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The REAL Value of a Renter's Policy (and EXPERT Advice)

Author: VU Faculty

While "expert" sites are proliferating on the net, it pays to get advice from real subject experts. Below is a question and answer provided at a well-known consumer insurance web site. Compare their response to the question to that of some of our faculty. 

 

Question..."I was a renter in the same residence for nine years, and had an accidental fire which severely damaged one room. Not only did our landlords ask us to leave, but now their insurance company is coming after us for the claim. (We received none of this money, by the way.) We did not have renters insurance, which I am being led to believe would not have covered the dwelling, only the contents or my personal belongings. I have never heard of this, and I haven't recovered from my own losses. What are my rights and what can I do to stop this?"

Answer?You're right in believing that renters insurance only would have covered your personal belongings. Insurance for the structural space you are living in should be covered under your landlord's policy. Even if your landlord has not purchased landlords insurance, this does not mean that liability lies with you. According to [Here the site names an insurance company that shall remain anonymous (despite their indirect connection to Peter Sellers) because we can't believe that someone there actually said this. - Ed.], the fact that you do not own the property means that you are not legally liable for damage done to it. You should ask your landlord's company to give you the rule in writing that allows them to come after you for payment.

Disclaimer: We are consumer journalists, not financial planners or insurance brokers. So, while we try our best to answer your questions, nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.

Faculty Responses

To quote Perry White of the Daily Planet, "Great Caesar's ghost!!!" Imagine the potential liability of an insurance agent if he/she gave this kind of advice! They have a disclaimer (see above) that they are only consumer journalists...if so, why not stick to consumer issues as opposed to technical advice? Makes you wonder if some states would prohibit this as an unlicensed activity...either insurance or law. In any case, several of our faculty members couldn't resist writing to the "journalist." Below are their emails (edited so as not to violate any community decency standards)...note that the last one reveals a critical renter's policy coverage that's often overlooked.

Faculty Response
It's clearly possible that if she had purchased a homeowners (renters) policy on her belongings, the policy would have also responded for the structural damage caused in the fire. If she had been negligent in causing the fire, perhaps by way of allowing an unattended pan of grease to cause the fire, then she would in most cases be deemed to have been negligent and the "renters" policy would respond for the subrogation papers the insurance company has sent her. Clearly, the insurance company covering the building feels there is some negligence on the part of the tenant by way of "coming after her," as the article states. Even if she is not negligent in the fire a renter's policy would DEFEND her in the claim and defense costs alone can easily bankrupt many apartment dwellers.

When I lived in an apartment over 30 years ago, a tenant in another building on the complex left an unattended charcoal grill he had just started to answer the phone. After 20 minutes on the phone, he noticed an "orange glow" coming from his living room and smelled smoke. His grill had caught the balcony upstairs on fire, spread to the roof eaves, and shot down an un-firestopped attic space. To make a long story short, the entire 16-unit apartment building was a total loss, along with the contents of all 16 tenants, none of which (according to local news accounts) had any renters insurance. The tenant soon discovered that he was responsible for the destruction of a $600,000 apartment building and all of the tenant contents. He was fortunate no one was hurt.

Since an HO-4 policy typically includes just $100,000 in liability coverage (some "renter's" policies only include $25,000 coverage), this illustrates why someone living in a multiple-unit building like an apartment or condominium unit has a great need for a personal umbrella policy in an amount at least equal to the cost to replace the building and all of its estimated contents values.

Your statement of "You're right in believing that renters insurance only would have covered your personal belongings" is not correct and would lead one to believe that a "renter's policy" ONLY covers personal belongings, which is certainly not the case. Liability and defense coverages are some of the most valuable coverage provided in the typical "renter's insurance" policy.

Faculty Response
I was very disappointed in the reply  made in your Q&A column of June 23, in regards to a renter who experienced fire damage to both her personal property and the landlord's building. The reply indicated that damage to the landlord's building was not covered by a renter's policy. Actually, the industry-standard renter's policy ("HO-4") does have coverage under the Section II Liability provision for property damage to the property of others, if the insured (renter) is legally liable. There is specific coverage for what the insurance industry refers to as "fire legal liability." That is, if the tenant causes fire damage to the landlord's building, the tenant's HO-4 renter's policy will cover the fire damage, up to the Section II limit of liability, usually $100,000.

