Important Insurance Coverages for Multifamily Housing
Multifamily housing ownership can be a rewarding real estate investment. You face a lot of risks as a property owner. It is critical that you purchase the right insurance to protect you and your investment from the risks you face. There are many insurance coverages available that protect you from specific risks. We will address several of the more important insurance coverages.
Property insurance will help protect against damage to the physical structure of the property in the event of a covered loss such as fire, smoke damage, windstorms, hail, explosions, vehicle and aircraft damage, riots, and vandalism. You must understand what your insurance covers and which perils are not covered. The last thing you want is a nasty surprise you are not covered from a particular loss. If you have a mortgage, your lender will require you to maintain acceptable property insurance on your building(s) during the term of your mortage. It is always recommended that you purchase full replacement cost value insurance. Full replacement cost value is the amount of money it would take to replace your damaged or destroyed building with the exact same or similar building in today’s market.
General Liability Insurance
General Liability or GL insurance is type of insurance policy that provides coverage to the business for bodily injury, personal injury, and third-party property damage caused by the business or injuries that occur on the business’s premises. General Liability is considered comprehensive business insurance, though it does not cover all risks a business may face. There are two types of CGL policies, a claims-made policy that covers claims regardless of when the event occurred, and an occurrence policy where the event must take place during a set period. A third-party property management company will require the property owner to add itself to the policy as an additional insured if the GL policy does not already provide coverage to the property management company.
Business Interruption Insurance
If your tenants were forced to leave their rental due to a covered loss, business interruption insurance or business loss income insurance would be critical to reimburse you for the loss of rental income while your building is out of commission awaiting repairs or replacement.
General liability insurance is important, and it offers valuable financial protection. However, you might someday encounter a liability claim that is bigger than the limits on your underlying liability policy. When your liability coverage limit is exhausted, you could be responsible for the rest of the claim. Umbrella insurance provides coverage that goes beyond what is offered by your underlying liability policy. For example, you have a $1 million general liability policy, and your claim is $3 million. The general liability insurance will pay up to the coverage limit of $1 million and your $5 million umbrella insurance policy will cover the remaining $2 million. Without the umbrella insurance policy, you could be responsible for the uncovered portion of the claim which in this example would be $2 million.
Crime or Fidelity Insurance
Crime insurance or Fidelity insurance is a policy that protects you from the loss resulting in criminal acts, such as:
- Employee theft of money, securities, or property
- Forgery or Alteration
- Computer Fraud
- Funds Transfer Fraud
- Money Orders and Counterfeit money
There are several other insurance coverages you should consider such as flood, equipment breakdown, cyber liability, errors and omissions, and directors’ and officers’ insurance.
In summary, it is important to consider all the risks you face as a multifamily property owner and make sure you have sufficient insurance coverage to protect you and your investment. An ounce of prevention is worth a pound of cure is as true today as it was when Franklin made the quote. You should allow your property management company to assist you with determining your coverage requirements.