By Laurence Jankelow (MultiFamilyExecutive.com Article) — If someone told you there was a single paragraph you could add to your leases that could save you thousands of dollars and give you significantly greater peace of mind, you’d add it, right?
Well, there is: It’s a clause requiring tenants to carry renters insurance and showing you proof of an active policy. If you don’t already have such a clause in your leases, I recommend adding one as soon as you’re finished reading this article. Here’s a look at why requiring renters insurance is such a savvy move for landlords and property managers and how this policy can protect you.
How Renters Insurance Protects a Property Owner’s Investment
As most landlords and property managers know, the insurance they carry on their building does not cover their tenants’ belongings. But renters insurance goes beyond protecting furniture and clothing in case of damage.
A typical renters insurance policy includes the property coverage most people think of immediately, plus several other coverage types, including these:
- Third-party property damage: If a visitor to the building’s property is damaged, a renters insurance policy can pay to have it repaired or replaced. That’s important because without that coverage, the guest might go after (i.e., sue) the property owner.
- Liability: If a guest is injured while visiting the property, renters insurance can cover things like an ambulance ride and medical bills. That’s a big deal because liability claims, while rare, are the second most expensive claim type, clocking in at an average of about $26,000. Again, this is important because an injured guest whose costs aren’t covered by renters insurance might try to sue the property owner.
- The deductible for your property insurance, if they cause property damage: If a renter causes damage to your building—say, negligently causing a fire that burns the place down—their renters insurance can cover the deductible on your insurance policy. So while your insurance policy would be the one to ultimately pay for the replacement of the structure, you wouldn’t even be responsible for paying your deductible out of pocket if your tenant had adequate insurance.
- Additional living expenses: If damage to your building makes it impossible for your renters to stay in it during repairs, their renters insurance will pay for temporary shelter (in a hotel or another apartment). In some states, landlords may be responsible for handling additional living arrangements in the absence of renters insurance, which can be an expensive and time-consuming burden.
In other words, by adding a single paragraph to your rental agreement, you can avoid several potentially costly situations.
Another major benefit of renters insurance: It can reduce your landlord insurance premium. If you require renters insurance and can provide proof to the carrier of your policy, you can often get a reduction of your monthly premium. This is because, plain and simple, renters insurance makes your property less risky to the company offering your landlord coverage.
Other Benefits of Renters Insurance
Beyond the purely financial, there are a few other benefits to requiring your tenants to carry renters insurance.
First, the coverage ensures that your tenants and their possessions are protected. Renters (especially younger renters) may not think to get insurance on their own—or even know that renters insurance exists. But having a policy means they’ll be able to replace or repair their necessary possessions in the event of covered damage.
Second, it’s inexpensive—often less than $20 per month. Because of this, requiring renters insurance is a helpful proxy for gauging financial stability. If a renter pushes back or complains about the additional cost (which, remember, is negligible), consider it a red flag that they might not be in the best financial situation to pay rent in a timely manner.
Finally, it minimizes the chances that a tenant will sue you. That’s because a renters insurance policy offers financial protection for most of the things that can go wrong during the life of a lease. When a renter is financially compensated by their insurance benefits, they have no incentive to come after you. That makes life easier for everyone involved.
What Renters Insurance Doesn’t Cover
It’s important to note, though, that renters insurance doesn’t cover everything. Most policies specifically exclude coverage for damage caused by …
- Floods (i.e., water damage that comes from outside the house);
- Sinkholes; and
- Illegal activity by the policyholder
On top of that, most policies have pretty low limits for valuable personal property like jewelry or musical instruments. In the interest of making sure everyone walks away from a rental agreement happy, it’s probably best to mention these limits to your tenants to make sure they’re able to adequately protect themselves and the things they care about.
Updating Your Lease
Now that you’re aware of all the ways requiring your tenants to carry renters insurance can protect you, it’s time to update your standard lease agreement with a clause that requires tenants to carry this coverage.
You may also want to require proof of an active renters insurance policy at the time of lease signing to ensure that your tenant’s policy is active at all times. If the policy becomes inactive or if they fail to get coverage in the first place, you could be named in a lawsuit if a tenant or their guest gets hurt in your building.
If you still have questions or expect that your tenants might, feel free to visit this guide to renters insurance, which offers more details about how renters insurance works.