Even if the landlord had insurance, that does not relieve the tenant of responsibility. After the landlord's insurer pays the claim, the insurer will seek recovery against any party which might have negligently caused the damage (known as "subrogation"). If the tenant's negligence caused the fire, the landlord's insurer will in all likelihood seek recovery from the tenant (whether or not the tenant has insurance). However, if the landlord has waived subrogation against the tenant, his insurer cannot bring an action against the tenant.

It was also stated that a person isn't legally liable for damage to property if they don't own it. That is ridiculous! If someone hits your new car, would you expect that they aren't liable because they don't own it?? On the contrary, you would expect the negligent party to pay for the damage to your car, rather than your own insurance company. That's pretty much how the landlord would feel. Overall, I do enjoy your web site.

Faculty Response
Just a quick note about the response in the June 23 Q&A article at your web site...

First, a renter's policy (commonly called an HO-4 Tenant's Form) does, indeed, cover damage to the occupied unit, typically up to $100,000, under the Liability section of the policy. Normally, damage to property in your care, custody or control is not covered, but an exception is made for this and other situations.

In fact, when I have trained agents in the past, I often make the point that the best candidate for a personal umbrella policy is a renter or condo owner who can negligently burn down the building in which they reside, along with the contents of others...not to mention the potential liability for loss of life. It's the liability insurance in a renter's policy that is of the greatest value, not the meager coverage typically provided on personal belongings.

In addition, because apartment dwellings live in such close proximity, when it comes to potential claims for invasion of privacy or wrongful entry, they are even more likely candidates for personal injury protection than insureds who own their own single family residences. Accidentally walking into another apartment, entering because you heard something you thought was a call of distress, or being accused of being a "Peeping Tom" are all examples of where personal injury coverage, typically added by endorsement, can come in handy.

Second, with regard to the statement "According to [anonymous company], the fact that you do not own the property means that you are not legally liable for damage done to it. You should ask your landlord's company to give you the rule in writing that allows them to come after you for payment."...

I can't believe that a [anonymous company] representative made this statement...most likely what he/she said was you usually cannot be held liable for damage to property you OWN, not property you do not own. As far as asking for the "rule" in writing that allows them to come after you, you'll find that "rule" in every freshman law book in the country...it's a fundamental legal principle that you have the right to recover for damages negligently caused to you or your property.

So, the landlord's insurance company, under the right (by common law or contract) of subrogation, has every legal recourse against the tortfeasor as does the landlord. Most commercial property policies, though, allow the landlord to waive this right...so, ultimately, it's up to the landlord as to whether the insurer can pursue this claim. The way this works in most cases is that the landlord's property insurer pays for the damages, then subrogates for recovery from the negligent person's liability insurer.

The response in this article is completely inaccurate and a disservice to those who view it. Even though you have a disclaimer on the page, I suspect it would be in the best interest of [web site] to remove or revise this article. I hope you will take this "criticism" in the spirit in which it was intended...to give notice that you have content with factual errors in order for you to be able to better serve your visitors and avoid any liability that may be incurred.

If I or any of our expert faculty can be of assistance to you in the future, please feel free to let me know. [Web site] is an excellent site for its intended audience but, like all of us, we're not perfect and we can make mistakes. I hope this information helps.

Related Court Case and Commentary

The following is commentary provided by Don Malecki on Tennessee Supreme Court case:

A RENTAL OF A UNIT SHOULD REQUIRE PROOF OF INSURANCE
Who Knows How Large Those Losses Can Be?

If a condominium owner rents or leases his or her unit, it might be saving the lessee a lot of pain, grief, time and expense if, instead of merely making the lessee accountable for any damages, the rental or lease agreement were to also require proof of insurance. The reason is that whenever an insurer has to pay for loss to the property caused by someone other than the named insured, one can almost count on an action being filed by the insurer in subrogation.

A case in point is Travelers Property Casualty Company of America v. William Wesley Terry, No. M2005-020350-COA-R3-CV, Tenn. App. 2007.  Briefly, the insurer filed a subrogation action to recover damages resulting from a fire that damaged the property of its named insured, the condominium association.

The fire and resulting damages in excess of $1.2 million were allegedly caused by an unattended candle in a unit which, at the time, was being rented pursuant to a monthly rental agreement. This rental agreement made no mention of property or liability insurance. What it did require was that the tenant was to repair any damage that resulted from his negligence.

