How Insured Are Your Tenants?

• Jul 2015
• NARPM Residential Resource

Residential Resource

Most renters incorrectly assume that the landlord has a responsibility to make them whole financially if there is a fire or plumbing leak. This responsibility only exists if the landlord can be shown to be negligent.

I recently had an extended conversation with a client about renters insurance. The conversation led to a lot of questions which led me to do some detailed research. My research uncovered a number of additional considerations that I thought would be worth exploring in this article.My previous understanding of the value of recommending (or in many cases requiring) that tenants purchase renters insurance was focused on protecting the renter from the loss of their belongings. Most renters understand that they are on their own if they suffer a loss of their belongings as a result of a theft or negligence on their part. Most renters incorrectly assume that the landlord has a responsibility to make them whole financially if there is a fire or plumbing leak. This responsibility only exists if the landlord can be shown to be negligent.Most renters do not understand that probably the greater need for renters insurance is liability protection for their actions that result in property damage or harm to others. Depending on the damage done, the tenant’s liability can be many times more than the value of their belongings.
An important legal doctrine is subrogation.

The concept is that the first party (insurance company for the property owner) makes a payment (pays the owner’s property damage claim) on an obligation of a third party (the renter whose actions or inactions resulted in the loss). The first party invoking the subrogation principle can then recover the paid damages from the third party. The following legal case, although taken from a condominium context, highlights many principles that could apply to any of your rental units. The extent of the liability only increases as the primary unit is connected to other units (duplex or condominium setting).

INSURANCE COMPANY VS. NEGLIGENT TENANT

The specific case is Travelers Property Casualty Company of America v. William Wesley Terry, No. M2005-020350-COA-R3-CV, Tenn. App. 2007. The short version of the case is the insurance company for the condominium association (Travelers) successfully sued the occupant of one of the condo units (Terry) to recover damages resulting from a fire that damaged the property.

The fire was allegedly caused by an unattended candle in a unit which, at the time, was being rented by its owner to a third party (Terry). The monthly rental agreement (lease) between the condo owner and Terry made no mention of property or liability insurance. The lease did require that the tenant was to repair any damage that resulted from his negligence.

Travelers alleged that Terry lit a candle in the bedroom and left it unattended. As a result, the fire damaged the building and the common areas. Terry not only denied liability but also filed a motion for summary judgment to stop any claim by Travelers. The trial court granted this request based on the so-called “Sutton co-insured anti-subrogation rule.”

Travelers appealed maintaining that this rule was inapplicable because Terry was not in privity of contract with the insurer or its named insured, the association. In other words, there was no direct contractual relationship between the insurer and the tenant. When this relationship is lacking, there is no privity of contract. The court explained that this “co-insured subrogation rule” had it origin in a 1975 case where a landlord’s property insurer sued a tenant and his young son, claiming subrogation rights for a fire caused by the son. The jury returned a verdict against the father. On appeal, the Oklahoma Court of Appeals held that the insurer had no right of subrogation against the father. The reason, the court explained, was that the law considers a tenant to be a co-insured of the landlord, absent an express agreement between them to the contrary.

As it turned out, the case was remanded back to the trial court for further proceedings, because the court could not conclude whether the tenant was a co-insured or had a justifiable reason to believe he was a co-insured under the association’s property policy. This decision was based on the fact that:

• tenant did not have a contractual relationship with the association and therefore was not in privity with the association or its insurer,
• there was proof that the tenant’s rent payments did not go toward fire insurance premiums,
• the rental agreement did not induce the tenant to believe he would benefit from the association’s property insurance policy, and
• to the contrary, the rental agreement specifically provided that the tenant “shall be responsible for damages caused by his/her negligence and that of his/her family or invitees and guests.”

The costs of the appeal were assessed against Terry.

LEASE DOCUMENT ELEMENTS

Although the number of successful subrogation attempts is few because of the co-insured defense, some do have a similar outcome to the previous case. So how should you address this in your lease? Most insurance companies recommend that you waive your right of subrogation in return for the tenant waiving their subrogation rights referred to as a protective mutual waiver of subrogation. This protects you and the property owner against any liability for negligence on either of your part. For example, you can be held liable for property damage resulting from failure to correct a hazardous condition in a timely manner of which you were previously aware.

The second item to address in the lease is the requirement for renter insurance. Not only will the tenant benefit from protection from loss of their contents and negligent liability, but your owner will benefit from profit reduction due to tenant-negligent actions resulting in property damage. The damage amounts are often less than the owner’s policy deductible. The liability component of the tenant policy will often step in to cover these losses.
The Insurance Services Office (ISO) defines a standard renter insurance policy designated as HO4. It defines (and therefore is limited to) 16 perils that the policy covers for personal property loss. Most HO4 policies have a Section II Liability provision providing the tenant with general liability insurance and medical payments to others, with insurance coverage generally limited to $100,000. Some policies will allow the policy holder to increase this limit or suggest that a separate umbrella policy is purchased.

The best way to ensure that the tenant has and maintains the renter insurance policy is for the owner or property manager to be named as an “additional interest,” also known as a third-party designee. This endorsement does not convey any coverage to you or add any cost to the tenant. A copy of the declaration page which specifies the policy limits will then be sent to you. You will also receive notice of any change in coverage, including cancellation and non-renewal.

Do not confuse this with an “additional insured” endorsement which appears to offer you additional benefits, when in practice may actually reduce coverage for the property owner. There are many adverse consequences of this designation that are best explained by your insurance broker. One such reason is that most renter policies have significantly higher liability limits to third parties than to the named insured. This is one of the counter-intuitive
items that you are best to avoid.

IN SUMMARY

Here is a convenient checklist to implement the previous suggestions:

• Consult your attorney and insurance broker to advise you on the issues regarding requiring renter insurance and the associated implementation matters.
• Review your standard lease and check that the question of subrogation is addressed.
• Consider requiring renter insurance as a lease condition; set a minimum for the liability limits based on the value of the rented property.
• Require that you are listed as an “additional interest.”

Disclaimer: I am a technologist and not an attorney or insurance broker. Nothing in this article should be interpreted as a recommendation to buy or sell any insurance product, or to provide financial or legal advice

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