Question: I am moving into a new rental house and the landlord’s rental agreement requires me to get renter’s insurance.
Why should I have to pay for that? Shouldn’t the landlord have insurance that covers my stuff in case the house burns down?
Answer: It is a common misconcep
tion among renters that their personal property is covered by the landlord’s insurance in case of fire, theft or other disaster. Every time you see a story in the news about a major fire at an apartment complex, you usually see stories about residents who have lost everything and have no insurance to pay for replacing their property.
Most homebuyers don’t have a choice. Mortgage lenders require that a hazard insurance policy, commonly called “homeowner’s insurance,” must be in place on the day that the purchase loan closes.
It’s not that the lenders are concerned about protecting the homeowner’s property; they are just trying to protect the collateral that is their security for repayment of the loan.
If a borrower fails to make the mortgage payments, the lender forecloses and sells the house to recover its money. But if the house were to burn to the ground, the mortgage company would take a huge financial loss if it had to foreclose on a pile of ashes.
That’s why lenders insist that the homeowner’s policy names the lender as an “additional insured.” That way, if the house burns down, the lender is covered as well as the homeowner.
It’s fortunate that lenders require homeowner’s insurance, because left on their own, many homeowners would “go bare” as they say in the insurance industry.
As a mortgage company owner, I am always amazed when the owner of a “free and clear” home comes in for a loan and we discover that they do not have a homeowner’s insurance policy in place.
They choose not to pay for insurance because no one is forcing them to buy it. They are focusing only on the few hundred dollars per year they are saving rather than the hundreds of thousands of dollars worth of financial risk they are taking.
What if their house burns to the ground?
The few thousand dollars worth of insurance premiums saved over the years won’t go very far toward rebuilding a $300,000 or $400,000 home.
Renters often make the same mistake. They don’t buy renter’s insurance to protect their personal property against fire and theft primarily because no one makes them do it.
As a landlord myself, I always advise my tenants to purchase a renter’s insurance policy. My rental agreement even contains a clause stating, “Tenant hereby agrees to immediately obtain a Renter’s Insurance policy.”
There is no way, however, that I can force my tenants to actually go out and buy an insurance policy.
During my move-out inspections, I often discover that the tenants never bothered to get renter’s insurance during their tenancy despite signing an agreement to do so. If their property had been damaged or stolen, I would have pointed to that clause in the rental agreement to protect myself from claims by the tenant, but that wouldn’t do much good for the renter.
Many renters mistakenly believe that their landlord’s insurance policy protects their property in the event of fire, theft or other hazards.
In reality, the landlord’s policy covers only the building itself.
Most people don’t realize how much “stuff” they own until they have to go out and replace it all. Clothing alone can cost thousands of dollars if you have to replace your entire wardrobe.
For a relatively small investment, renters can protect themselves from financial disaster. A renter’s insurance policy covering $20,000 worth of personal property costs only about $200 per year.
Remember that the policy covers theft and other hazards as well as fire. Few of us have the misfortune of experiencing a major catastrophe, but the chances of someone breaking into your apartment and stealing your TV or computer are far from remote.
Any renter reading this column who does not have renter’s insurance should call their insurance agent as soon as possible.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can email him at features@heraldnet.com.
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