You have a policy to protect your investment, but your tenants need one to cover their own interests. How do you talk insurance with your tenants?
A landlord’s policy protects your property in the case of physical loss as well as other liabilities, but contrary to what many tenants think, it doesn’t cover their possessions or liability if they cause injury or damages to someone on the property. It’s up to you, as the landlord, to encourage them to purchase a renters insurance policy.
According to a recent survey commissioned by InsuranceQuotes.com, only 34 percent of the nation’s tenants have renter’s insurance. That should concern you, as an investor, because many of those tenants don’t purchase their own coverage, thinking they’re covered under their landlord’s policy. If anything catastrophic ever does happen, they will expect their losses to be covered and learn, too late, they’re out of luck.
Some states allow landlords to require their tenants to purchase renter’s insurance as part of the lease, but even if your state doesn’t, you should discuss insurance with them. You may even consider offering a small discount in their rent if they do.
But, the conversation could feel a little awkward if you don’t understand renter’s insurance or know what to say. Here’s some things to keep in mind.
A landlord’s policy covers the landlord
Before you broach the topic of insurance with your tenant, you need to understand your own landlord’s policy and what it covers. A landlord’s policy is similar to homeowner’s insurance in that it covers you against damages resulting from causes such as vandalism, water, fire, smoke damage, vehicles, and explosions. But, a landlord’s policy offers additional protection that you want as an investor.
First, a landlord’s policy offers fair rental income, which protects you if the property becomes uninhabitable due to a covered loss. In such an event, you would be covered for the rental income you would have received from your tenants for as long as it takes to replace or repair your property, up to 12 months.
It also offers you greater liability protection against injury claims or property damage. Depending on the policy, this protection could include legal fees, damages, and legal counsel.
A landlord’s policy does not cover the tenant, though. If his property is damaged or destroyed as a result of a covered loss, such as a fire, he’s out of luck—the landlord’s policy does not cover his belongings. Likewise, if the tenant’s dog bites the repairman, your policy would not provide him liability coverage.
A renter’s policy covers the renter
Where your policy leaves off, renter’s insurance picks up. Similar to a landlord’s policy and homeowner’s policy, if his property is damaged by a covered event, he can be reimbursed for its loss. Most renter’s policies offer only a limited dollar amount for jewelry, furs, sports or musical equipment, and collectibles, according to the Insurance Information Institute, so if the tenant owes these items, he will want to purchase a separate policy called a “floater” to cover them.
Renter’s insurance also provides liability protection should he ever be sued for bodily injury or property damage done by you, your family members, and your pet. Most renter’s insurance policies come with at least $100,000 of liability coverage and pay for both the cost of defending you in court and any damages awarded, according to the Institute.
A renter’s insurance policy also pays an additional living expenses benefit if your rental property is destroyed by a covered disaster and he needs to live somewhere else while it is repaired. Under these circumstances, the insurance carrier will reimburse his hotel bills, temporary rentals, restaurant meals, and other expenses incurred during the rebuild or repair. The total payout for this benefit, though, may be financially capped or have a time limit.
Why your tenant isn’t insured
So, if tenants are at risk without renter’s insurance, why don’t they purchase it? Many simply don’t know it exists. They are well aware of homeowner’s insurance, but don’t realize there’s a policy that covers renters. Or, as mentioned above, they think they are covered under your policy.
Others may be aware of renters insurance but think it’s too expensive. That’s actually not the case. According to the National Association of Insurance Commissioners, the average renter’s insurance policy costs $185 per year, or less than $15.50 per month. Still others think it’s a waste of money since the chances are slim anything “bad” will ever happen to them, or they put off purchasing it, assuming that it can wait until later.
How to have “the talk”
The best time to broach the subject of insurance with your tenant is when the two of you sit down to review the terms of the lease. Some states allow you to require your tenant to carry a renters’ insurance policy, but even if your state doesn’t, you should still take the time to discuss with the tenant how he does not have protection under your policy.
Begin by explaining what your landlord’s policy covers and how a renter’s policy benefits him. You may also want to explain that most policies offer only a limited dollar amount for high end items such as collectibles. Encourage him to consider a “floater” if he needs additional coverage.
You’ll also want to mention that even a renter’s policy doesn’t protect him in every circumstance. Some events, such as floods, are not covered. If you live in an area that has special insurance needs such as floods, earthquakes, or hurricanes, you may want to encourage him to purchase this additional coverage as well.
Come prepared with an estimate of what it might cost to buy renter’s insurance, even if you have only a ballpark figure. Point out to the tenant that insurance companies often offer discounts on renter’s insurance if you have another policy with them for your car or business. And, some companies also have discounts if the property has a security system, has deadbolt locks, and uses smoke detectors, or if he has good credit and is more than 55 years old.
Why does it really matter?
So, why should you care if your tenant has renter’s insurance? Not only does it protect the tenant in case his property is damaged or destroyed, but it provides you with an additional layer of protection. If the tenant’s flat screen TV is stolen, he will be able to file a claim with his renter’s policy carrier. Or, if he damages someone’s property, his policy will be targeted, not yours.
Plus, it gives you some reassurances that if the tenant’s property is stolen, he won’t have to decide between paying you rent and replacing all of his electronics. His renter’s policy will cover his losses.