Without Proper Insurance, it’s a Dangerous Investment…

Owning buildings can be a very good way to build your equity. However, it can also be a huge liability - without the proper insurance, you’re left wide open to financial disaster. Unfortunately, the most damaging mistakes are also things that are easily preventable with the right steps. Many of these steps will also save you money in both the long and short term. Take these points into consideration and take corrective, preventitive actions now to ensure your property is a success.

Liability for Tenant Injuries

If you’re going to own them, maintain them! You can be held responsible if your negligence causes an injury.

• Make sure you maintain the premises and remove safety hazards.
• Take all reasonable steps to avert accidents.
• Fix problems quickly, especially if it is not expensive or difficult.

Tenants can file a personal injury lawsuit or claim against your insurance company for:

• Medical bills
• Lost earnings
• Pain and other physical suffering
• Permanent physical disability and disfigurement
• Emotional distress
• Damage to personal property

Ensure you take care of your property and have the proper liability limits set in place, just in case you’re faced with an unforeseeable  liability.

Insure All of Your Properties

If you have more than one property, or multiple buildings, it can be easy to miss insuring additions such as garages, mother-in-law additions, sheds, etc. Ensure all of them are covered by reconciling your list of insured locations against your property taxes or federal income taxes. You should have your insurance agent review this list with you annually to ensure you don’t have any gaps in your protection program.

Liability Can Be a Shocker

Did you know you can be held liable for dangers you didn’t even know about? For instance, you could be held liable if:

• The wiring in your rental is very old and you don’t check it, if there is an electrical fire, or if the tenant is injured.
• Your chimney isn’t cleaned for many years and the tenant is injured or their property damaged by a flue fire

Even if you didn’t know about it, you could be held liable. A “reasonable person” would take preventative steps and clean the chimney regularly and check or replace old wiring.

Insure Full Value of Building

If you insure your building at less than full value, your insurance company will be receiving premiums that reflect a less-than-full-value coverage. This causes the assumption that if there is an incident, you will be responsible for loss sharing (“coinsurance”).

If you have an incident, the amount you could potentially receive is lessened by the percentage of your coinsurance. For instance, if your coinsurance is 20% and your building is worth $250,000, your potential payout on claims would be only $200,000. Worse, if your property value has gone up but your policy doesn’t reflect it, you face additional deductions from your possibly payout.

Can you afford to eat a loss like that? If not, be sure to insure your property to full value.

Personal Injury Insurance

Personal injury means injury other than bodily injury, such as:

• False arrest, detention or imprisonment;
• Malicious prosecution;
• Wrongful entry or eviction;
• When you say (libel) or write (slander) something about a person or organization that defames their character, or;
• Violation of a person’s right of privacy.

As it may or may not be included on your insurance policy, be sure to discuss it with your insurance agent. Even if you are meticulously careful and hold no guilt whatsoever, you will still have to defend yourself in court. This can lead to staggering bills from lawyers. However, if you have Personal Injury Insurance, if you have such allegations brought against you, your insurance company should defend you.

When Bad Decisions Bites You In the…

Negligent conditions don’t have to be physical problems with the building, like lighting or broken steps. It can be other things, such as dangerous activities of tenants or mean/vicious dogs.

• If you know of a tenant doing dangerous work with powertools in a common area, if someone is hurt, you may be held liable.
• If you know of a dangerous dog, and don’t take (Document it! Always make a copy!) action to evict the tenant or get them to control or get rid of the dog, you could be held liable if the dog hurts or kills someone.
• If you’ve given the tenant notice already, and the dog bites someone before the notice period is up, you probably won’t be held liable, as you’ve done all you can under state law.

Liability isn’t limited to just dog bites, either. Horses and other large livestock in public areas can also pose a risk.

Replacement Cost Coverage vs Actual Cash Value

Simply put, Replacement Cost is better. In the event of a claim, Actual Cash Value means the insurance company will:

• Pay out the amount that item is worth currently, or pay out the cost to replace the item, minus depreciation.
• Reserve the right to replace or repair the item instead, if this is more economical.

With Replacement Cost, the insurance company will pay you what you paid for the item at the time of purchase, assuming you have kept the proper documentation and the item’s value is stated in the policy at the time of signing.

Another way to ensure you have a fair payout on your claim is to get Inflation Protection, which protects against property being values decreasing due to inflation. Talk to your agent to discuss the best option for you.

