When you are managing dozens, hundreds, or even thousands of rental units the concern of damage to your property that is caused by your tenants or their guests is ever-present. This concern only increases as your management portfolio grows. If there is unit damage it is often necessary to complete any repairs to the unit to keep it habitable. How those repairs are paid for can be approached in several ways, some less desirable than others.
The first logical source of funds to pay for repairs would be the security deposit collected when the lease was first signed. Unfortunately, the bill for damage often far exceeds the amount that was collected for the security deposit. According to iProperty Management, the average cost for home insurance claims related to water damage is over $10,000. Another pitfall for this option is the security deposit is a one and done source, meaning that if the same tenant causes more damage in the future the security deposit would have already been exhausted.
If there is no security deposit available, the next most desirable option is that your tenant has an in-force renter’s insurance policy (HO4) that they have paid for out of their pocket. Not only will a renter’s insurance policy cover any losses to their personal property, but it will also cover physical damages to the property from some of the most common perils including fire, explosion, smoke, or water damage. Although this situation is the most ideal, alarmingly it is not often the case. The Insurance Information Institute says that only 37% of tenants have renter's insurance. As a property manager, you could consider requiring your tenants to maintain renter’s insurance as part of the lease agreement. Placing this stipulation on potential tenants would decrease your unit’s attractiveness when compared with other available units which would make it more difficult for you to fill vacancies.
In the event that the tenant does not have a renter’s insurance policy in force, the security deposit has been exhausted and there is still an outstanding balance to pay for repairs, you could place a claim with your primary property insurance policy covering the unit. Indeed, this will often recoup any costs for repairs that have to be made, but the ramifications for these claims can have long-lasting effects. As your loss ratio increases because of the additional claims, your insurance company may be forced to raise your premiums or deductibles when the policy renews to satisfy their underwriting requirements.
When all the aforementioned avenues have been exhausted you will have to turn to the least desirable option of paying for any damages out of pocket. Having these repair costs hitting your bottom line directly hurts your balance sheet and is not a sustainable solution.
To address these risk concerns Unitas Financial Services have developed Tenant Liability Protection as part of their Property Management Solutions. This policy provides property managers with peace of mind knowing that losses resulting from tenant damage caused by some of the most common perils will be covered. You also do not have to be concerned about this policy not being in-force because you would be the policy owner. Additionally, this policy would supplement your primary policy meaning you won’t see any raises in premiums or deductibles because of an increase in claims on your primary policy.
When a new tenant signs a lease and they do not provide proof of renter’s insurance the property can be protected from any potential damage the tenant or their guests cause from the most common perils of fire, explosion, smoke, and water. The premium for each additional unit is comparable to what a tenant would pay for a renter’s insurance policy. This premium is often passed onto the tenant through an increase in rent or lease origination fees.
One of the most advantageous aspects utilizing Property Management Solutions from Unitas Financial Services is that any covered losses caused by your tenant or their guests will not come out of your bottom line. Being able to avoid these direct losses can help provide you more liquidity, which provides you with the flexibility to run your business.
