Coverage guide · rental property

One building, two things to insure: the tenant’s and the owner’s

A tenanted house or flat is one address with two different things to insure: the tenant’s belongings and the owner’s building. The California Department of Insurance states the tenant’s half in a single sentence: your landlord does not provide insurance for your personal property.

The tenant’s belongings are the tenant’s to insure

The Department introduces the point with the reason for it — news reports of apartment fires often include tragic stories of renters who lost everything because they were not insured. The answer it describes is a renter’s policy, also known as tenant’s insurance, which may be used to provide coverage for your personal contents located in the property that you occupy. Coverage is also provided for loss of use, personal liability protection and medical payments to others.

What the four letters look like on a renter’s policy

The Department publishes the shape of the cover generally provided. Coverage C, personal property, is an amount designated by the insured, subject to a minimum determined by the insurance company. Coverage D, loss of use, is 20% of Coverage C. Coverage E, personal liability, is generally subject to a minimum of $100,000. Coverage F, medical payments to others, is generally subject to a minimum of $1,000. Those are floors and proportions rather than recommendations: the tenant chooses the contents figure, and loss of use is the one that moves with it.

The owner’s building, and the rent it produces

The owner’s half of the address is a different exposure entirely, because damage to a rental can cost the owner the rental income as well as the building. In its commercial guide the Department describes that as a time element coverage: business interruption, extra expense, and loss of rents and rental value are the most common time element coverages, and loss of rents and rental value cover loss of rental income to the property owner caused by damage or destruction of a building rendering it unfit for occupancy. The trigger to notice is “unfit for occupancy”: the loss being insured is the rental income, which the Department groups with the other losses stemming from a direct loss rather than with the direct loss itself.

Two valuation bases, and the gap between them

How much either side collects depends on a definition that rarely appears in a sales conversation. The Department’s glossary defines actual cash value as an amount equivalent to the fair market value of the stolen or damaged property immediately preceding the loss, and notes that for real property this can be based on the fair market value before and after the loss. Replacement cost it defines as the cost to repair or replace an insured item, adding that some insurance only pays the actual cash or market value at the time of the loss rather than what it would cost to fix or replace it, and that with personal property replacement cost coverage the insurer pays the full cost once the repair or purchase has actually been made. Depreciation, in the same glossary, is a decrease in value due to age, wear and tear and similar causes.

Two entries off the commercial endorsement list

The Department’s commercial guide lists the most common coverage forms and endorsements used in commercial property insurance. Not one of those names mentions a tenant; the descriptions beneath two of them do. Improvements and betterments coverage, which the guide says is usually added by a lienholder, covers all permanently installed improvements and betterments which cannot be removed when a tenant vacates the building — the fitted work that stays behind at the end of a tenancy. A second entry on that list is written about limits rather than about occupancy. Inflation guard automatically adjusts the limits of insurance to keep up with inflation, and the adjustment can be tied to the construction cost index in a regional area or a specified percentage per year. This endorsement, the guide says, can be very important in helping to maintain adequate coverage limits, which can protect against potential coinsurance penalties in a property loss.

Where a landlord’s file has to be tidier than an owner-occupier’s

Three of the Department’s general points bite harder when nobody who owns the building sleeps in it. A policy limit is the maximum a policy will pay, either overall or under a particular coverage. An exclusion is a listed cause or condition that is not covered. An endorsement is an amendment used to add or delete coverage, also called a rider. An owner who can say, without opening a drawer, what limit stands behind the structure, what the rental-income coverage is measured against, and which valuation basis the policy uses, has answered the questions a claim will ask in the order it asks them.