Risky Business: Top Tips for Managing Insurance
Last year's extreme weather events raise a critical question: What are the best ways to ensure adequate coverage without overpaying?
By Meeghan Fuhr
The catastrophic natural disasters of 2017 disrupted millions of lives across the country and inflicted billions of dollars in property damage. Among other impacts, the storms, floods and fires brought the issue of insurance coverage to the forefront. For investors and property managers, last year’s events raise a critical issue: What is the best strategy to make sure you have all the coverage you need in the case of a major event, but don’t overpay?
Small-balance multifamily owners and managers typically don’t have their own risk-management personnel, so it is their responsibility to make insurance decisions. Choosing a broker that understands your individual situation and risk profile will help ensure that you have adequate coverage and bring you peace of mind, even in the worst situations.
Keeping up with regular maintenance and inspections at your properties is a key practice that can put you in a better position if things go wrong. It can be easy to put off repairs, especially as a property owner with time and resources spread thin. Small maintenance issues, however, can quickly go from bad to worse, especially when a disaster hits. Keeping up with regular maintenance can help you avoid significant damage, while also better preparing you if you need to file an insurance claim.
What Policies are Necessary?
Finding an adequate insurance package can be a daunting task for landlords. You could fail to get the right type of insurance coverage, the proper amount of coverage, or a combination of both. According to Justin Herndon of Allstate Insurance Company, essential coverage includes protection for the dwelling itself, liability protection and rental income coverage.
Insurance for the building will typically cover the physical structure itself, as well as contents in the property that are owned by the landlord and used for renting out the unit, such as a refrigerator, washer or dryer. This coverage is essential, particularly in the event of a fire or natural disaster. If the property is damaged to the point where a resident needs to relocate, there is also coverage that will reimburse the landlord for the rental income lost.
Issues don’t solely arise after a natural disaster, though. Individuals may suffer an injury at the property for any number of reasons, and it’s not only important, but necessary to have liability coverage for this reason. “Accidents can and do happen, and a landlord can be held liable for the cost of medical bills if someone at the property sustains a serious injury,” said Herndon.
Worth the Cost
The previously mentioned policies are common and well-known to landlords. Other policies, however, can be equally important but are often overlooked. One example is a personal umbrella policy, which landlords often opt out of, but could be an essential form of protection.
There can be instances where liability limits offered on basic policies are not sufficient enough to protect a landlord in the case of a serious injury at the property. “If a landlord is sued for $1M because of an injury a tenant sustains at the property, and the landlord’s policy only provides coverage up to $300K, the landlord could be personally liable for the remaining $700K,” explained Herndon. For small-balance portfolio owners, large sums like this could put them out of business completely.
Limitations and Misconceptions
All insurance policies contain limitations or exclusions that landlords may not be aware of. For example, vandalism or burglary while the property is vacant may not be covered by the primary policy, however, it is possible to add additional coverage such as this to the base policy. “It is important to talk with an agent about what a policy provides coverage for and what your specific needs as a landlord might be,” Herndon said.
Renters insurance is another important topic, as it doesn’t directly protect the landlord but still decreases their risk significantly. According to Herndon, many residents believe they are already covered by the landlord’s policy. If they were aware that they aren’t protected, they may decide to opt in for insurance themselves, even if it wasn’t required.
It’s certainly beneficial to landlords as well. “It protects the landlord from incurring additional costs if the renter is found to be the responsible party due to negligence,” Jon Snyder, sr. product manager at Esurance, explained. “For instance, if there were a fire in the kitchen that was the result of the renter’s negligence, the insurance company would collect from the renters insurance allowing the landlord’s insurance company to repay the deductible and recoup costs to repair the property.”
Reassess Your Coverage
Insurance coverage should be customized based on each individual’s risk profile. It is especially important for small-balance portfolio owners and managers to consult with an insurance broker they trust so they can feel comfortable that they are protected even in the worst-case scenarios. However, according to Herndon, customer needs can change. “We recommend yearly insurance check-ups to ensure appropriate protection and peace of mind.”