Reduce Maintenance Costs

You can avoid denial of claims for many property damage, tenant liability and injury claims by maintaining your property and keeping solid documentation. Here’s how:

• Before move-in, use a checklist. Inspect the premises and fix any problems before new tenants move in.
• Ensure tenant signs statement/checklist that shows condition upon move-in.
• Every 6 months, give tenants a checklist for reporting potential safety hazards or maintenance problems.
• Personally inspect all rental units once a year with a checklist. Have the tenant sign off on the annual inspections.
• Your commitment to repair and maintenance procedures should be clearly set out in the lease or rental agreement.
• Encourage immediate reporting of problems in private and common areas, such as:
  • Broken sprinkler systems
  • Outdoor path or hallway lights burned out
  • Security problems
  • Broken doors or windows
  • Broken or damaged steps
  • Heating, plumbing or electrical issues
  • Garage door malfunctions
• Ensure all complaints and repair requests are documented, as well as details about when and how the problem was addressed. Don’t forget to include who did the repairs in your records.
• Urgent repairs and safety issues should be handled within 24 hours. Maintain clear communication with tenants about the problem, when repairs will be made, and if it will affect their use of the property.

Exclusions to Your Policy

1. Boilers and Machinery: If you have a boiler, your HVAC system is not covered by your insurance policy. It requires a separate Boiler Policy.
2. Electrical Arcing: Artificially generated electrical current that disturbs electrical devices, appliances or wires.
3. Mechanical Breakdown: Mechanical breakdown, including rupture of bursting by centrifugal force.
4. Explosions of Steam Boilers, Piping, Engines: Explosion of steam boilers, piping, engines or turbines caused by or resulting from any condition or event inside such equipment.
5. Loss or Damage to Steam Boilers: Loss or damage to steam boilers caused by or resulting from any condition or event inside such equipment.
6. Loss or Damage to Hot Water Boilers: Loss of damage to hot water boilers, or other water heating equipment caused by or resulting from any condition or event inside such boilers or equipment.

When The Money Dries Up…

If your business suddenly goes up in smoke, what happens next? It’s been razed to the earth…

• You have zero income coming in.
• How will you pay your mortgage? Your car payments? Kids tuition?
• What will happen to your employees?
• If it ends up being months before business can resume… will your customers come back?
• Will your insurance pay for setting up a temporary location?
• If you MUST keep your business in operation, how will you fulfill obligations to clients?

To protect yourself against these losses, in addition to loss of your physical property, talk to your insurance agent about:

• Business Income Insurance: This coverage will give you coverage for the net income earned, and protection is also provided for normal operating expenses (including payroll). Ask your insurance agent for a business income worksheet and go over it with your accountant.
• Dependent Property Insurance: If your supplier has a fire in their building, and because of this, your own business is interrupted, this coverage will provide you with protection from losses. Ask your insurance agent about the options available with this coverage.
• Time Until Normal Operations: If you think there is a possibility that when you reopen your doors to business, it will be off to a slow start, you should consider purchasing Extended Loss After Operations Resume coverage. This will help you by supplementing your income stream while business returns to a pre-incident state of operations.
• Extra Expense: If you need continuing operating costs (for instance, if your business has public demand and can’t close, or if your competition is tight, as with small businesses), Extra Expense Insurance will provide this. This includes a temporary setup for your business location until your permanent location is repaired or rebuilt.

Documentation

Keeping good records are critical to running any business, including landlords. Ensuring there are proper records, should the need arise, will keep your business running smoothly.

• Files on Current Tenants, such as:
  • Application
  • Criminal background checks
  • Records / Checklists reporting the condition of space prior to move-in
  • Security deposit record
  • Lease
  • Any other documents from the application process
• Files on Previous Tenants, such as:
  • Current file
  • Exit inspection records
  • Security deposit records and refund receipts
  • Any other pertinent documents
• Maintenance Records
  • Task journal from maintenance crew
  • Maintenance expenses (most easily tracked through accounting records)
• Key Management
  • Ensure that the proper people have the necessary keys/spares. It is important to security to also collect keys from old employees/tenants.
• Accounting and Customer Data Records
  • If using a computer system, BACKUP YOUR FILES on a regularly scheduled basis!!! Store the backup copy of your files off-site.
  • Keep as many records as possible in your accounting system (Accounts payable, Accounts received, Fixed asset purchases and disposal, Security deposits, and Depreciation schedule).
  • If a claim for loss of rent is ever filed, your main evidence will be your accounting records.

Records are also to be kept in an accurate manner as well as complete. This is especially true for accounting records. These records are critical when settling and insurance claim.

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© 2008, Mark S. Balcos.  The reader assumes all responsibilities for his/her own actions in regards to any items discussed in this report.  Adherence to all applicable laws and regulations, federal, state and local, governing the use of any product or service described in this report in the US or any other jurisdiction is the sole responsibility of the reader.  The publisher and author assume no responsibility or liability whatsoever on the behalf of the reader of these materials. The reader is encouraged to consult directly with his/her insurance professional.

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