The cold hard truth is that most of you are incredibly underinsured on your landlord policies.
Over the last three months, I’ve personally been involved in several “alligator” cases within the company. An “alligator case” is a major issue such as a roof leak that leads to mold issues. During this time, I discovered that nearly all the policies I reviewed lacked at least one of the four main elements that every policy should have.
Those elements are:
2)Loss of Rent
4)Fire and Liability
Let’s start with Malicious Intent. This is when a resident intentionally damages your home. We’re talking carpet ruined by pets or lack of cleaning. Holes in the wall. Broken windows, stolen appliances, you name it. Malicious Intent doesn’t cover normal wear and tear. Things such as paint over two years old or carpet over 10 years old.
Currently, I am assisting a landlord with a situation where the resident has let the grass die off and is refusing to allow us to enter the property.
I asked the landlord to send me a copy of their insurance policy. What I discovered was mind-boggling. The company that issued the policy (USAA) doesn’t offer Malicious Intent coverage. USAA is a great company but it’s imperative that you have this coverage to protect you against damages caused maliciously by the resident.
My concern is since the resident let the yard die and is refusing to let us in the home, what are they hiding from us? My experience tells me that there is damage inside the home.
My advice, first, find a new insurance company. Secondly, in the meantime, increase your liability coverage. I will discuss this later in the article.
Now let’s talk about Loss of Rent or some call it loss of use.
Loss of Rent comes into play when something happens to the property that causes an unexpected, prolonged vacancy. For example, a house fire, or mold remediation, or a flood.
Most policies that have loss of rents will pay you rent for up to 12 months. In the last 12 months, we’ve had three house fires. Two were caused by the resident and one was an electrical failure in the attic.
All three fires caused the whole house to be condemned and the residents had to relocate. Two of the three will take between 10 and 12 months to be built back. The third should only take 4 months.
The long-term build-backs will receive loss of rents ( this is the same amount of rent you were getting with the resident in the property) because the resident had to permanently relocate. The third one, the resident is receiving displacement rent from their renter's insurance. Allowing the resident to pay rent and stay in a hotel while the build-back is happening.
So, loss of rent is a very big deal to keep you from losing your investment property if you cannot make the mortgage payments for a year without rent.
Now let’s talk about Vandalism. People can be so cruel, helping themselves to things that don’t belong to them, including the copper from your AC unit or breaking into your vacant unit and stealing the kitchen appliances.
That’s where the vandalism part of the policy comes into play.
Vandalism coverage will protect you if someone steals your AC unit or breaks into your home. There is a catch, you need to read the fine print on your policy, most will not cover any damage if the property sits vacant for longer than 30 days. If you know your property is up for rent, or that you are planning an extensive renovation, then you might call your insurance company and advise them. Some will allow you to extend the coverage to 60 days instead of 30. Having that extended coverage could mean the difference between you spending $6,000 on a new AC or you having to pay a $1,000 deductible and your insurance company replacing the unit. Fire and Liability are the next topic of discussion and they are a huge topic. Let me ask you this, when was the last time you looked at the replacement value coverage of your policy? Most insurance companies are not keeping up with inflation. What does this mean to you? It means that most likely you are incredibly underinsured and you will have to come out of pocket with a large sum of money.
True Story: There was a kitchen fire in a condo. The resident started cooking and went to the grocery store leaving her food on the stove. Thankfully, the resident has insurance. However, the landlord’s policy was so underinsured that he had to pay $42,000 out of pocket. Of course, the two insurance companies will duke it out and come to an agreement.
In the meantime, the landlord is out the $42,000 and had to come up with that cash so the repairs can commence. He had no idea that the insurance company wasn’t increasing the replacement value as property values rose and inflation hit. Some policies have a “gap coverage”, that will kick in if there is a discrepancy between the current coverage and the market conditions at the time. So in this case, if the landlord had this coverage, the “gap coverage” would have kicked in and covered that additional $42,000.
After hearing this, I was enraged, and I personally called his insurance agent and questioned him as to why these policies are so underinsured. His answer was, “I don’t have time to review all of my client's files. If they don’t ask, I don’t adjust”.
Scary, wouldn’t you agree? I thought so, which is why I’m continuing to preach about insurance and the importance of reviewing your policies on an annual basis. I don’t want any of you to be in the position that this investor found himself in. If there is anything that you do for yourself this year, please make sure you review your policy and make sure you have these four main elements in your policy, call us to give you what your property is worth so it’s insured properly.