Landlords of rental homes face much higher risks of a liability loss and/or property loss than the average homeowner. Before purchasing a rental home it’s important to research the tenant’s legal rights and your own legal obligations and rights as the landlord. Both the tenant and the landlord need to protect themselves by obtaining the appropriate insurance coverage.
Protecting Yourself Starts with a Good Legal Contract (lease)
Landlords need to understand the importance of a good legal contract or lease agreement. This document should clearly dictate all the rules the tenant and landlord will follow to ensure a good working relationship and a well maintained home. It could very well be the only protection you have if the renter owes past due rent payments or damages your property. I’m amazed at how many landlords tell me they haven’t even thoroughly read, nor understand the lease they and the renter signed. Bradford Publishing (http://www.bradfordpublishing.com) is a good source of legal forms and reference materials for landlords.
Screen all tenants over 18yrs old
Another significant loss exposure that landlords face is an unfavourable tenant. The best defence in preventing an unfavourable tenant from moving into your rental home is to obtain a tenant screening report on every adult over 18 years of age who will be living in the home. There are many sites on-line which provide this service for a small fee. This report will provide you with a criminal background check, a credit report and prior rental history. Getting the insurance company to pay to repair damages to the home which are caused by the tenant can be tricky. If the damage is determined to be ‘hard living’ or due to the landlord’s not monitoring their property, your insurance claim may be denied. In certain circumstances, some carriers will determine “tenant caused” damage to the home to be “vandalism” and may pay the claim, but this determination can be very subjective and policy language varies greatly among insurance policies. So…… finding a responsible tenant with a good rental history is of utmost importance to the landlord!
Inspect Your Property Regularly
Don’t be afraid to put in your lease that you will be dropping by regularly to inspect the inside and outside of the home. It’s your right! We once had a client who hadn’t heard from their renter in 2 years, but the rent payment was always on time. One day the rent check never appeared, the phone was disconnected and the renter didn’t respond to email. The home’s owner/Landlord entered the home to find out it had been ‘gutted’ to the studs and turned into a marijuana grow house. Of course the plants were gone and so were the tenants!
The 3 most important coverages on a Landlord Insurance Policy
1. Building (Dwelling)Coverage
This is the amount of coverage on the policy to ‘replace’ the building in case it’s destroyed. Building replacement amounts are estimates, the science is not exact, and labor and material costs change all the time. It’s a good idea to review the amount of this coverage every few years compared to local market conditions with your agent to make sure it’s enough to replace the home.
2. Loss of Rents Coverage
Landlords are responsible for the overall maintenance of their rental unit. But accidents happen every day. What if a rental unit is damaged by fire? The unit would most likely become uninhabitable for a period of time during repairs, which means the landlord will be losing out on rental income. Most insurance policies provide a limited amount of ‘rental income replacement’ coverage, but not enough. It is recommended to carry at least one years’ worth of ‘rental income replacement coverage on the policy.
3. Liability Coverage
This is the most important coverage because a potential loss amount is hard to determine ahead of time and can be limitless. As a Landlord, you have no way of knowing who is coming onto your property and the 24 hour activies occurring there. Yet, if someone gets injured on your property, you can be held liable, meaning responsible to pay for the injuries, rehabilitation, loss of lifetime income, ongoing medical costs….etc. These types of losses can be very hard (and expensive) to defend against. I advise clients to purchase the highest liability limit available from the carrier, $1 million if it’s available. Then add on top of that a liability umbrella policy which gives you an additional $1million, $2million or higher. Liability coverage is one of the cheapest coverages offered and may prevent your hard earned monetary assets from being turned over to an injured party! Here’s the best part ….if the carrier thinks you are innocent of the liability claim, they will defend you in a court of law on their own nickel. On some policies, the payment of attorney’s fees is taken from the policy limit of insurance; this reduces the amount of coverage to pay the injured party. Make sure the umbrella policy you purchase pays for attorneys fee’s ‘outside’ the limit of insurance shown on the policy or increase the insurance limit. As we all know, attorney’s fees and medical costs can add up quickly and even $1million in today’s world may not be enough insurance coverage if someone is injured on your property.
Since the financial meltdown in 2008, the habitational trend has been away from home ownership. Many factors are the cause; including (potential) homeowners with credit issues and job instability, millennials with huge amounts of student loan debt and/or a first-hand account of a family member who lost ownership of their home during the downturn. With the increased demand to inhabit a rental home, landlords need to be aware of their increased risk exposures and legal responsibilities to their tenants……. AND protect themselves BEFORE a financially devastating loss occurs! Having a detailed, comprehensive lease agreement signed by carefully screened tenants and the improper insurance coverage can greatly reduce the landlord’s risk of a large monetary loss.
Note: Data and information provided on this site is for informational purposes only and should not be considered professional advice. Denver West Insurance Brokers makes no representations as to the accuracy, or validity of any information in this article and will not be liable for any errors, omissions, losses, injuries, or damages arising from its display or use.