Most properties in the industry are operating with a false sense of protection regarding their renters insurance requirement in their lease agreement. While not requiring renters to carry liability coverage is ludicrous, requiring this of your residents and not enforcing the clause is in many ways even more insane (at least those properties not requiring this are consciously embracing the consequences).
Any clause in the lease, if not enforced, serves no purpose. Most residents in the multifamily housing industry are living with the requirement while not actually being covered. So ask yourself, “How protected am I really?”
According to the most recent Cost of Risk Survey conducted by the National Multifamily Housing Council (NMHC) in 2012, 84% of property management companies in the industry are requiring insurance in their lease, and we can make a reasonable assumption this number has increased since. The average participation rate of those that are requiring is 10%. This means that if I am a 100 unit property that requires my residents to carry insurance, I will only collect or retain the policy information on 10 residents. Furthermore, 15% of the time residents provide proof of coverage and cancel the policy immediately after (in our 100 unit scenario, 1-2 residents of the 10 that provided it). This means if a resident-caused fire breaks out you will have approximately an 8% chance of recovering your losses.
The non-requiring 16% of the industry willingly accepts the risks of not mandating. The other 84% of the industry believe they have implemented a policy and procedure that will help mitigate the estimated $40-55 per door in damages that occur every year; but if not implemented with the proper internal controls in place, that results in a false sense of security.
What Can Be Done?
There are several best practices that can be implemented by the property management company to increase the participation rates in the mandated insurance program. In part one of this series, we will give a basic overview of things that can be done. Part two will drill down further into specifics of each option.
Time of Move-in
The policy that companies should always implement is really a no-brainer. Properties should not hand out keys for move-in until proof of coverage is obtained. Every property I have ever spoken with has told me this is their policy, yet every month I see residents move in without a policy associated with their lease. The only way this happens if you have this policy in place is if your leasing agents are simply ignoring the policy.
At the implementation of the mandated requirement in the lease, the corporate team should send a universal policy and procedure announcement, and this should be continually monitored by property managers. This seems like a lot of manual labor, but there are many software solutions in the industry that will track reporting and manage communication to the residents automatically.
Interested Party or Additional Interest
Another necessary best practice is to require that you are listed as the additional interest or interested party on the declaration page of the policy. By doing this you can receive status change notifications of the policies, helping track the 15% cancellation rate mentioned above.
If you use a preferred provider you will likely not need to request this, as it will be a part of your contractual relationship.
Unlike the two practices above, which focus mostly on program control, this best practice is meant to be a consequence for residents who fail to provide or maintain active coverage. Add a lack of coverage violation fee to the insurance requirement in your lease. As mentioned above, it is not likely that you will evict a resident for breaching this clause. Adding language to the effect of, “for every month the resident fails to provide coverage or maintain active coverage, the resident will be assessed a $XX lack of coverage fee”, will allow you to be able to enforce the rule more aggressively. Like the old adage, the punishment fits the crime.
Leasing Agent Accountability
Leasing agents are the frontline of every property management company. As such, the collection of proof of coverage rests on their shoulders. If you are a leasing agent reading this, I am sure you perform every aspect of your job 100% by the book, and the description below refers to some other person. If you are a property or regional manager, I am sure you have had an agent like this.
“Pleasing the resident is important to me, and I really don’t like confrontation. Joe Resident walks in and asks for the keys, and informs me that he has the moving truck waiting outside and is ready to move in. I conduct one last check to verify everything is complete with his lease. I notice everything is good except he hasn’t provided proof of insurance. I ask him if he has it with him and Joe, in an exasperated sigh, says, “Ugh, I don’t have it with me do I have to have it right now or can I bring it later today or tomorrow?” I am starting to get uncomfortable because I know my manager wants us to get this (although I may not understand exactly why it is so important). I tell him that we really need this before he moves in. Angrily, Joe exclaims, “What, you seriously expect me to make the moving truck wait while I get ahold of the insurance company and sort this all out?” Now I am feeling really uncomfortable and I start to rationalize different options to quickly alleviate this discomfort. Completely ignoring the fact that Joe was informed that he would need this before move-in and yes, we really do expect him to provide coverage before handing the keys over, I decide if I make him promise to bring it back later it will be okay to hand over the keys. Joe never comes back to provide the proof.” (The likelihood in this situation is that he never obtained insurance in the first place.)
If proper training and reinforced reminders of the properties initiatives and policies are not increasing the collection of proof of coverage prior to move in, there may be another option.
I have associated with some property management companies that withhold lease bonuses or commissions on “incomplete” leases; these companies only consider them to be complete once proof of coverage is obtained. The agent doesn’t lose the opportunity to get paid, but will not actually receive payment until they collect proof of coverage. Since Captain Obvious is not available, I see no need to explain how this could be motivating.
What Lies Ahead?
In part two of the “False Security” series:
- Common Coverage Concerns
- Force Place and Master Policies
- Tracking and Reporting KPI’s