Business Insurance
Business insurance policies are important to protect landlords from financial losses resulting from unexpected events such as accidents, natural disasters, injury claims, or other liability issues.
There a number of decisions that a landlord must make to determine the appropriate policies and coverages for his business.
Coverages
While insurance coverage against almost any possible loss could be purchased at some cost from some company, what a landlord wants to do is pay for only the coverage for events and losses that are most likely to occur on his property. To do so, a landlord will need to understand insurance policies’ coverages, terms and conditions in relationship to his known business risks and financial condition.
There are two types of insurance coverages related to real estate. One is to protect the rental property from casualties, i.e. the physical losses or damage to the property caused by any of many potential events including fire, storms, theft, and vandalism. The other is to protect the landlord from liability for damages to other people or property. Adequate liability insurance includes coverage for injuries or losses suffered by others as a result of defective conditions on the property and legal costs of defending personal injury lawsuits. Liability insurance is important because judgments resulting from a lawsuit can be potentially larger than losses from casualties and the cost of defending against a lawsuit is often significantly greater than the ultimate award of damages.
Limits and Deductibles
Insurance premiums can be a significant cost of property ownership, but insufficient insurance can result in financial disaster. With the help of an experienced insurance agent, a landlord can evaluate important types of coverages, determine how high a deductible is acceptable to his business operations, and choose how large the coverage amount should be.
The more rental units and tenants, the more liability insurance is required to cover the risks, with all other factors remaining the same. Liability coverage can be much more important than all the casualty coverages put together. Exposure to financial loss due to physical hazards is actually limited, although the limit can be quite high. As a bottom line a landlord should obtain the highest possible liability limit even if it means accepting high deductibles on casualty coverages.
It is often more cost-effective to increase liability protection through the use of excess liability coverage, known as an umbrella policy. An umbrella policy takes over after the limit of another policy has been exceeded. It is often recommended that landlords purchase a moderately high basic policy liability limit and a high limit on the umbrella policy. When possible, it is best to obtain an umbrella policy from the same company that handles the underlying liability insurance in order to avoid possible conflicting strategies on how best to defend in litigation.
A deductible is the amount of money that is paid out of pocket before the particular insurance coverage begins to pay. Deductible amounts for casualty insurance range from a few hundred dollars to thousands of dollars. The maximum deductible to be considered would depend on a landlord’s risk tolerance, financial condition, and as applicable, the maximum allowed by the landlord’s mortgage lender.
Anytime that there is a deductible for a particular type of insurance, there is the opportunity for reducing the premium by accepting a larger deductible. This allows a landlord the option to use the money saved with a higher deductible to buy other types of coverages that are important to his business.
Costs
The type and amount of insurance coverages can affect the costs of insurance premiums. Some of the factors that affect premium costs are:
- Location of the property
- Identified risks in the geographic area of the property
- Type, age, construction, condition, and size of the property
- Number of rental units
- Building codes compliances and inspections
- Fire safety measures
- Burglar alarms and security monitoring systems
- Swimming pool on the property
- Gated access and entry/exit routes of the property
- Rental policies; e.g., smoking policy
Casualty Insurance
Dwelling insurance provides casualty coverage for physical damage to building structures caused by unexpected events such as fire, lightning, windstorm, hail, ice, snow or other covered peril.
Many landlords choose a policy which provides the broadest level of protection and covers a property against all losses except those specifically excluded from the policy.
Named Peril vs. All Risk Insurance
Casualty insurance is first party coverage for the insured’s own property against a wide variety of common perils.
First party property insurance is usually available in two types of coverage, named peril and all-risk. Under a named peril policy, a landlord must prove entitlement to collect under the policy whereas, under an all-risk policy, a landlord is assumed to be entitled to coverage unless the insurer can prove that there is some reason why coverage can legitimately be denied.
Named Peril Coverage
Named peril coverage relates to direct physical loss caused by specific named perils such as fire, hail, lightning, wind, or water damage. If the peril is not named, the coverage does not exist.
All Risk Coverage
An all-risk policy, called an open peril policy, covers all forms of direct physical loss that are not explicitly excluded from coverage, as opposed to coverage of a single peril or a combination of perils written as single coverages. Four elements have to be proven for the insured to be entitled to benefits under an all-risk policy:
- Occurrence of physical damage,
- Damage occurred during the policy period,
- The insured or covered property was damaged, and
- A covered peril caused the damage.
Both Named Peril and All Risk policies will only cover losses that are sudden and accidental. Losses that occur over a period of time are not covered as they do not meet the test of sudden and accidental.
Replacement Cost vs. Actual Cash Value
Insurance policies can pay the insured for losses in one of two ways:
- The actual cash value of damaged or destroyed property which is the cost of replacing property less physical depreciation, or
- The replacement cost which is the amount it would take to replace, rebuild or repair damaged or destroyed property with materials of like kind and quality without deducting for physical depreciation.
In general, replacement value coverage offers greater protection against significant loss.
Liability Insurance
Liability Insurance is designed to cover against lawsuits, settlements, and judgments up to the amount of policy limit, including the cost of defending lawsuits. This includes coverage for injuries or losses suffered by others as a result of defective conditions on the property and legal costs of defending personal injury lawsuits
Usually the policy states a dollar limit per occurrence and an aggregate dollar limit for the policy year. Liability insurance should cover both bodily (physical) injury and personal injury.
Bodily injury is physical based and encompasses a variety of injuries or related problems that might be suffered by tenants or their guests.
Personal injury is offense based and encompasses a variety of injuries that might be suffered by tenants or their guests.
Liability insurance will not cover intentional wrongdoing such as arson or assault, but will cover negligence and strict liability.
Occurrence vs. Claims-Made Policies
Liability insurance is available in two versions: occurrence and claims-made. An occurrence policy covers events occurring during a specific policy period no matter when the claim is made.
A claims-made policy covers claims that are made during the policy term, no matter when the actual incident occurred. An extended reporting period can be added to a claims-made policy in exchange for an extra premium to cover claims that arose during the regular policy period but were not reported to the insurer or asserted against the insured until the extension.
Duty to Defend
Under a liability policy, the insurance company also has a duty to defend the insured against any allegation covered by the policy.
Optional Coverages
There are optional coverages that could be important for business operations that are not covered in standard business insurance policies. As an example, some landlords choose a Loss of Income policy to compensate for lost income in the event that a rental property becomes uninhabitable due to a covered loss.
Annual Review
While insurance policies coverages are generally automatically adjusted annually to ensure that the policies are kept current on replacement costs, a landlord should also conduct periodic reviews of insurance coverages to ensure his properties are adequately protected.