Mitigating Property Loss and Liability
Develop a Loss Prevention Mindset to Increase ROI
By Shawn Woedl
In the real estate world, a critical component of asset management is risk management. Your risk assessment of the property and potential liability concerns should begin before you even purchase the property. Much of the advice that follows will seem common sense, but when you put on an insurance hat, you may see red flags you had not considered. To lessen your chances of property damage or an injury, you must cultivate a loss prevention mindset. First, you need to educate yourself on the circumstances which could put your property at risk. Then you can plan ways to minimize that risk and put your mitigation plan into action.
What to Look for When Evaluating the Purchase
Most seasoned investors have their own way of calculating their potential ROI on a property. Including the insurance premium in this calculation is common practice. But have you thought about factoring in potential, sudden property damage? Or what would happen if someone is seriously injured on the property?
When walking through a property to determine if you will pull the trigger, look closely both inside and out for common issues that could be a risk factor.
Outside
Look down. In what condition are the hard surfaces? Look out for uneven walkways that could lead to a trip and fall. Look up. Are there tree limbs hanging over the roof? Are the trees healthy? Unhealthy trees can drop limbs unexpectedly causing damage to either the property itself or nearby vehicles; or worse, injure someone on the premises.
Inside
Be on the lookout for deteriorating stairs or loose handrails that could be a hazard. And make sure they are up to current code. Depending on the final intent of the property, some insurers require that the property be in good condition and meets current local ordinances or state codes.
Look around for smoke detectors. These should be on each floor of the home (including the attic and basement), in every bedroom, near stairways, in or near all living areas, and of course the kitchen. The National Fire Protection Association (NFPA) recommends interconnected alarms so that they all sound when one goes off. Batteries should be changed twice a year and checked monthly. The importance of having smoke detectors in constant working order cannot be overstated from both an asset protection, and occupant safety and liability perspective. Working smoke alarms cut home fire deaths in half. And many insurers will deny a fire claim if it is determined that working smoke detectors were not present at the time of a fire loss.
What to Plan for When the Home is Vacant
A vacant home is at a higher risk of theft or vandalism. If the home is in an area that is more prone to crime, make sure that these are covered under your property policy. Also make the property less enticing to criminals. Mow the lawn and trim the bushes. Set interior and exterior lights on a timer to make the home look lived in.
Be sure the property is securely locked at all times – both doors and windows. Change the locks after purchase. Depending on the area, you may even consider installing an alarm system, which can also become a beneficial selling point for future tenants.
In a colder climate, turn off water at the source while the home is vacant to avoid burst pipes causing water damage in case of a freeze.
When Showing the Property
When you are showing the home to potential tenants, the increased foot traffic can increase the liability risk. If there is inclement weather, shovel snow off the front walk or sprinkle salt to melt any ice. If you noticed any potential hazards when you purchased the property, be sure they are repaired before you have people walking through to limit potential injury.
Many property owners are allowing potential renters to view the property alone by either using a keyless entry or lock box. Unattended individuals could cause property damage or commit theft of anything inside the home. Be sure someone is present for the showing and that nothing of value is accessible to visitors.
How to Mitigate Loss Once Tenants Move In
Cooking Fires
According to the NFPA, cooking is the leading cause of home structure fires and injury, but also one of the most avoidable. The most common cause is unattended cooking, and a major part of the problem is cooking oil or grease fires and the mishandling of them. Throwing water on a grease fire causes the fire to spread, the opposite of the desired effect. Ensure that a fire extinguisher is available near the kitchen and any heat source. Make sure your tenants know where they are and how to use them.
You might also consider installing a fire suppression device above the stove. These products are activated by a flame and can release extinguisher powder down onto the stove, helping put out the fire faster than the cook can react to it.
Animals
Do you allow your tenants to have pets on the property? If their dog injures someone on the premises, you may be at risk of liability claims because you own the property. For this reason, you should be aware of whether or not your Premises Liability insurance has any coverage for canine liability (and any breed exclusions), and you might even consider requiring your tenants with dogs to carry their own canine liability insurance as a first line of defense.
Understand Your Insurance Coverage
It’s important to remember that insurance policies cannot cover every type of loss. Therefore, it is key to familiarize yourself with your coverages and any coverage exclusions within your policy. Wear-and-Tear is a standard policy exclusion industry-wide, so if your tenant leaves you with damaged window blinds, smudges on walls, etc., those are considered Wear-and-Tear and are not covered, which is why you collect a security deposit. It is also important for your tenants to carry renters’ insurance.
Benefits of the Loss Prevention Mindset
You should now have an easier time getting into a loss prevention mindset. Take a few minutes right now to think about a specific property and how you would protect it from physical damage and keep prospective tenants injury-free. A loss prevention mindset will bring you residual returns well into the future.
