- Bill Barker, Liberty Mutual Insurance
WHY SHOULD A LANDLORD REQUIRE TENANTS TO HAVE INSURANCE?
When buying a home, we all know that it's the unknown that can come back to bite you. Whether an unforeseen defect in the home, or a title issue, there's all kinds of things to worry about. This is especially true of buying an investment property.
Recently I had a claim that illustrates this point rather succinctly. I have a client with a rental property, and their tenant thought it would be a good idea to run a fish farm (no lie, they had fifty large fish tanks to breed exotic fish) out of the basement of the home. They used the standard rental contract, which, forbids fish tanks over a certain size, and includes a clause requiring renters insurance for the tenants.
The problem was as follows: we insured the home, but, unfortunately, mold is an excluded loss. Mold is only covered in specific instances, where a covered cause of loss occurs first (like water from a fire hose, or a pipe bursting) and even then there are certain limitations. And the coverage for mold varies widely by jurisdiction. So I have a client looking at a $30,000 repair bill.
The contract required the tenant to have renters insurance, but the client never verified it. If the tenant had renters insurance, my client would probably have been able to collect for the mold damage on the renter's policy, due to the tenant's negligence. This is exactly why the real estate contract requires renter's insurance; so the landlord can collect from an insurance company in the instance of a tenant's negligence. In this instance the client came to me with the rental contract in place, and I had mentioned that they should verify that the renter had insurance.
I've seen landlords collect from a tenant frying chicken (they forgot that the pot of oil was still on the stove and went back to the grocery store to buy french fries), tenants hanging pictures and putting a nail through a water pipe, tenants letting a bathtub overflow on the third floor of a townhome (gravity is not always a good thing), and many other wild one-off situations.
Here's what they could have done. On a renter's policy, a landlord can required to be named as an "additional interest". As an additional interest, the insurance company is then legally bound to give notice to the landlord if there is a lapse of coverage, which would immediately alert them of a serious breach of contract. I typically advise landlords to require proof of insurance, with them named as an additional interest, before they turn over possession of the home.
A $100 renter's policy could have saved these people $30 grand.
When you buy a house, you pick the best negotiator to represent you as your realtor, the most experienced loan officer, and, if you're smart, as much title insurance as they'll sell you.
Insurance is something that people often purchase over a 1-800 number, and select solely based upon price. An experienced local agent is usually able to offer a comparable (if not better) price, and can provide a wealth of experience and knowledge to bring certainty to the unknown.
I'm Bill Barker, and I'm an insurance agent with Liberty Mutual. My entire career has been with Liberty, and I spent years as an adjuster on Liberty's Large Loss Homeowner's Insurance team. I've handled approximately 100 fire claims, testified in a murder trial as a result of my work in claims, and seen a lot of crazy things in my day. This helps me provide real-world advice, and a working knowledge of the world of insurance. I also hold the Chartered Property and Casualty Underwriter designation, the equivalent of a Masters Certificate in property and casualty insurance.