If you are a building owner renting to tenants you need to know how the type and amount of insurance a tenant has impacts you. If a tenant has no renters or liability insurance you, as a building owner, are at risk if something goes wrong. Ideally every lease should have an insurance clause which states the insurance requirements for a tenant who rents from you. By requiring tenants to carry coverage you can avoid the following scenarios.
Example 1: Dwelling Rental
A tenant who is leasing an apartment, or single family dwelling, from you is cooking and starts a fire that causes major damage to the building. As a building owner your insurance policy will pay out first. Your insurance company will then begin what is called subrogation to pursue the at-fault party and recover payments. Since the tenant was negligent in this instance your insurance company will attempt to reclaim the loss from the tenant.
If the tenant does not have enough renters insurance or enough assets to pay for the loss then the loss may not be fully recovered. The unrecovered loss will remain on the building owner’s policy and could lead to increased premiums. If a tenant has renters insurance it is much more likely that the full amount of the loss will be recovered, including the deductible.
Example 2: Commercial Rental
You rent space to a tenant who runs a sandwich shop. One day a customer entering the store slips, breaks their wrist and decides to sue. Both the tenant and you as a building owner are likely to be named in the lawsuit. If your tenant has liability coverage, the amount that you are sued for can be offset by what the tenant’s policy covers. If the tenant has no liability insurance and insufficient assets, then you could be the one stuck with the bill.
What are some best practices when it comes to requiring tenants to carry insurance?
The tenants liability limits should be a minimum of $300,000 if not more
The tenants should name you, the building owner, as an additional insured on their policy
The requirements for insurance should be clearly written in the lease.
In addition to requiring a tenant to carry insurance you should also update your own building owner policy. Most building owner policies only cover property and general liability and will not cover loss of rents. You could lose a lot of money if there is damage to the building that results in loss of rental income for an extend period of time. By adding loss of rents coverage to your policy you can protect the annual income of your property.
Client Advocates at Miller’s can help you review your coverage’s to make sure you have the right protection in place. They can also help you decide what you should require from your tenants in order to protect your assets.