Owner Beware

By Keat Foong, Executive Editor 

Say an apartment resident causes a fire in their unit. If the renter has renters insurance, a claim can be made against that policy, and the apartment owner would not need to seek redress from its own insurance company or the renter—who may not have the wherewithal to pay up.

Considering the benefits, it’s not surprising that the number of apartment companies today mandating that residents obtain renters insurance has increased sharply. According to a survey of apartment companies conducted by the National Multi Housing Council (NMHC), a full 66 percent of respondents said that they required renters insurance in 2010, up from 44 percent in 2009 and only 24 percent in 2008. And 68 percent of respondents said they require coverage of $100,000, with limits ranging from $25,000 to $2 million required by one respondent.

The largest apartment companies may be the ones leading the way in implementing renters insurance policies in their communities. “We consider [requiring renters insurance] an industry best practice that eventually will become an industry standard,” says Michael Greene, senior director of business operations at Greystar.

As a third-party apartment property manager, Greystar strongly advises its clients to implement renters’ insurance policies in their apartment properties. Reflecting the national statistic, the participation rate of Greystar’s national apartment management portfolio in this form of risk management has doubled in the past 17 months, with 429 communities enrolled in renters insurance programs, says Greene. Starting in 2010, Greystar had started looking into helping its clients to sign onto renters insurance in greater numbers and reap the benefits of such programs (Greystar itself does not generate any commissions or profits of any kind).

The greatest benefit to apartment owners is the ability to recover damages. If the resident should cause destruction to the apartment property, the landlord would be able to recover the costs of repair and replacement from the resident’s insurance company. The apartment company’s master insurance policy may cover the damage, but it may have a deductible. And in any case, making claims against its insurance policy may ultimately raise the rates for the apartment company. Another benefit to property owners is that residents are less likely to come to them asking for reimbursement for a stolen bike, for example, the theft of which the apartment company may not have caused.

Renters insurance today most commonly protects against damages resulting from smoke, fire, explosions and water and offers three basic components of coverage: liability coverage, personal possessions coverage and external living expenses coverage. Liability insurance protects against damages caused by the residents for which they are liable to other parties. Personal possessions insurance will reimburse the resident for loss of personal property, and external living expenses insurance will pay the resident for living expenses and accommodation costs if they should be displaced as a result of a fire or some other disaster. Landlords can mandate that residents purchase liability insurance—though not insurance for personal possessions or external living expenses.

Apartment companies are not allowed, under state laws, to require that residents subscribe to any one insurance company, but they can offer an insurance company or a list of insurance companies as an option to residents who may be pre-approved by those recommended companies.

According to Greystar’s Greene, renters insurance allows the company’s clients to decrease expenses in a number of ways, including lowering the property-level insurance premium or deductibles due to more favorable loss ratios. There is also, of course, the economic benefit of ancillary income that results from apartment companies signing agreements with renters insurance providers. Greene says this could amount to as much as $8 per unit per year for his company’s clients. However, the experience may be that the economic benefit is greater on the insurance expense than on the ancillary income side.

As renters insurance mandates become more common in the apartment marketplace, apartment operators are also less hesitant to make it a requirement in their own communities. “We have not seen any substantial market challenges. We do not feel we have lost any leases as a result of the requirement,” says Robert Lampher, president, property management at Pennrose. He adds that residents have come to almost expect the requirement.

In the market-rate portion of its 10,000-unit plus portfolio, Pennrose has begun to require that residents buy renters insurance. Pennrose requires proof of a certificate of insurance prior to the resident’s move-in. The apartment company also monitors units based on the original insurance and reaches out to the resident regarding policy renewals.

On the affordable housing side, however, the insurance policy is different as property owners are required under affordable housing programs to deduct the cost of mandatory fees charged to residents as a condition of occupancy from the maximum rent permitted for that unit, explains Lampher. Consequently, Pennrose is examining alternative options to resident mandates in this part of its portfolio, such as obtaining portfolio-wide renters’ insurance in order to lower the cost of renters insurance for individual properties. The company is also conducting cost-benefit analysis on the cost of buying the renters insurance on a company-wide basis versus the cost of damages that would normally be covered by renters insurance.

Lyon Communities, which has an apartment portfolio of about 11,000 homes, imposes a requirement on its properties in California, Colorado and Georgia that residents place and maintain renters insurance. However, in the state of Florida, property owners are not allowed to impose such as requirement, notes Suzanne Maddalon, executive vice president, operations at Lyons Communities. “Residents must present evidence of the placed policy in order to sign a lease and receive keys to their apartment, and we have this requirement for at least five years,” says Maddalon.

“We do recover repair expense reimbursement from these policies for losses that are caused by resident negligence such as fires, overflowing bath tubs and unreported water leaks that have caused substantial damage to the apartment,” reports Maddalon. The company cannot require a specific renters insurance carrier, she notes. “As long as residents obtain a policy with limited liability of at least $100,000 that covers their negligence and does not specifically exclude fire and water damage claims, we will accept the policy,” says Maddalon. But a substantial amount of time is needed for the management company to ensure compliance at move-in and throughout the residency.

All the same, renters insurance carriers are developing new software tools that help apartment companies monitor compliance. The ability to track compliance is the key to having a high penetration rate in the properties, notes Greene. “We strongly urge our clients to implement renters insurance.”