Why Your Homeowners Insurance Policy Isn't Enough

Landlords VS Homeowner

I have one building with 6 units in it, what is the difference between having a Homeowners insurance plan vs landlord plan and why should I consider Landlord plan?

A homeowners insurance policy also referred to as an HO3 is designed for an owner occupied home, this is your traditional 1-2 family home where the owner of the property is also a resident. The policy is designed to protect the homeowner who is also the named insured, you have the ability to add different types of endorsements that will not only protect the home but it is designed to protect personal property as well as valuable articles such as fine art and jewelry.

A landlord policy is designed to protect a building or investment property where the owner does not reside in the home. You have the ability to adjust coverages as you see fit. For example, a landlord may not have any personal property in a rental home, the policy form allows there to be no contents coverage since there is no need to pay for something you will never need. A landlord policy also known as a dwelling fire policy allows you to adjust the loss of rents on the policy, for example if you have a 6 unit building and you receive $2k per unit that equates to $12k per month and over $140k per year. You will want to make sure that you have at least $140k to cover your loss of rents for up to 1 year. A standard home policy would not allow you to make some of those changes. Landlord policies also have the ability to write the name in the name of an LLC or corporation as a large number of investors are using LLC’s to protect their assets.

A carrier rates the risk on many different factors, the largest rating factor is the occupancy of the home, an owner occupied home usually comes with a lower rate since the owner occupies the residence. A landlord policy is slightly higher since the occupancy is usually a non-owner who would not care for the property as an owner would. An insurance carrier could also deny a claim if the policy is written on an HO form when it should be written as a dwelling fire or landlords policy.

Renters Insurance

Why is Renter Insurance Still Necessary If I Have a Landlord?

Even though an owner of a building may have a landlords policy, it is still necessary for a tenant/renter to carry renters insurance. As the landlord policy does not provide coverage for the tenants property and a renters policy does not provide coverage for the building. A landlord is not responsible for the tenants personal property, in the event of a claim the landlord is only responsible to put the home or apartment back to its original condition. Since they have no financial interest in your property they are not allowed to insure your belongings or cover them on their landlords policy. A renters policy also provide liability coverage, which could be the most important part of the policy. This provides you coverage in the event you are sued or held liable for damages to the building, for example if you fall asleep with a cigarette or leave a candle burning and there is a fire the landlord or insurance carrier could come after you for damages, if you do not have liability coverage to protect you, you could be paying for the damage out of your pocket. When the apartment is unlivable due to a claim, you may not be responsible for paying the rent however you may need additional funds for your living expense, a renters policy has a certain amount of money built into the policy to cover out of pocket expenses associated with moving. Both a landlord policy and a renters policy work in conjunction to protect different parties from out of pocket expenses, both are necessary in order to make sure you are covered properly.

There are also different situations where the Landlord and the tenant are the same person, for example if the building is owned in the name of an LLC and the owner rents from the LLC, although the renter is also the owner they would require a renters policy since there is no coverage provided on the landlord policy for personal property. This type of setup also provides the owner/tenant additional coverage that would not be provided under the landlord policy

These policies are usually very inexpensive, monthly cost range anywhere from $10-20 dollars depending on your coverage limit. Both a renters policy and landlord policy are designed for different purposes and are necessary to be covered properly.

Umbrella Liability Limits

With the exception of some mortgage companies, there are no specific guidelines in regards how much Umbrella Liability a property owner should have. These days, there are many Risk Purchasing Groups around, which offer the ability to obtain high limits at lower premiums than could be obtained with an individual Commercial Umbrella provided by the carrier who has the underlying General Liability policy. There are several factors that should be taken into consideration including:

      • Number of units
      • How big the building is.
      • Types of amenities. Buildings with swimming pools, gyms, etc. should probably have higher limits.
      • Affordability – The main factor in the cost is the number of units. You should purchase the highest limit you can at the most reasonable level. Umbrella layers get cheaper as they get higher. For example, the first $25M in coverage may be $30 per unit, the second $25M may be $15 per unit and the third layer of $25M may only be $6 per unit. It becomes a matter of whether it makes sense to spend a few more dollars for more coverage.

That being said, we really don’t recommend anything less than $15M-$25M as we have seen awards in the $17M-$18M area. If ownership is the same in all buildings or if the property manager is the same for all buildings, you may be able to get one policy providing coverage for all of the properties. The limit would be per location, so there isn’t an issue of sharing a limit and the cost should be lower than doing them each individually.

Action Over Insurance

  • Any time you are hiring a contractor in New York who has employees or who is sub-contracting any work out, the contractor you are hiring should have an Action Over Exclusion a.k.a. Injury to Employee Exclusion. In New York, the Labor Laws are so unfriendly towards the property owner and they are held responsible for pretty much any injury to an employee of a contractor or subcontractor, whether or not that employee was negligent! The thought process is to transfer the risk back to the contractor you have the agreement with but even if you cross all of your t’s and dot your I’s, their coverage may not provide you with a defense if they have an exclusion for Action Over. Workers Compensation restricts an employee from suing their employer in exchange for the ability to receive compensation regardless of whether or not they were negligent, but that does not stop an injured employee from suing the property owner. With proper risk transfer, the contractor’s insurance is supposed to indemnify the property owner and property manager. When there is an Action Over exclusion in the contractor’s insurance policy, the risk isn’t able to be transferred, as their policy will not defend the property owner and property manager if an employee of the contractor or sub-contractor were to be injured, because there is no coverage under the contractors insurance policy. This leaves the property owner in a bad position, because they then have to respond and defend themselves, generally by reporting the claim to their insurance carrier. More than likely they will be responsible for defending the property management firm as well, because their property management contract usually has an indemnification clause in it requiring the property owner to defend them if they are named in a suit that isn’t because of their negligence. Considering Labor Law claims can easily reach seven figures, this affects the property owners insurance rates for years to come. That’s the best case scenario. The worst case scenario is the property owner has some type of construction exclusion endorsement in their policy and they cannot rely on their insurance, forcing them to seek legal counsel. It is a coverage that should be maintained, but because it is very expensive to have, a lot of contractors choose to exclude it.

Water Damage

  • There are companies out there who will provide coverage for the property owner, affected tenants and even the tenant who causes damage. Without a process to transfer the risk of resident who caused the damage, the property owner’s loss experience and loss ratios will be adversely affected resulting in higher property insurance premiums for the property owner. In addition, tenants who don’t have coverage for damage are more likely to look for a new apartment, causing the property owner to have to find a new tenant. Coverage in this case is called Renters Legal Liability and typically provides a certain amount of coverage for the Property Owner if there is damage caused by a tenant. If the limit is not exhausted, it will typically then provide coverage for other affected tenants and lastly, the tenant who caused the damage. There is software that allows the property owner to monitor which tenants have their own insurance and which don’t and provides other risk management tools/training materials. The cost can be charged back to the tenants

To learn more about the different types of coverage you should be looking into for your buildings, contact @Mackoul Risk Solutions! They can help you decipher what may be needed by creating custom solutions for YOUR unique situation.

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