so I would be hypocritical to state otherwise.)

However, the purchase of your tiny house is an investment. At some point, you may want to sell it. If you restrict the pool of potential buyers to only those who can afford to pay 100% cash and then self-insure, your selling price might be greatly diminished.

Others have suggested ways of obtaining insurance that I would think borders on fraudulent like ——–. It is always best to be perfectly honest in your business transactions. Insurance forms are complex and not easily read. You might believe you’ve pulled the wool over some unsuspecting insurance company only, to find the coverage you bought doesn’t fit the exposure you’re trying to insure at the time of loss.

Proper insurance is available. It just takes some diligence to find it.

One person suggested that you could always buy a renter’s policy for the content of the tiny house you own, even if you couldn’t insure the house itself. That is nonsense. Think about it. If you were an underwriter and you didn’t want to insure the dwelling, why on earth would you insure the contents of that dwelling, when “contents” is much more easily damaged?

My guess is those who have not been able to find coverage have not been diligent in their search, giving up after speaking to only a few agents. Or, they may have called (unknowingly) a number of agents for the same company.

Why Are Tiny Houses Hard to Insure?

I’ve been in the insurance industry for nearly forty-five years and have highly varied experience. When I look at a tiny home I see a lot of risk characteristics that could cause an underwriter to blanch.

They’re Strange. Insurance is the art of combining a large number of homogeneous risks and allowing the law of large numbers work to predict the loss outcome. If you accurately predict the outcome and sell your product at an actuarially sound rate, your company will make an underwriting profit. To be homogeneous, risks must share a large number of key characteristics.

I’ve been an excess and surplus lines underwriter and a Lloyd’s of London correspondent so I’m trained and experienced in handling unique risks. The average home is insured for fire and other related perils for something close to fifty cents to a dollar per thousand of the insured value on the dwelling.  Underwriting opinions vary, but many excess and surplus lines underwriters don’t accept fire risks for under $2.00 per thousand. I believe a tiny house is a specialty risk and should be charged accordingly.

Many Tiny Houses are on Wheels. Years ago, my general agency sold a lot of insurance on manufactured homes. At that time, they were more commonly referred to as “mobile homes”.  The president of the insurance company and I were out to dinner one evening and he told me the story of how he started his company.  It was at a time when mobile homes were as unique as tiny houses are today. He said people didn’t know what to make of them. His company simply decided to ignore the wheels because they rarely moved.

The same isn’t always true of tiny homes. Many of their owners are buying them with the expressed purpose of being footloose and fancy-free. Insurance underwriters hate not knowing where a risk will be located. Insurance companies rate cities according to “protection classes” based on complex algorithms. Factors include: fire department training, availability of water, distance to fire department, etc.  An insurance underwriter would hate to price a risk for a protection class 5, which is about average, only to find out the risk has moved to “unprotected” or protection class 10. Rates can be two to three times as high for a protected risk as for an unprotected risk.

Construction Quality Varies. Tiny houses can be professionally built, but are predominantly do-it-yourself. Some do-it-yourself homes can be better than those done by professionals, but most aren’t. Because owners and designers want to give the illusion of space, many tiny houses have an abundance of windows and might lack structural integrity.

Given the uniqueness of each home, adequate rates could double based on its construction.  Some of the intricate carpentry used to create multi-purpose furniture could be costly to replicate at the time of loss. In some cases, shoddy workmanship might preclude coverage altogether.

Concentration of Values.  Insurance policies for homes typically include fifty to seventy-five percent of the dwelling value for personal property. The average new single-family U.S. home sold for about $325,000, in 2013. That would mean that the average home policy includes coverage for about $160,000 to $240,000 of personal property. Let’s say you have a master craftsman build your tiny house and the cost is $80,000. Since you’re probably moving from an average house, you agree to get rid of most of your furniture and a good share of your other personal property. Given insurance company standards you would have $40,000 to $60,000 of personal property. In reality, you probably will probably keep your more valuable possessions and have $80,000 to $100,000 of personal property. Personal property is more susceptible to loss than a building (think smoke and water damage), so you’ll want to make sure you have enough coverage.

Total losses are a rare occurrence for homes. Only about one in thirty home fires results in a total loss. In my opinion, the percentage of total losses with tiny houses would be much higher . . . probably as much as one out of ten.

The average residential fire in 2005 to 2007 in the United States created $21,000 in damage. In my opinion the average tiny house fire loss would be similar, even though the home value is much lower, due to both frequency of total loss and severity of average fire.

Windstorm. Although I assume most tiny house owners would use hail resistant roofing materials, the susceptibility to loss from wind can’t be ignored. I wonder if those that are not built on permanent foundations would have the necessary tie-downs.

Insulation. It scares me to see a picture of a tiny house online surrounded by bales of hay. I grew up on a farm. We used bales for insulation around our house, but I would highly recommend that everyone avoid that obvious fire hazard. In addition the bales might serve as an attraction for damaging vermin.

Clutter. One of the largest causes of fire is clutter or poor housekeeping. Sparks are inevitable. Mix sparks with clutter and you have a recipe for disaster. Tiny house owners need to be highly disciplined.

Liability. Since many tiny houses have vaulted ceilings and provide vertical storage store, falling objects might be a hazard for guests. From pictures I’ve seen, owners need to pay better attention to the steps into their homes.

Lofts can represent hazards for small children.

Zoning Laws. Insurance companies are often left to “pick up the chips” after a fire. Rebuilding a structure will attract inspectors who will enforce the laws. I’m not sure a contract that requires a rebuild is insurable given the hard-nosed zoning laws the tiny house movement is fighting.

It seems strange to me that tiny houses would have such a hard time with zoning laws when an estimated twenty million people live in manufactured housing in the United States.

***

Tiny homes have great appeal. They can be a sane alternative and should be properly insured. Keep in mind that a policy for your house may not cover damage during transit. If you’re planning on moving your house, speak to your agent.

Other Enhance Insurance articles related to “special” Home Insurance:

Do I Need Car Insurance or Home Insurance for My RV

The Hidden Implications of a Large Home Insurance Deductible

Does Home Insurance = Dorm Insurance

How Do I Insure My Second Home

Mobile Home Insurance

Enhanced Insurance is not written by attorneys. If you’re looking for legal advice, you need to contact a lawyer. Further, insurance practices and forms change constantly and are varied from state to state. For definitive answers in your area, contact a local agent.

While the majority of people want an agent involved in their purchase of insurance, many people want to see if they can save money by buying direct from the insurance company. Others want to try a direct quote to make sure the premium they’re now paying through their local agent is fair. If you want a quote for your coverage, click on the competitive quote button on the right side of this page.

Jim operates an insurance agent network called Insurance Partners, aggregating agents in the Midwest for over 25 years. He was National Agent of the Year for Metropolitan in 1993 and Midwest Agent of the Year for Travelers in 2011. He served as a founding board member of the Surplus Lines Association of Minnesota.

2 comments on “Tiny Houses Can Be Insured

  1. Just a note: I contacted Dave Fleming and was told that they are able to insure homes built by Tumbleweed Tiny House Company, but not tiny homes built by individuals.

  2. Jim, this is got to be the best summary of code and safety advice I’ve seen for the tiny house community! Well done! I built my own tiny house with my brother, but he’s a licensed elecrician and I’ve practiced architecture for nearly 20yrs. I also engaged a number of engineers (friends) on my project (e.g., code, structural, electrical). If you ever decide to start an online course (for DIYers) covering these very issues, let me know and I’ll help publicize! 😉

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