TRANSFERRING RISK TO RESIDENTS
BY DIRK WAKEHAM
Accidents happen; it’s a fact of life. Every day, residents inadvertently expose property owners
and other residents in the community to a variety of risks. Some are life threatening—such as kitchen fires—and others are simple mistakes, such as accidentally overflowing a bathtub.
Both types of situations are costly, affect the property’s profitability, increase insurance
premiums and can cause rifts between residents and owners. However, by transferring risk to the resident, owners can hold residents accountable for the damage residents cause and
significantly improve owner’s bottom lines.
“Apartment owners are susceptible to an enormous degree of risk from resident-caused damage,” said Grant Berkey, Vice President, Capstone Real Estate Services Inc., an Austin, Texas-based fee management firm responsible for more than 50,000 units. “As property deductibles and premiums escalate, we are encouraging owners to protect themselves by transferring risk
back to the resident. It can ultimately protect the property and its profitability when an accident occurs,” he said.
NAA LEASE ADDS INSURANCE CLAUSE
In March 2006, the National Apartment Association (NAA) Board of Directors unanimously voted to revise language in the insurance clause within the NAA Lease. Previously, the lease
language urged residents to have insurance, but didn’t require it as a condition of residency. Even though the resident posed a risk to the owner, the decision to obtain insurance was at the resident’s discretion.
Increased insurance premiums and a recent surge of costly natural disasters were two
reasons owners elevated the need to reduce their exposure to risk. Recognizing the value of risk
management, NAA also sought ways to better protect its members. As a result, the organization
revised the NAA Lease and gave owners the option of requiring renter’s liability insurance as a
condition of residency.
Most updated leases now denote that the property owners do not maintain insurance to cover a
resident’s personal belongings, damage to the property or personal injury. Residents are still
encouraged to retain insurance coverage to protect against liability claims and damages because of fire, smoke, rain, flood, water, and pipe leaks. The changes effectively dispelled the myth that “my landlord covers my belongings.”
To further protect owners, the revision also provides owners with the opportunity to require
insurance as a condition of residency. By doing so, residents agree that damage they cause will
be covered by their own insurance policies. For those owners who do not require mandatory insurance, an addendum to the lease clearly states that by opting not to have insurance, the resident acknowledges that he or she “may be responsible to others for the full cost of any
injury, loss or damage caused by your actions or the actions of your occupants or guests.”
Although it clearly states that residents are responsible, opting out of mandatory insurance provides little recourse for owners to collect on damages.
Full participation insurance at a community effectively transfers the risk from the property
owner to the resident’s renter’s insurance provider and holds the resident accountable for any
damage he or she causes to the unit or the property.
“Mandatory renter’s insurance is the pinnacle in risk management strategies, and the
industry is trending in that direction,” Berkey said. “A resident at one of our properties
recently started a grease fire in the kitchen, damaging the unit, as well as both adjacent units. The damage totaled more than $38,000 in repairs. Fortunately, the resident was insured and we were able to file our claim through their renter’s insurance policy.”
The claim was processed and the insurance provider paid the owner for the damages. In this
scenario, neither the property’s operating budget nor profitability were affected by the fire. If the
resident weren’t insured, the total value of the damages would have fallen to the property owner. Only after the deductible was met would the owner’s insurance provider cover the remaining costs associated with the damage.
SURVEY SAYS: 25 PERCENT REQUIRE IT
New data support the fact that implementing a renter’s insurance program greatly reduces
expenses. LeasingDesk Insurance Services recently commissioned a survey of apartment owners,
representing more than 800,000 units, to determine owner’s use and perceptions of renter’s insurance.
The study, which was conducted by SatisFacts Research, determined that requiring renter’s insurance as a condition of residency reduces the owner’s out-of-pocket costs for resident-caused damages by nearly 80 percent.
Ironically, the study found that more than 55 percent of owners acknowledged that they track expenditures related to resident-caused damages that fall below the property’s insurance deductible; however, only 25 percent currently require mandatory insurance coverage. Even when owners acknowledged an increase in insurance premiums from 2004 to 2005, few had a proactive risk management solution in place to limit the property’s liability.
IMPLEMENTING FULL PARTICIPATION
It is important to note that an owner cannot actually sell a renter’s insurance policy to residents. An insurance license is required to “sell” an insurance policy, so owners typically work
with reputable insurance providers that specialize in the apartment market. Often an owner will enter into an agreement with a renter’s insurance provider and implement a policy for each resident who is signing a lease to move in. With a full participation program, residents simply elect to accept the policy and are instantly enrolled in accordance to the arrangement that has been established on behalf of the community.
The study participants also reported that implementing a risk management program was easy. A
majority of owners from the survey (82 percent) who offered and required residents to have a renter’s insurance policy—and then enforced it - said they would “absolutely” recommend this type of program.
Owners who don’t protect their communities through renter’s insurance solutions are leaving
themselves and their assets exposed to a higher degree of risk. Recognizing the impact of risk
exposure, NAA has created opportunities for owners to implement better risk management
solutions, such as mandatory insurance, through its revised lease. Industry data underscore the fact that owners who require mandatory renter’s insurance recognize enormous savings once
risk is transferred back to residents.
“Accidents do happen - it’s inevitable,” Berkey said. “The good news is that risk transfer
solutions have a positive impact for residents, owners and the properties when something does go wrong.”
Reprinted with permission from the October 2006 issue of UNITS magazine; published by the National Apartment Association (NAA). For more information about NAA, please visit www.naahq.org