The high cost of worse case

Unpaid rent isn't the only form of bad debt apartment owners are facing today. Another is damage caused by residents' negligence or by factors beyond the control of the residents, but for which they could be blamed.


Without the protection of a mandatory, full participation, renters insurance program, apartment owners are exposed to a number of risks that can negatively impact their bottom line.

Fire and water
The most common tenant-caused apartment accidents are fires and they happen more frequently than people think. Take a sprinkling of this year’s headline news: A smoldering cigarette in a plastic trash bag causes an apartment fire in Muscatine, Iowa. A kitchen fire destroys 12 units in an apartment building in Salem, Va. Electrical cords next to a bed ignite bed linens resulting in $225,000 of damage to a Los Angeles apartment property. And the culprit in a Chicago apartment fire that injures 12 residents and a firefighter is found to be food left cooking on a stove.

But fires aren’t the only accidents common in multifamily dwellings. Others involve water, such as an overflowing bathtub on the 15th floor of a New York City high-rise that damaged units on the floors below.

The point is, accidents happen and in high-density living environments, odds are they will occur more often. Moreover, in today’s distressed economy, renters are staying in properties longer and leaving their apartments less often.

“The less renters go out to dine, the more impact they have on the unit and the more risk for the owner,” said Jay Harris, VP of business services for Core Logic SafeRent, formerly First Advantage SafeRent, a provider of resident screening services, property performance tools, automated lease and document generation and renters’ insurance through its RegistryTLC program.

“Owners are seeing more damage to their properties in this economy with renters cooking at home more often and some of our customers who have been on the fence about renters insurance now look to renters insurance to fill the gap of covering things that the security deposit may not cover. For instance, if they only have $500 for the security deposit and they can have another $10,000 or $20,000 in damages covering the unit when the tenant moves out, renters insurance looks pretty good,” said Harris.

When residents have no liability insurance, owners cannot depend on them to cover the damage they cause. Instead, owners must cover the costs themselves, or rely on their own insurance to pay. Mandatory renters insurance programs transfers risk to residents by requiring them to agree to purchase policies when they sign their leases. They make sense, since voluntary plans are difficult to implement and generally result in very low resident participation levels.

The downside is that the cost of the policy increases renters’ monthly cost of living.

While those costs vary by state, market and the class of the property, premiums generally are around $12 a month, or $144 a year, for about $30,000 of property coverage and $100,000 of liability coverage, with a deductible of $250, according to the Independent Insurance Agents & Brokers of America.

Countering push back
Even though that monthly outlay is relatively minimal, the idea of asking renters for any additional dollars, during the worst recession this country has experienced in many years, leads some operators to shy away from such a program. But Davy Johnson, VP of Woodbury, NY-based CLK Properties, said his company’s decision to make renters’ insurance a requirement across its 17,000-unit portfolio, located in 15 states and 30 cities in the Southeast, Northeast, Midwest and as far west as Texas, has paid off.

“It’s helped our bottom line if you consider that most of the losses that occur at an apartment community are primarily kitchen-related fires and those generally fall under the deductable of around $40,000 to $50,0000 type losses. This obviously has helped to cover our out-of-pocket expenses,” said Johnson.

“We have seen in the last few years that operators increasingly are comfortable with requiring tenants to have some liability insurance as a condition of moving in and we find a lot of successful examples of companies enforcing that requirement and finding that there is no negative impact on rent growth. Tenants appreciate the fact they have some coverage in the event of a fire, or some other damage to the unit. So, compared to a few years ago, we are finding more operators requiring coverage and making sure that their leasing staff carries out that requirement as a check box they complete as a condition of move-in. The effect is to lower the costs related to resident turnover and improve NOI, because the owners can now rely on renters insurance for coverage of resident-caused damages,” said Harris.

Acceptance of full-participation renters insurance programs has become more prevalent since 2006, when the National Apartment Association (NAA) revised the language in the insurance clause within the NAA lease form, giving owners the option to require residents to carry liability insurance as a condition of residency.

