Sophisticated property owners across the country have embraced the practice of requiring renters to maintain renters insurance. According to the National Multi Housing Council’s annual Apartment Cost of Risk Survey, two-thirds of apartment firms require residents to have renters insurance. That is a big jump from last year’s figure of 44% and up dramatically from 2008’s 24%.
If requiring renters insurance seems like a solution that can work for your property, contact us to learn more.
In addition to requiring insurance, a property owner might require that he be listed as an additional insured or an additional interest. While the terms seem similar, they are vastly different. and the use of either can have both positive and negative implications.
In fact, we think it is a great idea for the property owner to be listed as an additional interest and an awful idea for a property owner to be listed as an additional insured. Allow us to explain.
It is a great idea for an owner to be listed as an additional interest, also known as an interested party or party of interest, on a renters insurance policy.
The designation is designed to ensure that a third party (the property owner in this scenario) is notified should the policy cancel or non-renew. This endorsement does not convey any coverage to the additional interest nor cost the tenant any additional premium. Carriers such as State Farm, Travelers, Liberty Mutual, and Allstate all routinely list third parties as an additional interest and will quickly send notices of pending cancellation, cancellation, or non-renewal when appropriate.
The Effective Coverage renters insurance program capitalizes on this notification provision and tracks the status of renters insurance on behalf of owners throughout the country. Should an event occur where the tenant is liable for the damage, owners can rest assured knowing that the policy is in-force and the tenant can be held responsible.
Being listed on a policy as an additional insured, however, does not have any positive effects and in fact could detract coverage from the property owner. There are very good reasons why most carriers prohibit the exercise which typically leads to a frustrated tenant as he seeks to comply with the requirement. An additional insured is a person that enjoys the benefits of being insured under an insurance policy, in addition to whoever originally purchased the insurance policy. So while the tenant may purchase the renters policy, the owner or the corresponding organization has just as many rights to that coverage as the tenant does. At first glance, that might seem like a great scenario for an owner, but wait. It actually does not function correctly in practice.
Before an owner requires a tenant to list him as an additional insured, the following points should be considered.
- In the event of a lawsuit between the tenant and the property owner (both named insureds), the insurance company would have the obligation to defend both parties against each other and to pay any sums either might be obligated to pay each other. A renters insurance policy is not designed to handle this type of “co-mingled” defense and remuneration.
- If the resident caused a fire, the owner could potentially be prohibited from tendering a claim against the renters policy for the liability to pay for the damage. This is based on the rationale that one insured cannot be liable to another insured on the policy. It would be the equivalent of a husband and wife who are both listed on the policy as insureds. The wife comes home to find the husband started a fire while trying to cook a meal. Do you think she would have any luck suing her husband?
- The typical renters insurance policy will contain a significantly higher limit for liability coverage to a third party than protection for the contents of an apartment. A common limit of liability insurance is $100,000 and is designed to pay damages to a third party. However, if an owner is listed as an insured, how can he be treated as a third party? If he is listed as an additional insured, the claims check for the personal property will be made out to both of them and that will be the totality of remuneration for either party. Now instead of having $100,000 of protection, an owner will be forced to share a limit that could be as low as $5,000!
- A personal lines policy is not designed to list a commercial entity as a named insured and does not factor in the increase exposure that could arise from being the primary policy when defending a commercial entity. The correct way to handle a situation where both the tenant and owner are named as defendants in the same lawsuit would be to have the property owner tender a claim against the HO-4, assuming that the renter has committed the negligent actions that caused the bodily injury or property damage.
Now that we agree that being listed as an additional insured is a bad idea, let’s use an example to discuss why being listed as an additional interest is a great idea!
A wonderful new tenant, Lisa, walks in the door ready to sign the lease. Your leasing agents do everything perfectly and advise Lisa that she is required to have renters insurance. She complies by calling her StateFarm agent and having her fax the proof of insurance to the leasing office. Seven weeks later, she is situated and eagerly preparing for her house warming party. Everything is going great until the fondue pot gets knocked over and the place is on fire. No sweat. This is why we require renters insurance.
Unfortunately, Lisa tried to save a buck and canceled her policy only three days after moving in. Now Lisa is broke and living with her parents, you have a vacant apartment, and you are stuck paying your property deductible and higher insurance premiums for the next five years.
Would it surprise you to learn that 20% of all policies cancel prior to their intended expiration dates?
I didn’t think so. That is why a comprehensive renters insurance program combined with an effective additional interest tracking platform achieves the risk management goals of most property owners. The question now becomes, “Are we efficiently and effectively tracking the notices that are sent by carriers to the leasing office?” If the answer is, “We don’t have a process or our leasing agents process the notices,” you should contact Effective Coverage to discuss the alternatives.