SMART INVESTORS KNOW THAT THEIR PROPERTY MANAGERS ARE PART OF THEIR TEAM AND WANT TO MAXIMIZE THAT RELATIONSHIP
Oftentimes, when property owners are new to working with a property management company, they’re a bit hesitant and cautious, the way many people are when they take their vehicles to the mechanic. It’s natural to be skeptical when it comes to high ticket items like cars and houses and with homes it’s even easier because most people have more experience with property upkeep or collecting rent than they might have diagnosing an odd sound coming from the engine. The item that most often causes a raised eyebrow is common contractual language where property managers require homeowners to add them as additionally insured on the landlord’s home insurance.
What’s this all about? Shouldn’t property managers have their own insurance? Why do they need to rely on clients for this? What are the benefits of adding them? Something…seems…fishy…Let’s dig deeper!
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1. DON’T PROPERTY MANAGERS HAVE THEIR OWN INSURANCE?
Property management companies are real estate entities and as such they all need several types of insurance to operate. In short, all reputable companies will have an umbrella liability plan, and maybe some more specific coverage under that umbrella (i.e. contractors’ insurance), and they’ll have errors and omissions insurance (E&O) as well. They have insurance to cover themselves and their employees and do not rely on clients to cover their operations.
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2. SO WHY DO THEY WANT TO BE ADDED TO THEIR CLIENTS’ PROPERTY INSURANCE AS “ADDITIONALLY INSURED”?
Property managers have insurance that covers them and their actions, but their coverage will not cover incidents that happen at the home such as someone injuring themselves at the property, a water leak, or burglary. When something like this happens, victims are very likely to bring suit to any and all parties related to the property who then need to defend themselves, which gets costly.
3. SO WHAT? THE PROPERTY MANAGER GETS SUED…SO WOULD I AS THE PROPERTY OWNER AND I’M PAYING MY OWN INSURANCE COSTS
Almost all management contracts will include an indemnification clause whereas the property owner will agree to protect the property manager from “financial harm and cover the costs of losses that may result from the event”. This simply means the property manager will not be held responsible for issues they were not party to and if suit is brought against them wrongfully (as decided through the legal process), the owner is on the hook to cover those financial losses.
4. SO…BY ADDING YOUR PROPERTY MANAGER AS ADDITIONALLY INSURED, YOU’RE PROTECTING THEM FROM THE COST OF LAWSUITS THAT PROPERTY OWNERS COULD LIKELY END UP PAYING FOR.
Bingo. While it might sound up front like property owners are protecting property managers due to this arrangement, they’re really protecting themselves. And for that reason, most insurance companies will agree to this request without issue. Some may request a small fee and that fee is well worth it. If your insurance company gives you pushback, you might want to shop around.
It’s also worth noting that some insurance agents or representatives may argue that listing the property manager as an insurable interest or as an additional interest will do the trick. They are wrong. That coverage is inadequate.
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EXAMPLE TIME:
Despite reading an article about not allowing your tenants to have recreational items on your property, you gave permission for the family on the first floor to have a small bike ramp. That very day, a ten year old neighbor comes over and falls off the ramp and is seriously injured. Ultimately, the parents blame everyone other than their child and they sue the tenant, you (the owner), and your property manager. All three parties then need to defend themselves throughout the legal process and your property manager racks up attorney fees of $10,000. In the end, you’re found to be at fault and in addition to making the family of the injured boy whole, you also have to cover the property manager’s fees.
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MORE IMPORTANTLY, YOUR PROPERTY MANAGER IS YOUR TEAMMATE
Of course, as smart investors, we’re always looking to minimize risk and avoid sizable losses. Defending a suit like the one above would seriously inhibit your investment strategy, there’s no doubt about it. But just as important, it’s essential that property owners see their property managers as partners on the same side with the same goals. Landlords hire property managers so they don’t have to deal with the things they don’t want to. Performing maintenance, inspecting properties, dealing with pests, enforcing evictions, and most of the tasks and responsibilities of the property manager naturally come with increased liability and risk. Should something potentially litigious arise, making sure your property management company is listed as additionally insured helps create a united front and will make the legal process far more simple and less costly.
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NEXT STEPS:
If you’re starting with a new company and you’re naturally a little cautious, that’s not a bad thing. Over time an effective property manager will help you relax to the point that you often forget you own an investment property. But if that lack of trust continues beyond the first couple months, you may want to reexamine your options. There are a lot of property managers out there and they’re not all created equal. Many take on property management as a side-gig and may have other interests that keep them from giving your property the attention it deserves. At Nexus Property Management®, many of our clients come to us from previous management arrangements that didn’t live up to the advertisement. We all deserve to foster a working relationship with someone we can trust, especially when it comes to our six (and sometimes seven) figure assets. Contact our teams in Rhode Island, Connecticut, Arizona, and throughout Massachusetts if your property management company hasn’t yet earned your trust and you’re interested in learning more about our services, pricing, and reputation.
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Mick Lefort is the General Manager of Nexus' New Haven County Franchise Office and the Vice President of Operations for Nexus Property Management®, a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.
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