Renters’ Insurance Protects Landlords as Well as Tenants

Published on: December 12, 2011

Here’s a landlord’s nightmare — at least one of them. A fire has caused extensive damage to one of your buildings. No one was injured, fortunately, but all 50 tenants will have to be relocated while the building is being repaired, which will take at least five months and probably longer. The cause of the fire, as is often the case, is unrelated to the landlord or the physical structure of the property.

A Massachusetts statute requires landlords to provide $750 in relocation benefits to tenants displaced by a building disaster, so you cut those checks. But that payment won’t cover their temporary housing costs for long, and it certainly won’t replace the personal belongings that were damaged or destroyed in the fire. Many of your tenants, if not all of them, will need to blame someone for their losses, and will expect you to compensate them. At least some of them will sue you when you refuse.

Needless to say, both you and your tenants would be much better off if your tenants had renters’ insurance, which would cover both their temporary housing costs and their property damage. But the Insurance Information Institute estimates that only about 40 percent of tenants nationally have that coverage.

The benefits for tenants, although apparently ignored by many of them, are obvious. The relatively low-cost renters’ policy insures their personal property and provides liability coverage as well. If a visitor trips over a chair or falls off of a trampoline in a tenant’s apartment, the tenant alone will be liable for the damages. The landlord will have no liability unless his/her negligence caused the injury or contributed to it in some way, leaving the tenant on the hook for hundreds and possibly thousands of dollars in medical and legal costs that a renters’ policy would likely cover.

Landlords also benefit if their tenants have renters’ insurance in many ways, among them: Tenants who have this coverage are less likely to sue their landlords to compensate them for a loss. Even if landlords ultimately prevail in those suits, they still have to pay the legal costs involved. Rental property owners responding to a survey by Joshua Tree Consulting estimated that they juggle eight “nuisance” insurance claims per property every year. That can add up to a lot of legal bills and a lot of time landlords would almost certainly prefer to spend on other tasks.

Covering the Deductible

Equally important, a renter’s insurance policy would cover the landlord’s deductible on damages for which the tenant is responsible – no small consideration, given that the National Fire Protection Association estimates that 70 percent of fires in multifamily dwellings are the result of tenants’ negligence.

In a 2006 white paper analyzing the advantages of renters’ insurance, Joshua Tree (the consulting firm cited earlier) notes that landlords paid an average of $2,444 per property for tenant-caused damage in buildings where tenants weren’t required to have insurance compared with $1,364 in buildings where the insurance was mandatory.

The white paper also points out that in addition to being less likely to sue their landlords, tenants with insurance are also more likely to have the financial capacity to continue renting from the landlord after a disaster and “less likely to need free rent or other financial assistance.”

Although Massachusetts landlords aren’t required to provide assistance (beyond the $750 required by state law), we have found that judges and municipal officials sometimes pressure them to do much more. Standing in front of the city officials who are demanding that you pay for the tenants to stay in a hotel, even though the law does not require the payments, is not a pleasant experience.

Making it Mandatory

Landlords typically inform their tenants, or should inform them, that the landlord’s insurance will not protect the tenants’ personal property. Many include language in their leases making that point and “strongly encouraging” tenants to obtain renters’ coverage. Some property owners, particularly larger companies, go further and actually require tenants to obtain renters’ insurance as a condition of the tenancy.
One of our clients, a large Real Estate Investment Trust with holdings all over the country, has made renters’ insurance a requirement for all of its multifamily properties and more property owners appear to be following suit. A survey by the National MultiHousing Council found that 66 percent of the companies responding required insurance in 2010, compared with 45 percent in 2009 and only 24 percent in 2008.

One state (Virginia) specifically allows landlords to require renters’ insurance. The statute also authorizes landlords to obtain the insurance for tenants who don’t have it and bill them for its cost. Massachusetts, like most states, has no comparable authorizing language, but nothing in the state’s statutes prohibits landlords from making renters’ insurance mandatory for their tenants. And for all the reasons noted here, I think this is an option most rental property owners should consider.

Some are afraid adopting an insurance requirement will create a competitive disadvantage for them; given the option, they assume, tenants will choose a building where they don’t have to pay for insurance over one where the coverage is required. But that doesn’t appear to be the case. The Joshua Tree white paper describes the experience one landlord, who implemented an insurance requirement after fires in several of his buildings.

“We have had no reduction in traffic or leasing success….not one blip,” this landlord reported. “The benefits outweigh the cost and effort. If every apartment owner pushed it, all residents would be better off. We’re going to reeducate our renters about liability and the dangers of the way they live.” Renters’ insurance, he added, “is a solid risk management approach [for landlords] that benefits residents.”

Rental property owners responding to a national survey by Satisfacts agreed. Of the owners requiring insurance in some or all of their properties, nearly 85 percent described the impact as “positive” or neutral and 91 percent said the administrative burden has been “easy” or “manageable.”

A Few Basics

A renters’ insurance requirement doesn’t have to be complicated. Landlords implementing this policy should:

  • Make the insurance requirement a provision of the lease or rental agreement.
  • Specify a minimum insurance amount – higher in more expensive properties than in less expensive ones.
  • Require tenants to provide evidence of insurance at the beginning of a new lease and at each renewal. The lease should specify that failure to do so will be grounds for eviction.
  • Consider including a list of insurance companies offering the coverage, but don’t require tenants to use a particular company and don’t recommend any of them.
  • Consider providing informational material explaining the benefits of renters’ insurance for tenants and why they need that protection. Education can help tenants understand that the insurance the landlord is requiring is in the tenants’ best interests.
  • Enforce the insurance requirement uniformly. Allowing exceptions for some tenants will make it difficult to enforce the policy against other tenants and leave you vulnerable to charges of discriminating against them.

There will undoubtedly be some tenants who will balk at the insurance requirement, but probably fewer than you fear. The Joshua Tree white paper estimates that renters’ insurance will provide $110,000 annually in financial benefits to property owners for every 20 properties owned “at no cost” to them — a powerful argument in its favor.

Admittedly, that estimate assumes fairly extensive holdings, with an average of 250 units per property. But for smaller property owners as for larger ones, eliminating even a few nuisance suits every year or covering even one significant damage claim should more than offset the administrative burdens created by implementing an insurance requirement and enforcing it over time.