Landlords, make sure you have the right risk transfer practices in place

Ever had a less-than-cooperative tenant? Maybe this renter didn’t meet your requirements or maybe they actually caused a lawsuit against you while living on your property.

Ever had a less-than-cooperative tenant?  Maybe this renter didn't meet your requirements or maybe they actually caused a lawsuit against you while living on your property. 

Whether you're the landlord of one property or multiple apartment complexes, the security of your livelihood may depend on your understanding of risk transfer.

So, what is "risk transfer"?

It's basically moving legal responsibility from one party to another by means of a contract.  

As a landlord, you want to try to avoid being held responsible for a tenant's mistake (causing a fire, hurting someone or damaging property). When you rent your property to others, you can face an increased potential that you could end up being held responsible for losses created by the people renting the property - and anyone they invite or allow to visit. 

So you transfer your risk, starting with your lease agreement. A landlord can require a tenant to carry renter's insurance as part of the lease agreement.  This can transfer some of the financial responsibility of the property to the tenant, should the tenant be held responsible for the damage.   

The landlord's own insurance policy can also be a form of risk transfer. Insurance is designed to help minimize the potential risks that could arise from owning and/or renting the property.  

 Here's where it gets complicated - the typical insurance property and general liability coverages may not provide the full protection a landlord needs for losses caused by renters or others.

Why? Because people who are NOT renting property to others may not need to pay for these coverages in their policy. So the policy may not address this specific need of landlords. The solution could be adding coverage to that policy that does indeed address it. This needs to be a topic of conversation with your insurance agent.

Another potential risk factor you might be faced with based on your tenant's activities … their relationship with you. The relationship between a landlord and tenant is important, and it can get tricky if you're not comfortable with the tenant's activities on your property.  If written properly, a lease agreement may be something you can fall back on to help protect your property, and help to maintain a working relationship between all parties involved.

So, what types of provisions should your contract with your tenant include? Three types of risk transfer provisions that could be beneficial for you to include in a landlord-tenant lease agreement include: indemnity, additional insured, and a waiver of subrogation.  

1. Indemnity

An indemnity provision could be a primary way for a landlord to shift their risk in a contract.  This provision could include wording that requires the other party to agree to such things  as the following:

  • The responsible party agrees to compensate the other (insurance people like to use the word "indemnify"). This essentially makes sure the other party is fully compensated in the event a loss, injury and/or damage incurred.

  • One party is responsible for defending the other. If a landlord ends up with legal expenses due to a third party claim against them the tenant must pay them and, potentially, arrange for their defense.

  • A hold harmless provision, the party agrees to release the other party from the responsibility for any damages, loss and/or legal liability that might arise.

This type of clause can be beneficial in protecting the landlord's interests when a situation arises where bodily injury or property damage occurs thanks to the actions (or omissions) of the tenant.  If you're a landlord, and you don't include an indemnity provision in your lease agreement, you could be putting yourself at an increased risk of being held responsible for an injury that happens because of something the tenant did.

2. Additional Insured

Additional insured provisions also help landlords by allocating risk - giving the landlord another avenue of protection through the tenant's insurance policy.  But, for these provisions to work, one party must list the other as an "additional insured" on their insurance policy. The insurer could then be required to indemnify and defend the additional insured as per the policy terms and conditions.  

Some things you might want to consider when including an additional insured provision in a lease agreement:  

  • The provision should include minimum requirements for the tenant's insurance policy. These requirements could include things like; a financial rating of the insurance company, coverage time period, limits of liability and types of coverages.

  • The landlord may want to require proof that they've been added as an additional insured on the tenant's insurance policies.

  • Consider requesting copies of all insurance documents.  

3. Waiver of Subrogation

The right to reimbursement, or subrogation, means that the tenant can seek compensation from the landlord even if the tenant was responsible for the claim, or vice versa.  Subrogation claims can cause arguing between parties as to who is responsible. To prevent this, a tenant may choose to add a provision that has the tenant agree to waive rights of subrogation prior to any loss in favor of the landlord.  To personalize the waiver of subrogation, landlords can request one that is all-encompassing or one that is specific to particular dangers. It also can be specific to locations or work and can contain consent of the named insured.

So, how do you make sure your contracts have the right provisions? Always consult with your legal and insurance professionals first. You could greatly limit your risk exposures - and help lower your risk of difficult situations with a tenant. Make sure you take the time to review all documents, and with the right professionals.

If you'd like to dig deeper into this topic, here's a whitepaper on shifting risk through the use of contracts

State Auto Insurance makes no representations or guarantee as to the correctness or sufficiency of any information contained herein, nor guarantees results based upon use of this information. State Auto does not warrant that reliance upon this document will prevent accident and losses or satisfy federal, state and local codes, ordinances and regulations. The reader assumes entire risk as to use of this information.

Summer is just around the corner and soon swimming pools around the country will be filled with...