Real estate is often viewed as a safe, long-term investment. Whether it’s a modest single family home or a massive 100,000-square-foot warehouse, investment property can provide rental income and then can be sold later for significant gains. Before handing over the keys to tenants, property owners should secure the right type of insurance coverage to protect their investments from loss, damage, and potentially financially disastrous lawsuits.
Dwelling Insurance for Habitational Property
In the insurance world, investment properties such as single family homes, duplexes, or small apartment buildings are considered habitational properties. Owners of these types of properties should consider dwelling insurance to cover the physical structure, basic liability, and loss of use. Dwelling insurance doesn’t cover the property’s contents, so landlords should strongly suggest or even require tenants to carry their own renter’s insurance to protect their personal property such as furniture, electronics, and other household items.
Lessor’s Risk for Commercial Property
For investment properties leased out for commercial purposes, the property owner should carry Lessor’s Risk Only (LRO) in addition to property and general liability coverage. Lessor’s Risk is ideal for owners of retail buildings, warehouses, apartment buildings, and office space. To qualify for Lessor’s Risk, no more than 25% of the building can be occupied by the property owner, either for residential or commercial purposes. Lessor’s Risk protects property owners in the event they are sued when others sustain injuries or damages on the property. Even if the property owner is not found liable, the LRO policy will still pay defense costs, which can easily reach several thousands of dollars.
Even though wise landlords require tenants to carry general liability coverage and name the building owner as an Additional Insured, a Lessor’s Risk policy is still a smart option. If the tenant sustains property damage or is found liable for personal injury and the tenant’s policy declines coverage or has insufficient coverage for the claim, the property owner could be found liable for damages. In this case, the Lessor’s Risk policy would protect the property owner from those losses.
When Other People’s Problems Become Your Problem
Between property damage, personal injury, loss of use or income, a wide assortment of accidents can spell disaster for a building owner who doesn’t carry Lessor’s Risk. If not for a LRO policy, the landlords in the following scenarios could very easily face financial ruin.
An owner of a commercial retail building leases out a space to a camera shop. A customer is holding an expensive camera lens when she trips and falls on the threshold of the store’s front door. The lens is ruined as it crashes on the sidewalk and the customer injures his wrist. She files suit against the building owner for damages to the camera lens and medical expenses. The customer is now unable to work due to her injury, so her lost income is also included in the suit.
A grease fire that started in a bar caused $60,000 in building damage to the bar and the adjacent clothing boutique next door. Both the bar and the boutique had to be closed for six weeks while the building was repaired. The owners of the bar and boutique sued the building owner for lost income. Since the fire also ruined $15,000 of the boutique’s inventory, the business owner also filed suit for that property damage.
No matter how hard a building owner works to keep his property in pristine condition or how careful he is about selecting tenants and requiring them to carry adequate insurance, accidents happen and people are prone to file lawsuits for damages. Lessor’s Risk is an essential layer of coverage to fill the gap between a property owner’s general liability and property coverage and the coverage carried by tenants. Considering most Lessor’s Risk policies are very low cost, the small investment in an insurance policy to protect property owners against financially crippling lawsuits is well worth the up-front cost of the policy.
If a landlord maintains the building’s physical condition, it will greatly reduce the risk of lawsuits resulting from people sustaining injuries or property damage. Basic preventative maintenance combined with adequate general liability, property, and dwelling or lessor’s risk coverage can help ensure a property owner’s investment will continue to be profitable for many years.
First appeared in Atlantic Specialty Lines. Used with permission.