Not All Insurance Is Created Equal

Not All Insurance Is Created Equal

     While none of us likes paying for insurance, most of us aren’t willing to risk the financial devastation that could come without it. Renting residential and commercial properties comes with different risks, so a one-size-fits-all approach doesn't work. Be sure to get the insurance that protects you against financial losses from structural problems, legal problems, and access to essential services.

     Sometimes people become landlords by happenstance, for example, when they inherit their parents’ home and choose to rent it out to earn some income. Rather than homeowners’ insurance, they now need landlord insurance.

     As a residential landlord, you need to protect yourself against financial losses from problems with the building itself. You also need to consider risks related to tenant injuries; disputes arising from security deposits, late payments, and evictions. In older homes, you may need to buy additional coverage for environmental hazards such as mold, lead and asbestos. As with homeowners’ insurance, landlord insurance doesn’t typically include earthquake or flood insurance, so you’ll have to pay extra for these if you want them. Flood insurance is often required; earthquake insurance isn’t (and I don’t recommend it).

     Several years ago, a tenant in one of our rentals slipped and hit his head. The insurance company settled with a $2.9 million award. Although I disagreed with the sum, once the insurance company rules, that’s the ballgame. Thankfully, I had enough coverage that I did not have to pay out of pocket.

     The main reason I didn’t pay out of pocket was due to my umbrella policy. If there’s one piece of advice I’d give regarding landlord insurance, it’s to purchase an umbrella policy. In my case, my basic policy had a million-dollar limit; my umbrella policy covered the rest. Umbrella policies aren't expensive and they provide enormous peace of mind. If you get sued, a basic policy will often cover legal fees and a significant award against you. However, there is usually a deductible and a cap. Once your primary coverage runs out, your umbrella coverage kicks in. You can win a lawsuit and still spend six figures defending it. You can also lose a $100,000 claim while spending $200,000 in legal fees.

     If you’re managing rentals like VRBO or Airbnb, you're no longer in the passive business of renting a home. You're running an active enterprise which requires additional “short-term rental” insurance coverage.

     If instead of a residential property, you inherit your parents’ commercial building, your insurance premiums change. Commercial landlords need general liability and commercial property insurance, and sometimes additional coverage.

     Commercial buildings come with higher risks than residential buildings. If a pipe breaks and floods your residential rental, you must pay for your tenant’s temporary lodging while repairs are completed. It’s expensive, sure, but not nearly as expensive as relocating a business, especially one with specialized equipment like a restaurant or manufacturing operation. Rather than relocating a business temporarily, commercial property owners typically pay for “business interruption,” meaning the profits lost during downtime. This can run five to ten times the monthly rent.

     Another factor contributing to the higher cost of commercial premiums relates to equipment. If you lease a building along with specialized equipment and the building burns, the replacement cost can be higher than for a residential building and its contents.

     One more point when managing a commercial building: ask to be named as an additional insured on your tenant's policy. More often than not, an injured party will seek damages from anyone they can, and you could get named in a lawsuit even though you have no culpability.

     Whether you’re working with residential or commercial property, I recommend adding code upgrade coverage to replacement cost insurance. If you simply rebuild a building as it was, it may not pass inspection because building codes have changed. A building constructed in 1950 likely has plumbing, wiring, insulation, and windows that no longer meet code, and replacement cost alone won’t pay for what it takes to rebuild it legally.

     To be sure you get good advice and the service you need, I recommend finding a local insurance agent you trust, one who knows the business and returns your calls in a timely manner.

     If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

     Dick Selzer is a real estate broker who has been in the business for more than 50 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.