One of the biggest assumptions in the property management industry is that the biggest risk a manager takes on is the renters themselves. Even the most rigorous background checks and rental history scans won’t account for renters who may simply treat the property with a bit of a “use and abuse” attitude. Still, there are some risks that are not just beyond your control, they’re even beyond your tenant’s control. In all likelihood, they’re costlier to you than a fresh coat of paint or new drywall from a semi-destructive tenant.
As a property manager, you’ll need to consider five insurance types in particular: General Liability Insurance, Umbrella Liability Insurance, Errors & Omissions Insurance, Commercial Property Insurance, and Dwelling Property Insurance.
Let’s break these down a bit to better understand why they’re important.
General Liability Insurance and Excess (Umbrella) Liability Insurance
A General Liability Insurance policy is designed to protect your business against a number of different risk factors. At a basic level, it protects you and your business against third party claims related to bodily injury, property damage or personal injuries that occur on your property. Although you may or may not be responsible for these, a General Liability Insurance policy will help mitigate the risks.
General Liability coverage is designed to help landlords or property managers in situations where a third party (such as the tenant) attempts to claim the property owner is at fault for a loss suffered on the property. For example, if a break-in occurs while a tenant is away, that tenant may try to sue the landlord for failing to secure the property with an alarm system of some kind. This is especially true if the tenant noticed that the lock was broken, notified you, and the situation was not properly resolved.
This policy will have a specific coverage limits, per-occurrence and total. This coverage limit can be supplemented with an Umbrella Liability Insurance policy. This will add a cushion of extra coverage, for example, in the case that a major, unexpected event happened that exceeded your General Liability per-occurrence coverage limit.
Of course, that may not be your fault as a landlord or property manager. It’s generally the tenant’s responsibility to take care of their own home security. Nevertheless, some may not see it that way, and instead try to find recompense with the landlord. It’s not just these issues which may cause a tenant to file a claim. Any injury they suffer on your property may lead them to try to file a claim against you. These kinds of issues are exceedingly common.
Property Management Liability Insurance
Property Management Liability coverage is a portion of a General Liability Insurance policy. It is typically included in the policy unless specifically excluded. This insurance protects your business from a wide range of potential errors that can be connected back to you. For example, if one of your properties required new pipes, but you failed to check a burst pipe in the winter, the subsequent damage to a renter’s property would come back to you. It’s rare that a property manager is going to require their renter to do a checkup on the health of pipes. That’s usually the property manager’s responsibility.
Sound like a far-fetched scenario? It’s not too unlikely. The polybutylene piping recall affected tens of thousands of homeowners and property managers alike. Before anyone knew there was a problem with the piping, it was easy to excuse property managers for any damage leaking pipes might have caused to a renter’s property. Now, however, if you still rent out properties with this piping, given the known problems, and have not investigated to make sure your properties are not using it, you could easily be at fault.
Errors and Omissions Insurance (E&O)
An E&O policy is a recommended form of coverage for most property managers and landlords, especially those who manage a large number of residences. An E&O policy will protect you and your business in case you make a mistake somehow that negatively impacts a renter.
For example, if you run a credit check for a potential renter, but accidentally run a report on the wrong person, this could come up on the mistaken individual’s credit report. These kinds of inquiries can actually lower a credit report. You may end up with a claim against you as a result. An E&O policy would help mitigate the cost, including covering any potential damages. Outside of this, an E&O can help cover situations that involve mistakes relating to a variety of renter-specific issues, such as repairs that needed to be made but were missed as an oversight, or misplaced rent checks.
Commercial Property Insurance
A Commercial Property Insurance policy is extremely important for property managers, as it’s the insurance policy that protects your most valuable assets. In particular, property managers who own or manage properties which owned in the name of the business, and not an individual, should purchase a Commercial Property Insurance policy.
At the most basic level, a Commercial Property Insurance policy works like a Homeowners Policy for a business. Loss or damage to the building and valuable items within the building are covered. This includes loss events such as fires, theft, gas explosions, vandalism or other sudden, unexpected and unavoidable events.
However, it’s good to check what incidents are not covered. For example, oftentimes earthquakes and floods would not be considered covered events, so if your properties are located in high risk areas for these, you should look at additional coverage as well.
Dwelling Property Insurance
Dwelling Property Insurance is an alternative to a Commercial Property policy, but generally not recommended if you manage multiple properties, or a business is named as the owner. There are three forms: DP-1, DP-2, and DP-3.
DP-1 is the basic form of this insurance, covering only damage to the physical property due to a small list of named perils, such as lightning, internal combustion or fire. It does not cover vandalism or theft. DP-2 has very specific named perils but includes a much longer list of these. A DP-2 policy also operates as a “replacement cost” policy, whereas a DP-1 is typically an “actual cost value” policy. However, a DP-2 generally does not cover a vacant home. DP-3 insurance is the broadest coverage for landlords and property managers, as it operates without named perils. Instead, all perils are covered with the exception of some that are specifically excluded.
Certificates of Insurance
You may have yourself covered, but what about your tenant or the people that work on the property?
It’s important to keep track of the certificates of insurance for anyone performing work on your properties. Additionally, you may want to make Renters Insurance a requirement for your tenants. You can ask tenants for a deck page or a binder that shows verification of current insurance.
Keep in mind that it’s not enough to verify that they have these documents — you’ll also want to make sure that the insurance policies are current and meet the requirements you’ve set. This will lessen the chance that you might be held liable for instances that directly affect tenants or are caused by contractors, as well as provide them an avenue for claims that doesn’t involve pulling you into a legal liability struggle.