Protecting Yourself as a Landlord - Part III

Third in a series of three articles
by Robert Locke, RMP, MPM

In the first two articles we suggested that the big picture in protecting yourself as a landlord is a layering process you accomplish over time, not something you do today.  It starts with “getting title out of your name” to create anonymity and become harder to identify as the owner. Next we said to “manage through an entity (preferably an LLC) instead of managing in your name.” This adds another layer to protecting your personal assets from the liabilities of owning a rental. Lastly we suggested “manage your properties by-the-book” as it relates to the laws that govern the landlord/tenant business so you’re on good ground when things go badly. Follow these simple rules and you’re over half way to having the best model to protect yourself as a landlord.

By following these guidelines we have managed 7,000 tenants over 30 years and have only had five law suits, none of which cost over $5,000 to settle and none got in front of a judge. This last article addresses the insurance you should set up to protect yourself, and your personal assets, from the liabilities of being a rental property owner.  

The first, and cheapest, insurance defense is a good Landlord Policy. Landlord policies (like home owner policies) cover property damage as well as liability risks. Many insurance companies have gotten out of the landlord business because of their heavy losses and you may not be able to get one from your current carrier. Many companies require you have your auto and home with them before they will issue a landlord policy. Securing a good landlord policy is getting harder every year as companies are more timid than ever regarding properties held in LLC’s, Land Trusts, Corporations and other slippery title holding strategies. Some have limits on how many they will insure while others require you have a professional manager in place before they insure the property.
  
Here are some things to consider when you buy a landlord policy:

 

 

1. Make sure your policy has an All Risks Provision.
   Basic landlord policies only cover natural disasters (fire, windstorms, tornadoes, and floods). This may not be sufficient coverage. A policy with an All Risks Provision expands basic coverage to include such things as theft, vandalism, and malicious mischief. If you have this coverage it will pay for the damages caused by an angry teenager spray-painting the kitchen black to get back at his parents (malicious mischief), or the cost of a tenant taking your refrigerator when they move out (theft) or when it’s broken into while vacant (vandalism) . It’s often part of the policy, or can be added through a cheap rider, but it’s a must. Make sure your policy has an All Risks Coverage.
2. Many landlord policies reduce (or cancel) coverage if the property is vacant more than 30 days.
   Make sure you know what the premium changes to (or what the coverage reduces to) during a vacancy. They won’t call you and ask if it’s vacant, they’ll just deny coverage when it burns down during a vacancy.  You can buy “vacant property insurance” but it’s pricey. You can pay by the month or by the quarter and get a refund when it becomes occupied. Read the fine print carefully because insurance sales agents don’t always know what the vacancy terms are.
3. Make sure your policy has a Loss of Rents Provision.
   A Loss of Rents Provision means if the house burns down, the insurance company will continue paying you rent until the house is back in rent-ready condition. Without this provision you will be carrying your own mortgage during the restoration period.
4. Increase your liability coverage limits.
   Basic liability coverage on a landlord policy is typically $300,000. In today’s litigious world you need a lot more than that. Most companies offer $500,000 or $1,000,000 for pennies in additional premium. Typically it costs $20 to $30 per year to raise your coverage to $500,000. This is too cheap to pass up.
5. Make sure your property manager is covered.
   Most management agreements require the manager’s name be added as an “additional insured” for the purpose of liability. If a house burns down and a lawsuit develops over wrongful death, your insurance carrier will cover you and your property manager. In most cases it costs nothing to add them to the policy. You can add your manager through an endorsement if the language in the policy does not automatically cover them. Bottom line is: make sure your property manager is covered. It’s a standard practice in the industry and generally costs you nothing.
6. Shop around for good coverage.
   Like any other insurance there is good coverage, and not so good coverage. Our experience shows that companies change their policies on a regular basis and what was good three years ago isn’t necessarily good today. It’s a moving target so keep on eye on it.
7. Consider a Personal Umbrella Liability policy.
   You should always carry a Personal Umbrella Liability policy whether you own rentals or not. Consider at least $1,000,000 policy because the premiums are cheap. It covers your home, your car, your boat, your RV, your big wheel and your iPod. It is inexpensive (under $300 a year) and the day may come when you wish you had it. Personal Umbrella Liability policies are generally good until you reach three or four rentals, then they cut out and your coverage is zero.
8. Consider a Commercial Umbrella Liability policy.
   Here is the problem. After you buy your fourth or fifth rental property your personal umbrella policy becomes void as to your rentals. The company just stops covering you the day you buy your next property (every company has their own formula). They won’t call you and ask “how many do you have?” they just deny coverage when there’s a claim. The Personal Umbrella Policy has low limits of coverage for rental houses so read the fine print and keep a good count on how many you have.

   A Commercial Umbrella Policy is not expensive and covers everything you own without limits. When you buy such a policy you get to list everything you want covered so there is no mistake as to claims. It’s called a “schedule of coverage” and it’s your way of identifying all you have and make sure it’s all covered under the policy including your 20 rentals. At every renewal date you get to review the schedule and make sure you add whatever you bought (or sold) in the past year.

9. Bulk Coverages
   For the ambitious investor with 20 or 100 rentals there are companies that will insure them all under one policy and give you the opportunity to add and drop properties as you go. Generally they are economical but don’t offer extended coverages (All Risk Provisions) or high liability coverages, so keep that Commercial Umbrella Policy in place.

Protecting yourself (and your personal assets) from the risks of being a landlord is not difficult but it does take some forethought and purposeful planning. Don’t just get some insurance and think you’re on safe ground. The more properties you own, and the longer you’re a landlord, the greater the chances that you’ll become involved in some kind of litigation with a tenant and you’ll be glad you had a plan. You’re only one law suit away from loosing it all because the landlord/tenant business is unforgiving and can snatch everything you own if you’re not careful to protect yourself.