With all the media hype about the so-called looming fiscal cliff, it’s a good time of the year to remember how to avoid financial disasters and to do what we can to prevent losses. Property Managers with experience know how costly the process of eviction can be, as well as the expense of repairing damaged rental units that have been “trashed” by destructive former residents.
Recently I did some research about a genre of insurance for landlords to insure their rental properties against damage and lost revenue. That fact of the existence of what is often called Landlord Insurance speaks to the unique risks and perils associated with owning residential rental housing.
My research indicates that the most common landlord insurance policy covers damage to the building caused by residents. It typically covers the damage whether or not it was committed intentionally. Let’s face it, some residents are thoughtless and don’t take care of the owner’s property. Others are hostile and can be destructive. Whether the problem is negligence in not reporting damage and the need for repairs or its outright vandalism, the final result can include serious property damage and expensive repair bills.
Thankfully, most residents aren’t destructive or irresponsible, and to be more certain that’s why the Property Manager carefully screens applicants and performs background checks. Yet it’s hard to screen for the kind of guests that residents have at their home or the fact that other circumstances can lead to unexpected outcomes. That’s why we have insurance, for the unexpected and hard to avoid situations that cost an owner significant amounts of money and lost revenues.
Owners and their Property Managers sometimes find themselves the defendants in lawsuits brought by residents, some of which may have learned how to use the legal system to exploit the unwary. The most common allegations for law suits are situations like unlawful rental eviction, discrimination, physical injury or invasion of privacy. There are many varieties of owner-landlord insurance policies and riders, but it seemed obvious to me that a thorough landlord insurance policy covers the cost of legal expenses incurred during litigation. It also typically pays the damages if the resident prevails in their lawsuit.
For better or for worse, we live in a litigious society. No matter how kind, how responsible and how fair an owner is, there is a reasonable likelihood that sooner or later they may be sued. Having a policy that includes rent loss or rent default insurance prevents a big expense and potential loss that impacts both the owner-client and the Property Manager. “Nothing saps profits as quickly as not having rent coming in to cover expenses. There are several ways a landlord may suffer a loss in rental income,” states one helpful online source of information.
Remember also that the alternative to buying Landlord Insurance or Eviction Insurance, which carry hefty premiums, is to include in the owner’s expense budget an amount each month for what I’ll refer to as Self-Insurance. The problem with Self-Insurance is that it takes years sometimes to build up enough reserves to cover the costs of unplanned expenses like eviction, loss of rent, and atypical amounts of property damage.
The compromise solution may include the use of both an insurance policy and Self-Insurance. Use higher deductibles and smaller policy limits while putting aside as much as possible each month for the owner’s Self-insurance fund. A knowledgeable insurance broker with a good reputation can help owners decide. In the final analysis the owner will probably look to you, the Property Manager, for guidance and ideas. That’s why it behooves us all to learn all we can on this topic so our owner-clients can be well-informed and carefully prepared.
Written by Marc Courtenay on 27. Feb, 2013 from PropertyManager.com