If you’re managing a residential rental property of significant size and are not already requiring renters insurance, you’re in a decided minority. The latest Apartment Cost Risk Survey from the National Multi Housing Council, which surveyed some 55 apartment companies with over a million units between them, found that 84 percent of them actually did have mandatory renters insurance policies in place at one or more of their properties.
However, smaller landlords haven’t kept up. According to the Insurance Information Institute, only 37 percent of renters surveyed reported they own renters insurance. That figure is up substantially since 2011, however, when about 29 percent of renters reported owning renters insurance.
The average renters insurance premium, nationwide, was $187 per year, using 2012 data. (The average homeowner pays $1,034 per year, though for more coverage.)
How Does Renters Insurance Help You?
- Renters insurance protects the property against damages the tenant might cause. Renters insurance usually comes with $100,000 or $200,000 in liability insurance protection. If your tenant causes damage or injury, renters insurance ensures there is at least some liquidity in place to make you or any other injured party whole.
- People with renter’s insurance are more likely to stay with you after they lose property in a fire, burglary or anything else. Because their losses over their deductibles are covered, they aren’t as likely to “midnight move” out of your apartment, breaking the lease to move back in with their parents while they lick their wounds and start over. Sure, if they break the lease, you can file a lien against them—but your chances of collecting on a renter with little property to his or her name are slim.
- Tenants with their own insurance are less likely to sue property owners and managers if they suffer a covered loss.
- Tenants who get compensated for losses are more likely to be able to pay rent.
- Some renters don’t want to rent in places where renter’s insurance isn’t required. They know if a neighbor’s dog bites them, or if their neighbor causes a fire that damages their property, they aren’t protected unless their neighbor also has renters insurance in place.
How Should You Enforce a Renters Insurance Policy?
Any requirement to own renter’s insurance is unenforceable unless it’s written into the lease agreement. Have new tenants sign a lease addendum—and have existing tenants sign it at renewal, and you have an enforceable contract: A tenant’s failure to maintain renters insurance would be a violation of the terms of the lease, and generally evictable—though in practice few quality tenants will want to move over a $14.50 to $16 per month premium payment that they benefit from, anyway.
Should I Require a Certain Carrier?
You can accept any renter’s insurance policy that meets your criteria for liability and property protection. Furthermore, some renters may prefer to bundle renters insurance with their car insurance to get a premium discount. This is fine—your main objective is to ensure your risk and the risk of neighbor tenants is covered. Indeed, you don’t want to be seen routing insurance business to any particular provider in exchange for a fee or commission unless you take care to comply with “steering” rules in your jurisdiction.
Pro tip: Some property managers want the property to be named as an ‘additional insured’ on the policy. This is not necessary and occasionally can cause conflicts. Here’s why:
If you and your tenant come into conflict, the attorneys for the insurance company would have an obligation to provide a defense for both of you. Furthermore, if the tenant does cause damage, and you’re listed as the additional insured on the same policy, it could hold up your claim. A policy cannot pay a claim from one insured to an additional insured on the same policy. The potential for collusion and fraud is just too high.
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Let’s take it a step further: A typical renters insurance will cover about $10,000 in property and $100,000 or so in liability to a third party. But if the apartment company or landlord is the additional insured, they cannot be a third party.
Let’s say the tenant starts a cooking fire and causes $25,000 in damage. Because the building is now property since it belongs to the additional insured, it will be covered up to $10,000, but not $100,000. You and the tenant will have to work out some way to divide the cash. The tenant was the one paying the premiums all along, though—and probably suffered his or her own losses in the process.
You may be able to sue or get a lien against the tenant for the remainder. But your chances of collecting are slim. And the amount of damage is below the deductibles on a lot of the policies apartment companies carry. That’s a dead loss—and an all-around ugly situation.
The solution: Instead of insisting on ‘additional insured’ status, consider having the property named as an ‘additional interested party’ or ‘third-party designee.’ This still authorizes the insurance company to alert you in case of lapse—and they will send you a notice if the policy lapses or is not renewed. This does a much better job of protecting your tenant.
Make sure your staffers in the office know what that means, too. Some renters, not knowing what ‘interested party’ means, are suspicious of managers and landlords who ask them to be added to their policies in any way. If your staffer can explain that all it does is let them know that the policy is in force, and that this requirement actually helps them because it protects them against potential liabilities their neighbors might cause (fires, dog bites, etc.), most people are just fine with it, and may even appreciate the additional level of protection.Read more on Legal Considerations