Why Risk Transfer for Landlords?
Presented by: Christopher F. Hawthorne, CPCU, CIC
A property owner’s Insurance premiums can be driven upward for rental properties due to loss history. The insurance policy provides money to rebuild damaged property, to defend in a liability suit, to pay settlements as well as take care of employees when they are injured on the job. These combined costs are labeled as losses.
An insurance loss has the potential of driving insurance premiums up for four or five years as well as limiting which carriers will wish to work with a property. When an insurance carrier is determining what it will offer in terms of premiums, it will incorporate the prior four years of losses as part of the pricing mechanism. The fewer and smaller the losses, the more carriers will be interested and the lower the premiums can be offered.
An available risk management technique to lower the size of a property owner’s losses arising from the rental of that property is the inclusion of Risk Transfer language in the lease. Risk Transfer in the lease can protect the landlord’s insurance program and future premiums by transferring the cost of a loss to the tenant’s insurance program.
The major types of protection in risk transfer are:
Hold Harmless-Tenant holds Landlord harmless for a loss when Tenant has caused part or all of a loss.
Indemnify– Tenant agrees to reimburse Landlord for damages (settlements and judgments).
Defend– Tenant agrees to pay the cost to defend Landlord after a loss if Landlord is named in a claim or suit.
Additional Insured Status– Tenant provides coverage for Landlord under Tenant’s insurance program.
Primary Coverage-Tenant states that it’s coverage is primary should Landlord be brought into the suit.
Non-Contributory-Tenant states it’s policy disallows Landlord’s policies from sharing in the loss.
Waiver of Subrogation-Tenant disallows its’ insurance company from pursuing Landlord’s insurance carrier for any amount due to Landlord’s negligence that may have contributed to the loss.
In short, Landlord is highly protected by Tenant through contractual agreement in the lease as well as the tenant’s insurance program.
While not seen in all leases, the above language is quite commonly used and is a very easy risk management tool for a Landlords to implement. The rewards are lower losses, a well insured tenant and a greater number of insurance carriers available to offer coverage / lower future premiums.
It is critical to involve your attorneys as well as your insurance agents when drafting a lease. As always, a team approach and communication will put everyone is a better position to succeed and survive a loss.