Protecting Against People Problems
Your tenants can be the source of claims that erode your investment profits.
You likely protect your investment properties against fire, floods, earthquakes, severe storms and other obvious threats. But do you protect your properties against your tenants? Are you prepared to settle a property or bodily injury claim out of your profits for years to come?
Tenants can hold the success of your investment properties in their hands. But, your insurance policy should play a role in transferring that risk and maintaining the security of your assets.
Risk Transfer
Risk transfer is a risk management strategy that allows you to transfer your insurable risk to a third party (i.e., insurance company) by exchange of a small premium payment. Risk transfer can benefit you as a real estate investor by transferring the risks associated with owning property and the financial consequences resulting from claims that arise from that risk.
Property Insurance
Whether your investment property is an apartment unit or a family home, if you are renting the property, you will have little control over the physical damage that can occur in or on it. To mitigate your risks, tenant-occupied dwelling insurance will cover the costs incurred by damage. It does not, however, cover your tenant’s personal property.
There are two common types of insurance policies for investment properties: special perils and named perils.
Special perils policy offers coverage against just about any type of damage you can think of, with certain exclusions. The policy does not list the perils your home and/or personal property is covered against. Instead, it only lists the perils that are excluded. If damage to the home is not caused by something listed on the exclusion list, you are covered.
Rather than listing exclusions, a named perils policy specifically lists the perils for which your home and/or contents are covered. If your home or personal property is damaged by something not on the named perils list, you are not covered.
As with all homeowners insurance, be sure there is enough coverage to protect all your property values and assets. A typical policy will provide the replacement cost value for your building and the actual cash value for your contents.
Replacement cost value is the amount necessary to replace or repair your building with similar materials, without considering depreciation.
Actual cash value, on the other hand, is the value of your property when it is damaged or destroyed. This amount is typically determined by subtracting the depreciation from the replacement cost value. A word of caution about actual cash value: The limits in place may not be enough to replace your building to rentable condition. You may be required to pay out-of-pocket to finish the repairs.
Liability Insurance
Liability insurance covers you for accidental injuries to your tenants and their visitors. As the owner of the property, you are responsible for taking steps to ensure that anyone who enters, whether welcome or unwelcome, stays safe.
Ensure that gates are secure and fences cannot easily be climbed. Adequately cover or protect any conditions, including pools, ditches, walls or other manmade physical features that might present a hazard. This includes covering pools to avoid accidental drowning, installing sturdy fencing around hazardous areas and placing warning signs. Property owners are also liable for maintenance and security. Negligence means that the property owner was aware that someone could get hurt on the property and did nothing to prevent it. If you take all necessary precautions to protect individuals who are on your property, you are less likely to be found negligent in a premise liability suit.
Consider, for example, an investor who owns more than 75 properties throughout the Southwest. This client carried an individual insurance policy for each home, ensuring separate limits. Most of the homes were built in 2005 or after, and most had swimming pools. But each home carried a liability limit of just $300,000—an amount that isn’t nearly enough to adequately cover the array of claims that may arise.
As an example, think about a drowning in either a pool or a bathtub. In one recent tenant child bathtub drowning claim that occurred in an investment home, the total claim paid was over $1.5 million following all litigation and settlement costs. If this had happened to the investor in the example who had just $300,000 in coverage, he would have been responsible for more than $1.2 million in claims expense.
Securing the best insurance package for your real estate investments begins with planning. Analyzing all your risk is critical to successful implementation of your insurance program. Conversations with property managers and tenants will uncover areas that need additional attention.
Be sure to partner with a provider that offers ongoing assistance, consultation and risk mitigation service that helps you control your insurance expenses and enjoy a profitable investment property.
Glendon D. Nelson Jr.
Glendon D. Nelson Jr.,CIC, is a commercial insurance broker and surplus lines insurance broker. He is following in a family insurance tradition established by his great-grandfather. He is a fourth-generation insurance professional with nine years of commercial insurance experience and a 14-year tenure with The Mahoney Group. Nelson began his career working within the specialty programs department as an assistant. Through his passion for the insurance industry and his eagerness to learn, he has amassed a variety of knowledge and experience. In addition to obtaining his CIC, Nelson is working toward earning the CRM designation. Nelson can be reached at (480) 214-2794 or gdnelson@mahoneygroup.com.
