Often, when people move into an apartment, they’ll be required to get renters insurance. It’s a good idea anyway, but there are a few property management companies out there making a big mistake with this requirement. We’ve seen properties require as many as four additional insured parties on a policy.
So Why Should My Landlord Be Additional Insured On My Renters Insurance?
They shouldn’t! That’s right, listing your landlord as additional insured causes more problems than it solves. What you should actually be asking is, why should my landlord be additional interest on my renters insurance?
Why Should My Landlord Be Additional Insured On My Renters Insurance?
Many people ask why they should list their landlord as additional insured on their renters insurance policies. Is it a good idea? How does it impact liability coverage?
The two accomplish entirely different goals. Adding a landlord as an “additional interest” gives them the right to be notified if the policy lapses, cancels, or otherwise is not in force for some reason. This is a common requirement, and one that all property management should adopt. It does not offer any coverage or rights to change anything about the policy, it’s strictly a notification provision.
Additional Insured Status Can Open A World Of Trouble If There’s A Loss
First, let us point out that additional insured is common on commercial policies. A subcontractor will list the general contractor as additional insured on the subcontractor’s policy because if there’s a loss, the contractor is responsible for the work of his subs. The contractor lists the building owner as additional insured so that if there’s a loss that creates liability for the building owner, the contractor’s policy can be responsible for it.
The problem is that additional insured and additional interest behave very differently in the event of a loss. What is liability on renters insurance? The insurance carrier agrees to pay for bodily injury or property damage to a third party which arises from your negligence. So why shouldn’t a landlord be additional insured?
By being additional insured, the landlord is given protection similar to if he were a named insured on your renters policy. That’s all well and good as far as damages to other people go, but there’s a serious problem here. Can your spouse make a liability claim against you on your renters insurance policy? Of course not! Per the definition of “named insured,” that spouse is a party to the policy and insured under it.
Because the spouse is insured under the policy, they are generally barred from making a claim against the policy’s liability coverage. You can probably see where this is headed. Your landlord, as additional insured, would generally be barred from making a claim under your liability coverage. What does that mean to you if you accidentally start a fire that does hundreds of thousands of dollars of damage? It means that when your landlord’s insurance carrier subrogates and tries to collect that money they paid out from the responsible party, you’re personally on the hook for it because your landlord doesn’t have a claim against your liability coverage, as additional insured.
There Arises The Question Of Defense Conflicts
The insurance carrier is required to defend you if you are sued for a loss which likely would have coverage under the policy. If there’s a fire for which you’re responsible, and injuries to others arise, do you want your insurance carrier defending both you and the property owner? There’s a significant potential conflict of interest there. The property owner and their insurance company will lean heavily on your insurance to defend them, which has the potential to leave you out in the cold, so to speak.
Additionally, There Is Risk Of Dilution Of Policy Limits
Carrying enough liability coverage to protect yourself is a very different matter from carrying enough liability coverage to protect yourself as well as the property owner. In a fire loss, claims can stack up quickly. If not enough coverage is present, each claim is paid proportionately. This creates a situation where your coverage is suddenly far less appropriate than you thought it was.
Additional insured status provides risk transference for the property manager, meaning that some of the risk they might normally take on is now taken on by you and your policy. There’s really very little reason to accept that additional risk in most situations. The additional insured endorsement has its place, but that place is primarily in the world of commercial lines insurance and personal lines automobile policies, though only for leased vehicles.
Additional insured vs. additional interest is a complex, but fairly settled, area of insurance. If you’d like to find out more about why landlords want to be additional insured and what the risk is to you, contact Effective Coverage at (800)892-4308.