Up in smoke

It was a frigid early morning a few days after Christmas in 2003. A resident, actually just a kid by some standards -- he was 22, lit a cigarette while still in bed.

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The resulting fire at the Spanish Gate Apartments burned the entire 59-unit community to the ground. One woman was killed. Another was sent to the hospital in critical condition. All remaining residents were instantly homeless, left with nothing but literally the clothes on their backs.

Only one had renter’s insurance.Most residents barely escaped into sub-zero temperatures by 1:30 that morning, some barely having time to grab their shoes. Still others were rescued in shorts and T-shirts from their fourth-story balcony.

In the aftermath, the management company was faced with the daunting task of sorting through the rubble of what was once an apartment community, and helping to recover the lives of forty families who had been their residents only hours ago.

The resident who began the fire in his first story apartment, Blake Fieber, was subsequently brought up on a multitude of charges, including first degree homicide, felony criminal mischief and first degree arson. Fieber publicly apologized.

“Our residents lost all their possessions and were forced to start over with nothing,” said Drake Powell, Senior VP of Baron Property Services, management firm for the community. “We assisted our residents with hotel costs, relocation and one free month of rent, but as you can imagine that the fire and resulting aftermath had an enormous impact on our residents’ lives, as well as the property’s operating budget.”

Resident damage is costly
The leading cause of apartment fires is cooking equipment in the kitchen by 46 percent, according to a recent study by the National Fire Protection Agency. The second and third causes are arson (10 percent) and smoking paraphernalia (9 percent). Data also indicates that the financial impact of fires at multifamily dwellings exceeded $1.1 billion within the study’s four-year time frame, 1999 to 2002.

“In my experience, the vast majority of fire damage that occurs in multifamily properties usually involves a resident cooking in the kitchen,” says Jan Fairbairn, resident services manager for Metric Property Management, a management firm that oversees a portfolio of 64 properties with more than 18,500 units. “Even when these fires are caught and extinguished quickly, the cost to fix the damage is very costly, and ironically, seems to fall just below the property’s insurance deductible.”

Although fire is the most life-threatening and costly types of resident-caused damage, the list doesn’t stop there. Overflowing bathtubs and toilets can cause damage to units below, residents break windows and doors, and the damage that pets often cause can also be overwhelming. When residents are not held accountable for damage, it costs owners hundreds of thousands of dollars in below-deductible costs. Such events affect the property’s profitability, increase an owner’s insurance premiums and cause consternation between management and resident.

Yet, when an owner mandates renter’s insurance as a condition of residency, risk to the entire community is significantly reduced. Shifting liability for property damage is not only a more accurate line of sight from cause to effect, but it also improves a property’s operational costs, and overall value.

Industry association responds
Recognizing the need to protect members and the overall value to renters, in March 2006 the National Apartment Association (NAA) Board of Directors unanimously voted to revise the insurance clause within the organization’s lease template. Previously, the language of the lease document urged residents to carry insurance, but didn’t require it as a condition of residency. Even though the owner faced the most risk, it ultimately was the resident’s choice to obtain insurance.

The organization changed the language in the document, giving owners the option of requiring renter’s liability insurance as a condition of residency. The new lease also clearly communicated that the owner or management company does not maintain insurance to cover a resident’s personal belongings or damage to the property, once again attempting to dispel this common myth among apartment dwellers.

The most beneficial change provided owners with the opportunity to require insurance as a condition of residency, often referred to as full participation insurance. When residents are required to carry renter’s insurance, the owner significantly reduces the property’s exposure to risk because the policy covers damage caused by the resident. Owners who choose not to mandate resident insurance have little recourse to collect on damages, even though the lease clearly stipulates that residents “may be responsible for the full cost of injury, loss or damage caused by your actions or the actions of your occupants or guests.”

Survey data illustrates cost savings
New data suggests that implementing a renter’s insurance program greatly reduces expenses. LeasingDesk Insurance Services recently commissioned a survey of apartment owners spanning more than 800,000 units, to determine their use and perceptions of renter’s insurance. The study, conducted by SatisFacts, 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 also 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 study participants 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. According to the Insurance Information Institute’s Factbook, only 29 percent of renters, apartment dwellers and otherwise, are covered by some form of renters’ insurance — whether it’s required or optional.

Implementing full participation
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 such a program.

It is important to note that only a licensed insurance broker can sell an insurance policy. Because of this, owners typically work with reputable insurance providers who specialize in multifamily. It is not uncommon for properties to enter into an agreement with an insurance provider to pre-approve the entire community for liability coverage. With a full participation program in place, residents simply elect to accept the policy and are instantly enrolled in accordance to the arrangement established on behalf of the community.

Metric found it a simple task. “As we considered renter’s insurance, we thought we may encounter resistance from both prospective and current residents,” added Fairbairn. “But in fact, the exact opposite occurred. Residents applauded our decision to implement mandatory insurance throughout our entire portfolio of properties. While we reduced our property’s risk, we attracted a higher-quality resident and delivered a valuable amenity.”

Owners who don’t protect their communities through renter’s insurance solutions leave themselves and their assets exposed to a higher degree of risk. Industry data underscores the fact that owners who require mandatory renter’s insurance recognize enormous savings once risk is transferred back to residents. It’s even gained support from one of the leading multifamily associations in the industry.

“After the Spanish Gate fire, we researched the benefits of renter’s insurance and decided to make it mandatory,” commented Powell. “The important thing for renters to know is that living in a multifamily unit brings exposure from other residents who can cause damage. It’s not just you and the circumstances under your control.”

Author: Dirk Wakeham