According to the NMHC annual Cost of Risk Survey, published in November 2009, 44 percent of apartment firms require residents to have renters insurance, a huge increase from the 24 percent reported in 2008.

Renters at risk
Owners aren’t the only parties at risk from accidents. Renters also face financial losses in the event of an accident caused by their own negligence or by their neighbors, and they are vulnerable to theft. In fact, renters are 50 percent more likely to experience theft than those who own their homes, according to the Bureau of Justice Statistics.

Most renters have more than $20,000 worth of belongings in their apartments and many incorrectly assume their landlord’s insurance policy will replace those items if they’re stolen or damaged.

The contents of renters’ apartments aren’t covered by the renters liability policy either, which is limited to damage to the property, injuries that occur on the property and provision of temporary housing while any damage is being repaired. But renters have the option of purchasing coverage for their own furniture and belongings.

“We’ve found that many tenants don’t even know renters insurance is available and when they realize it can provide them the coverage that they need to protect their contents and to get their life going in the event there is a loss, whether its their fault or someone else’s fault, most people generally understand insurance and what it can do for them. So, it’s a matter of explaining that this is not just something the property owner is requiring, it is for their own good, as well. They can go investigate and it’s not been a problem, but you do need to make them aware that there is an advantage for them, as well as an advantage to their neighbors and to the property itself,” said Johnson.

“With so many residents adding their personal contents to the coverage because it’s not very expensive, when there is a loss, most of them are able to get back on their feet very quickly and you don’t hear as many tragic stories of people losing everything. They’ve lost everything, but they have a way to rebuild their lives,” he said.

Implementing coverage
Full participation insurance programs allow residents to select any insurance carrier, as long as minimum coverage limits are met, and the property owner is provided with proof of coverage and is listed on the policy as an “additional interest.”

But many multifamily owners choose to partner with an insurance provider to offer residents a convenient coverage option. Family-owned and operated CLK, which began as a New York City-centric apartment owner and manager in 1980 and grew into a diversified commercial real estate firm, chose to roll out the RegistryTLC program offered by SafeRent in 2006. That mandatory renters insurance program began at apartment communities in Mobile and Memphis.

SafeRent helped to educate CLK’s operators, regional VPs and district managers and provided training for the onsite managers and staff, explaining how renters insurance works and why it is important to the company and the residents, Johnson explained.

“Once we were comfortable with that internal education, we did pilots in two cities and met weekly, through conference calls, to determine the reaction of the market and the staff and, of course, we were gauging this against whether the program had any negative impact on our ability to rent apartments. We made minor modifications to our education, but overall determined that our staff understood the program. We also found that there was not the perceived market resistance to the requirement for renters insurance that some people would have you believe. We then took what we learned from the pilot program, and incorporated that into the next roll-out, until we had it rolled out across the entire portfolio,” he said, adding that the program was implemented across the entire portfolio in around six months.

Depending on the RegistryTLC program in place at the property, owners can choose how to handle billing. SafeRent offers robust reporting on who has opted for coverage and, if a policy expires, notifies the operator immediately so they can check with the tenant to make sure they have some coverage in place.

“SafeRent provides reports that allow our managers to track all the transactions that take place that are purchased under the SafeRent program or, if a resident chooses to use a carrier other than SafeRent, will track and report this, as well” said Johnson.

Harris asserts that RegistryTLC, which is SafeRent’s own product, underwritten by the First American family of companies, pays claims on damages that a number of others in the industry don’t, such as water.

“In the end, implementing a required renters insurance program was a business decision we made. It was one of the ways we were going to operate and we haven’t had to back off from that one bit, even during the recession,” said Johnson.

And he notes that SafeRent’s service goes way beyond the claims response. “They consistently provide support all the way down to the site level to the people who are in and out of the apartments every day, giving them guidance and training on how to document claims and do the things necessary to submit them and, when they are submitted, they are settled very quickly. Our risk manager is thrilled,” said Johnson.