Insurance and Rental Properties
Friday Feb 25th, 2022
A few recent conversations with some of our landlord clients have prompted this reminder about the importance of keeping insurance on rental properties.
Sometimes landlords believe that because their tenants carry insurance coverage, they themselves do not require a policy on their rental property. Here is a summary of the different types of property insurance that relate to a property that is tenant-occupied:
TENANT INSURANCE – covers fire and smoke damage to personal belongings, flood and water damage to personal property, theft of your belongings (at home due to a break-in or outside of the home), personal liability coverage, expenses relating to resolving identity theft, and emergency accommodations if something happens and the home is deemed to be unsafe to live in.
LANDLORD/OWNER INSURANCE – at minimum, it covers damage to the appliances and fixtures in the property, as well as any upgrades that have been made to the property; optional coverage may include legal protection (expenses incurred to protect or defend your rights as a landlord), personal liability (from unintentional injury to your tenant from the use of your rental property), or rental loss (lost rental income due to the rental property being rendered inhabitable)
CONDO BUILDING INSURANCE (if condo) – the building insurance coverage included in your monthly maintenance fees covers damage to the common elements of the building (eg. hallways, elevators, lobbies, parking garages, amenities, etc.) as well as liability.
Let’s take a look at an example of a water leak in a condo building. Imagine that the water hose connecting the washing machine to the water supply line failed when your tenant started a load of laundry and then went for a work-out at the gym in the building. By the time they return, there is water everywhere in the unit and upon further investigation, the water has leaked into the unit below as well as the hallway. After the water has been shut off, industrial fans are brought onsite to air out the wet areas and typically remain for a few days.
Here is a rundown of financial responsibility for repairs, assuming that all parties were holding proper insurance:
- The tenant’s insurance would cover the damage to their own personal belongings and temporary accommodations if the unit was not livable during the airing out process or repair
- The condo’s building insurance would cover the cost to repair the hallways (if required)
- The owner’s insurance would cover the cost to repair the damage to the unit
- For the unit below, that owner would also have to go through their own insurance company for a claim to repair the damage to their own unit, due to a concept called subrogation – it allows the insurance company for the unit owner below to payout a claim, but with the right to pursue the insurance company of the owner above to recover these costs
- In a situation where the tenant is deemed to have caused the leak due to their negligence, then the tenant’s insurance would cover the cost of repair to the unit to what they would call the “standard unit” – the original builder’s standard finish as described in the legal documents of the condo. The owner’s policy would cover the cost of any upgrades that they had made to the unit, over and above what is described as the standard unit. For example, if the standard unit included carpet throughout, the tenant’s insurance company would cover the cost to replace the damaged areas with carpet, and the owner can file a claim under their own insurance for the difference between the cost of carpet and the hardwood floors that they had installed a few years back.
A few more things to mention about insurance and rental properties:
- On the anniversary of your tenant’s lease, assuming that they are continuing on a month-to-month basis, remind them to renew their policy and ask for a copy for your files
- Ensure that your insurance as the owner covers any upgrades that you have done to the property
- Proof of insurance is required for any mortgage lender, so be sure that it is up-to-date if you are looking to renew or refinance or switch mortgage providers
There are many potential situations that can occur, with most being out of your control as a landlord so it is best to ensure that you have proper coverage to avoid major out-of-pocket repair costs that will affect your overall return on investment.
If you have any questions, please reach out to us or to your insurance provider directly!