In its complaint, the insurer alleged that the tenant lit a candle in the bedroom and left it unattended.  As a result, the fire damaged the building and the common areas. (This insurer did not provide coverage for the contents or furnishings of the individual units.)

The Decision Backfires Temporarily

The tenant not only denied liability but also filed a motion for summary judgment which, interestingly, was granted by the trial court based on the finding that the so-called “Sutton co-insured anti-subrogation rule,” which was adopted by this court in another case, precluded recovery against the insured as a matter of law.

The insurer appealed maintaining that this rule was inapplicable because the tenant was not in privity of contract with the insurer or its named insured, association. In other words, there was no direct contractual relationship between the insurer or the association and the tenant. When this relationship is lacking, there is no privity.

The court explained that this “co-insured subrogation rule” had it origin in a 1975 case where a landlord’s property insurer sued a tenant and his young son, claiming subrogation rights for a fire caused by the son. The jury returned a verdict against the father. On appeal, the Oklahoma court of appeals held that the insurer had no right of subrogation against the father. The reason, the court explained, was that the law considers a tenant to be co-insured of the landlord, absent an express agreement between them to the contrary—comparable to the permissive-user feature of automobile insurance.

As it turned out, the case was remanded back to the trial court for further proceedings, because the court could not conclude whether the tenant was a co-insured or had a justifiable reason to believe he was a co-insured under the association’s property policy. This decision was based on the fact that (1) the tenant did not have a contractual relationship with the association and therefore was not in privity with the association or its insurer, (2) there was proof that the tenant’s rent payments did not go toward fire insurance premiums, (3) the rental agreement did not induce the tenant to believe he would benefit from the association’s property insurance policy, and (4) to the contrary, the rental agreement specifically provided that the tenant “shall be responsible for damages caused by his/her negligence and that of his/her family or invitees and guests.”

The costs of the appeal were assessed against the tenant.

Analysis

It is surprising how many times a tenant of a rental agreement or lessee of a lease agreement has been able to escape the subrogation attempts of insurers by maintaining they are co-insureds. It happens a lot. In fact, this particular court stated that there were only two cases in the past decade where subrogation was permitted against tenants. It is still risky to have a rental or lease agreement that does not address waivers.

Who would have thought that through a renter’s negligence, a loss of $1.2 million could result?  It does not appear the unit owner thought about the enormity of a potential loss—given that he only required the renter to repair any damage stemming from his negligence. Then again, maybe the renter was a millionaire.  

This case did not mention whether the unit owner maintained insurance. Surely, if the building and common areas sustained $1.2 million in damages, and the candle was within the unit, the unit’s furnishings should also have been damaged or destroyed.

In any event, the kind of insurance the unit owner might have recommended of the tenant could have been a Renter’s policy, commonly referred to as an HO-4—Contents Broad Form. The Renter’s policy not only provides coverage for the contents of the named insured and his/her family members, but also includes personal liability insurance. The lease agreement could also require a stated liability insurance limit, such as $500,000 or $1 million.  One must keep in mind, however, that the personal liability insurance does not cover liability for property damage to property rented to, occupied or used by or in the care of an insured, except when the property damage is caused by fire, smoke or explosion.

If the renter had such a coverage form, therefore, its liability for damage to the unit owner’s personal property would have been covered.  This also begs the question of what would be covered if the aforementioned exclusion did not have an exception for fire, smoke or exclusion.   Since it was only the unit or interior space that was within the tenant’s care, custody or control, presumably the Renter’s policy would pay for all other damage.

A dwelling fire policy could also be used to provide contents coverage for the renter (lessee).  Many insurance companies will also allow personal liability coverage to be added to the dwelling fire policy. Limits generally will not exceed $500,000.  Should greater limits of liability be desired or required, the personal umbrella policy will provide coverage for these types of residential exposures.

Some insurers will permit a unit owner to maintain the HO-6 (Unit Owner’s Form), even if the unit is held for rental and not occupied by its owner. This is usually accomplished by a specific endorsement granting permission to rent/lease the unit. This is the more preferable approach, because it provides the additional benefit of having Coverage A, Building Alterations and Additions available to provide coverage for building items not covered by the Master Policy.