Renter’s Insurance
Question: I am the owner of several residential rental properties. I have heard about renter’s insurance, and that I should require my tenants to obtain this insurance because it will protect my interests. Can I do so, what are the benefits of such insurance and should I have my name added to the renter’s insurance policy?
Answer: All very good questions. First, what is renter’s insurance and what does it cover? There appears to be some misunderstanding on the part of landlords as to the scope of the renter’s insurance coverage. It does not take the place of the landlord’s insurance policy, and it does not cover the damage to the landlord’s interests in the real property improvements. So why should a landlord require that tenants obtain such renter’s insurance? Because it benefits both the landlord and the tenant in a number of particulars:
Coverage and Benefits to both Landlord and Tenant of Renter’s Insurance
If the tenant causes damage to the landlord’s property (and this is beyond just ordinary wear and tear, which would not be covered by any insurance), then renter’s insurance will cover the tenant’s obligations to the landlord for the cost of the deductible on the landlord’s policy, and will cover any subrogation claim the landlord’s insurance company would have against the tenant. This indirectly benefits the landlord as it prevents a potentially substantial economic hit to the tenant which may in turn make it difficult for the tenant to pay rent.
Example: Tenant negligently starts a fire which destroys $5,000 of the tenant’s household furnishings, and results in damages of $25,000 to the landlord’s property. The landlord has an insurance policy with a $5,000 deductible per occurrence.
Scenario A (no renter’s insurance): Landlord has to pay out $5,000 to cover the deductible, the landlord’s insurance company covers the $25,000 of damage, and the tenant has to come up with a total of $30,000 to cover (a) the landlord’s deductible payment of $5,000; (b) the $20,000 paid out by the landlord’s insurance company, and (c) $5,000 to replace the destroyed household furnishings. Many tenants would have no capability of handling this amount of loss, may as a result move out of the rental property, landlord loses a tenant and has to sue to recover the $5,000 deductible.
Scenario B (renter’s insurance): Landlord’s $5,000 deductible would be covered and repaid to the landlord, the $20,000 paid out by the landlord’s insurance company would be reimbursed through the tenant’s policy, and the cost of replacement of the $5,000 of the tenant’s household furnishings would be covered. Tenant takes a nominal economic hit (the amount of the deductible), hopefully remains in the property, continues to pay rent, and landlord has a happy tenant.
Pretty easy to see which of the two scenarios would be preferred by any landlord.
Renter’s insurance also does provide liability coverage to the landlord in the event of an injury occurring on the property. Ever had this one occur before? Tenant’s grandma comes for a visit, slips on a wet entryway, and ends up in the hospital for a week. It’s clear that the condition of the entryway is due to the tenant’s conduct. Tenant has no money and no insurance. Who does the grandma sue? You, the landlord, because you have the perceived deep pockets and insurance. The lawsuit may be dismissed, but you still have to go through the hassle of dealing with the claim. If the tenant had renter’s insurance, Grandma could just look to that policy for coverage, so the existence of renter’s insurance may result in a reduction in nuisance lawsuits.
There are also a number of other benefits to the landlord from renter’s insurance, including:
A. There is a theft of the tenant’s property. It’s not the fault of the landlord, but the tenant nevertheless sues the landlord for the loss (why – because it’s easy to do!). If renter’s insurance was in place it would cover the loss and likely prevent a claim against the landlord.
B. You are helping the tenant. This is not to say that you need to be the caretaker of the tenant, but if you help educate the tenant on the value of renter’s insurance, and require it in your rental agreement, you are doing not only yourself, but the tenant, a favor. And when that first loss does occur, which is covered by the renter’s insurance, rest assured the tenant will be grateful (and will let others know).
What Should be in the Rental Agreement regarding Renter’s Insurance
As advisable as it may be, Oregon law does not require that tenants obtain renter’s insurance, and unless it is required under the terms of the rental agreement with the tenant, the tenant would have no legal obligation to obtain such insurance. So…
What should be included in the rental agreement with the tenant?
1. Make it mandatory that the tenant obtain renter’s insurance (evidence of such insurance should be required before the tenant is given possession of the rental property), and that it is a default under the rental agreement if such insurance is not renewed and maintained throughout the term of the rental agreement.
2. Specify a minimum amount of insurance, with the amount being higher in more expensive properties than in less expensive ones.
3. Require that the tenant have their insurance company add the landlord’s name on the certificate as an “additional interest”, so that the landlord will know if the insurance is being cancelled for some reason, such as the nonpayment of the required premium.
For a copy of a sample provision, or a copy of a typical renter’s insurance policy feel free to contact any of the representatives of Total Property Management Services.
How, if at all, should a landlord be named on a renter’s policy.
A detailed discussion of this topic is beyond the scope of this article. Suffice it to say that what a landlord should seek is to be named as an “additional interest” on the renter’s policy. This will not provide any additional coverage to the landlord, and will not change the nature of the renter’s insurance. What it will do, however, is cause the renter’s insurance company to notify the landlord if there is any cancellation of the renter’s insurance or any major change to the terms of the renter’s insurance policy. This notification then enables the landlord to follow up with the tenant. This addition does not result in any increase in the premium payable by the tenant.
General cost of renter’s insurance.
The cost of renter’s insurance is relatively low. Most policies start at around $10/month/ $125 per year and go up from there. Location, credit score, prior losses, type of construction, etc., all play a part in the pricing.