Renters insurance: the no-lose policy

This article presents the manifold benefits landlords receive by requiring their tenants to purchase low-cost renters insurance.

 A landlord’s more worry-free tenancies

Renters insurance is a personal insurance policy purchased by renters in possession of the landlord’s property. Standard renters insurance policies offer the tenant coverage for the tenant’s personal property losses and tort liabilities the tenant may incur.

The tenant’s personal property includes anything moveable — jewelry, electronics, furniture, etc., but not any real estate they own or possess. Tort liability refers to the tenant’s responsibility for injury they may cause to another person or another person’s property, such as the landlord and his rental property.

When a tenant is responsible for harming the landlord or the landlord’s property, the tenant is required to pay the costs incurred by the landlord to repair the damage. Renters insurance covers the tenant’s liability owed the landlord and relieves the insured tenant of the burden of paying the landlord’s costs.  Under the policy, the tenant’s liability for losses becomes the obligation of the insurance company.

A nonresidential tenant searching for a renters insurance policy will not find it under that name. Renters insurance is available only to residential tenants.

However, nonresidential tenants will find similar coverage under a business owners insurance policy, which insures moveable property, including company inventory, as well as damage the tenant might cause to the leased property.

Personal property coverage

Requiring residential tenants to purchase renters insurance significantly reduces a landlord’s risk of loss caused by a tenant renting his property. It serves as both a partial replacement for a large security deposit and source of recovery for losses caused by the tenant in amounts larger than the amount of the security deposit, excluding rental payment amounts.

Whenever property — the landlord’s or the tenant’s — is damaged, disputes inevitably ensue over who is responsible for payment of the costs to repair or replace (restore) the damaged property. The burden of restoration may sometimes fall on the landlord, regardless of how much insurance either he or the tenant has. In most cases, the landlord’s expenses to correct damage to his property caused by the tenant can be significantly reduced by the coverage offered by a tenant’s renters insurance.

Many lease agreements include a provision exempting the landlord from any liability related to the rental property. However, this provision may not prevent a discontented tenant from demanding reimbursement for damage to his personal property whether or not it is due to the landlord’s negligence.

A landlord may legally include a provision in a residential lease agreement, requiring the tenant to obtain renters insurance.

A landlord may legally include a provision in a residential lease agreement, requiring the tenant to obtain renters insurance. This practice is even recommended by experts on landlord-tenant law. [Alexander v. Security-First Nat. Bank (1936) 7 CA2nd 718]

To confirm the tenant continues to comply with the terms of the lease, a landlord may also include a provision requiring the tenant to name the landlord as an “additional insured” on the renters insurance policy. This does not require the landlord to make any payments toward renters insurance or give him any additional responsibility. However, as an additional insured, the landlord will receive notification from the insurance company when the renters insurance policy is altered, cancelled or expired.

Tenants with renters insurance have no need to seek satisfaction from the landlord, as their personal property is insured and will be restored through their insurance company, subject to a deductible provision amount.

Tort liability

However, much more advantageous to the landlord than coverage of a tenant’s personal property is coverage of a tenant’s personal liability for losses they inflict on the landlord by their conduct. While a security deposit is the primary cash source for a recovery, renters insurance provides an added guarantee that the landlord will be covered should the tenant be responsible for damage to the landlord’s property.

Policy limits, of say $100,000, when compared to a security deposit equal to one month’s rent as a source of recovery, provide the strongest inducement for a landlord to require renters insurance of his tenants, new or existing.

Also, should a guest of the tenant be injured on the landlord’s property, the tenant’s insurance policy covers costs incurred by that guest, subject to a ceiling amount.  Essentially, the coverage removes a potential financial obligation from the landlord’s shoulders.

When residential property is damaged by a tenant causing a loss to the landlord, the tenant’s renters insurance pays the landlord for the cost to restore the landlord’s property.  The security deposit then remains intact for collection of any unpaid rent and the costs to correct extraordinary wear and tear.

Because the cost of restoring the rental property is picked up by the tenant’s insurance, the landlord is able to avoid filing a claim with his insurance carrier.  Thus the landlord avoids an increase in the premiums he would have to pay for his coverage.

Not a substitute for the landlord’s own coverage

“Fantastic!” landlords may say, “I can cancel my landlord insurance policy and let the renters insurance pay for any damage to the property while the tenant is in possession.”

Renters insurance is not a substitute for landlords insurance or homeowners insurance.

But renters insurance does not act as a substitute for landlords insurance or homeowners insurance (or a security deposit). The landlord’s insurance policy insures the real estate which is the rental property possessed by the tenant.

Thus, if the property is damaged by the tenant or others, the landlord knows the losses are covered by the insurance carrier and the cost of restoration will be paid by that insurer (after the deduction is applied, of course).

Because the real estate is owned by the landlord, the landlord alone can insure against losses due to damage to the real estate. Renters insurance covers only the named tenant’s personal liability for causing any damage to the landlord’s property; it does not insure the landlord’s interest in that real estate against any loss.

Thus, a landlord can only count on renters insurance to provide financial reimbursement to cover the restoration of his property and then only if the tenant is liable for the cost to repair or replace the property damage. If the tenant is not liable, then renters insurance does not apply to the property damage.

Landlords cannot rely solely on renters insurance to protect their property; they must invest in homeowners insurance or landlords insurance to cover losses for which the tenant is liable as well as look to the security deposit which may be inadequate.

Sell your tenant on renters insurance

Landlords requiring renters insurance of their tenants have no need to secret from their tenants the benefits of this tenant coverage. Renters insurance acts in the best interests of the tenants, not just for the landlord.  Rather than look first to the security deposit for reimbursement, then pursue the tenant for greater amounts due, the landlord looks to the insurer for payment and the security deposit remains intact.

Minimum loss coverage under a renters insurance policy is $25,000 for personal property and $100,000 for personal liability. This is greater financial coverage than most tenants will need. Best of all, the annual cost to the tenant will be around $100. For relatively low cost, tenants receive financial protection and at the same time strengthen their image with the landlord as an individual responsible for their actions.

This improves the relationship between landlords and tenants, as landlords are more comfortable renting property to tenants who are insurable and forward-thinking enough to invest in an insurance policy, and who display a measure of concern for the care and protection of the property.

Renters insurance protects the landlord, protects the tenant and his security deposit, and creates a cooperative and peaceful relationship between the two parties. Is it worth the trouble to include an additional lease provision at around ten bucks a month paid by the tenant? Definitely.

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