Like most things in life, there is a short answer and a long answer. Let’s look at both.
SHORT ANSWER:
If you don’t add your property management company as additional insured, and you and/or your property manager are sued for something related to the property, you will be required to pay your property manager’s legal fees and expenses out of your own pocket. The scary thing is this isn’t just a tenant. You could be sued by a neighbor, visitor, vendor, or essentially anyone else who is trying to sue you over a property management issue. Also, by adding your property management company to your insurance helps because it is much better to have a unified defense and coverage extending to both parties. That is what the property’s liability policy is for essentially. It can be a nightmare if your coverage doesn’t extend far enough.
Once a home policy is converted to a rental policy, adding your property management company as an additional insured party can be very simple. Often insurance carriers give discounts to owners hiring professional management because they see their risk is decreased when professionals are hired to manage the asset. So adding them might actually save you money in the long run!
LONG EXPLANATION – but worth it so keep reading!
The main reason why rental owners hire property managers is so they can escape the stresses of the daily tenant and maintenance issues of the rental property. Investing in real estate can be a lucrative path, but it doesn’t come free of problems, so hiring a knowledgeable property management company is always an option worth looking into.
Many questions arise when it comes to insurance policies and property managers. Should you add them? What are the benefits? Is it really that important? Is it expensive? Is it worth it?
If you hired a serious and professional company to manage your rental property, they will ask you to include them on the policy because they will understand how important it is. It will help to protect them and you as the owner.
You will need to add them as “Additional Insured”, and not just as “Additional Interest”. There is a big difference between the two! If they are merely “additional interest” they will only be notified of policy renewals, but if something was to happen they would not be covered. You want them covered.
Why should you add them if you’re insured? Why is it important for me as an owner? I’m fine if I’m sued!
You want your property manager to deal with all the small things, hiring vendors to fix things, finding tenants, do collections or evictions if needed… all the things you don’t want to deal with. Since they’re doing these items, they inherit liability and risk. If there were to ever be litigation, the owner and the manager would be the target. If the property management company is included as insured, the coverage will be extended to both parties. A unified defense can be assigned to represent both parties, drastically reducing legal fees and simplifying the process. If you don’t, you will most likely need to cover your property management company’s legal fees out of your own pocket because your insurance provider would not pay for their defense in addition to yours.
Why is it important for property management companies to be added to the insurance as additionally insured?
Most property management companies have their own liability insurance, both general and professional. This means they are covered if there’s financial loss due to a mistake or wrongful act on their part. But if something happens with the home itself, they are not covered. This makes the property management company vulnerable because if someone injures themselves at the rental property or if there’s a fire, burglary, a water leak, etc then they are on the line. This is something that can be prevented simply by adding the property management company to the insurance policy.
If the company is not covered, they would have to cover the expenses and seek reimbursement either from the owner or their insurance. A much more expensive and time-consuming way to handle something that can easily be prevented.
What about the insurance companies? Do they agree? Is it worth it? Is it expensive?
Most insurance providers are willing to add the property management company as additional insured upon request. The insurance carriers who charge additional for this and see it as additional risk simply don’t do enough of these rental policies, and you are better off finding a new provider. The major carriers and agents who understand real estate investments actually see the additional insured property managers as a reduction of risk, and will often give discounts because of it.
Final considerations:
- Always make sure to have your property management company is added as “additional insured”, not just as “additional interest”.
- Ask about the additional charges. If there is one, try looking for other companies to provide insurance. If you cannot find one that does it for free, remember that a small fee could save you a lot of expenses down the road.