By Thomas Lucier
Many residential landlords unknowingly strut around with the words sue me figuratively tattooed on their foreheads in bright fluorescent colors! They're considered in legal circles to be high profile targets because they run their rental housing business in a lax, haphazard manner with little or no regard to how they're perceived by their tenants and other potential adversaries. These are the flashy landlords who collect their rent from tenants while driving exotic automobiles and wearing expensive designer clothes.
These are also the same landlords who are woefully underinsured and totally clueless when it comes to knowing how to reduce their risks and limit their personal liability as landlords. If you don't want to end up as cannon fodder in court, you should take a low-key approach to running your residential rental housing business. By a low-key approach, I mean that you should operate your rental housing business in an honest, ethical, professional manner that keeps both you and your business under the radar screen of jealous tenants, overzealous code enforcement officials, snooping members of the media and sue-happy plaintiffs' attorneys looking for some quick cash.
Landlords Must Know How To Properly Protect Themselves
If you're a residential landlord whose goal is financial independence through the ownership of rental property, you most likely won't succeed until you first learn how to:
1. Maintain adequate property and casualty and general liability insurance on your rental property.
2. Reduce the risk of potential lawsuits as a landlord.
3. Limit your personal liability as a landlord.
Four Types Of Insurance Coverage Landlords Should Carry
At a minimum, residential rental property owners should carry the following four types of insurance coverage:
1. Property and Casualty Insurance. Property and casualty insurance covers residential rental property owners from fire, storm or other catastrophic losses that could render their rental property uninhabitable.
2. General Liability Insurance. General liability insurance is third-party coverage. It reimburses rental property owners if they're responsible for compensating another's losses. General liability insurance doesn't cover intentional wrongdoing such as arson or assault, but it usually covers negligence and general liability issues.
3. Flood Insurance. Flood Insurance is available for rental properties that are located in communities that participate in the National Flood Insurance Program. The federal government administers the National Flood Insurance Program, and insurance companies issue the policies.
4. Umbrella Insurance. Personal or commercial umbrella insurance provides rental property owners with excess liability insurance coverage beyond the limits provided in a general liability insurance policy.
What Your Insurance Coverage Should Protect You Against
Depending upon whether or not you have employees, your property and casualty and general liability insurance coverage should protect you against:
1. Fire, storm and other catastrophic losses.
2. Liability for tenant and employee injuries.
3. Tenant or employee theft.
4. Malicious damage and vandalism by tenants.
5. Loss of rental income.
6. Libel, and slander by employees against tenants
7. Discrimination lawsuits filed by disgruntled tenants and employees.
8. Allegations of fraud, misrepresentation and other intentional acts by employees.
9. Claims made that exceed insurance policy limits.
Require Everyone Working On Your Property Be Insured
To reduce general liability insurance premiums, require that all repairmen and contractors working on your rental property provide certificates of insurance proving that they carry adequate liability coverage and workers' compensation insurance. Require that each repairman or contractor have a minimum of one million dollars in liability insurance coverage.
Don't Allow Tenants To Keep Any Pets On The Premises
I'm not some sort of animal-hater, but for insurance and liability purposes, it makes sense not to allow tenants to keep any type of pets on the premises. For example, many insurers are leery of potential wrongful-death lawsuits that could result from tenants' pet dogs attacking and possibly killing people on the premises. This is what has happened to the owners of the San Francisco apartment building where a woman was mauled to death by two dogs in a hall last year. The landlord's liability insurer ended up paying the victim's estate millions of dollars.
Require All Tenants To Have Renters' Insurance Coverage
As part of your risk management program, include a clause in your rental agreement that requires all tenants to provide proof of renters” insurance coverage prior to taking possession and occupying the premises. Most renters' insurance policies provide coverage against fire and theft to personal property, and personal liability coverage for injuries and damages caused by tenant neglect.
Use An Independent Insurance Agent
Unlike captive insurance agents, who work for one insurance company, independent insurance agents represent many insurance carriers. An independent insurance agent works a lot like a mortgage broker who shops a loan application to mortgage lenders for the best interest rate and loan terms. An independent insurance agent shops an insurance application to property and casualty and liability insurance carriers to get the most coverage at the lowest annual premium.
Four Ways To Reduce Risks And Limit Personal Liability
Here are four ways to reduce your risks and limit your personal liability as a landlord:
1. Maintain adequate property and casualty and general liability insurance coverage on your rental property.
2. Form a separate business entity to hold the title to your rental property in.
3. Practice risk management techniques that reduce your risks and personal liability as landlord.
4. Thoroughly screen the backgrounds of all tenant and employee applicants for criminal convictions.
Maintain Adequate General Liability Insurance Coverage
Regardless of how safe and secure your rental property may be, and how much you plan and prepare for emergencies, you still must maintain adequate general liability insurance coverage on your rental property in order to help reduce your risk and limit your personal liability as a landlord. In addition to general liability insurance, you may want to purchase a personal or commercial umbrella insurance policy to give you added liability coverage.
Best For Residential Landlords To Adopt A Low-Key Persona
The best way to stay off the radar screens of potential adversaries is to adopt a low-key persona as a landlord that doesn't draw the attention to yourself and your rental housing business. For example, I've adopted the persona of the busy landlord who's making a living. Tenants assume that I'm always busy because I walk, talk and work at a rather fast pace. I'm always polite and courteous with tenants, but I never engage in small talk, or discuss my rental housing business with them. When I'm asked about the business, I simply state that, it's a living, and promptly go about my business.
Best To Use A Separate Entity To Hold Title To Your Rental Property
Lastly, given the overly litigious nature of most Americans today, I very strongly suggest, that you form a separate business entity such as a Subchapter S corporation or LLC, limited liability company, to hold the title to your rental property. It's one of the best and least expensive methods available to help to reduce your risk and limit your personal liability as a landlord. This way, there's a clear distinction between your personal and family assets, and the assets held by your corporation or your limited liability company. And, in most cases, any liability incurred by the business entity would be limited to the business entity's assets. However, please be advised that there isn't a business entity known to man that will protect its owners and officers from being held liable when it's used to engage in fraudulent or criminal behavior.
