Introduction

Insurance is a complicated subject, made more so by the insurance industry’s inability to explain its products in a way that the average person—or even the average business owner—can understand. Faced with an indecipherable policy squeezed into seven-point type on a flimsy brochure, most people toss the thing in a drawer and pray they’ll never need to look at it. Indeed, if you implement the strategies suggested in this book, you’ll probably never have to unearth your policy in a panic. But since some misfortunes are beyond your control, you should know what coverage you’re paying for—or perhaps, should have bought.

Fortunately, you don’t need to become an insurance professional in order to adequately and efficiently insure your property and business. In Step One, you’ll learn the basics that will enable you to manage your risks, stay in business, and make your properties a success.

What Do You Have to Lose?

Everything. Almost every risk you’ll read about in this book has the potential to ruin your business and leave you with attorneys’ fees and settlements or judgments to boot. A tenant who falls on your just washed lobby floor, for example, can sue you for medical expenses, lost wages, future loss of earning capacity, and more. These claims can quickly add up to several thousands of dollars. With the right insurance to cover these costs, you’ll survive.

As you read through this chapter, you’ll see how this dire scenario can play out. You’ll read some real-life examples of landlords who found themselves in very hot water, owing a lot of money to tenants or their families after a tragic loss. But in each case, the landlords were able to settle claims and keep their business alive thanks to the fact they had adequate insurance in place to cover their risks.

It Won’t Happen to You…

What happened. A 23-year-old tenant in San Francisco died in an apartment fire. The tenant’s family sued the landlord, a company that owned 60 properties, claiming that it negligently left a sofa over a floor furnace and didn’t equip the apartment with functioning smoke detectors. The landlord settled for $1.5 million, and its insurer paid the full amount to the tenant’s family.

How you can avoid it. Use good sense when placing furniture in furnished apartments. But understand that if you make a mistake—or if tenants move the furniture, and later claim they didn’t—you’ll need adequate insurance protection if someone is injured.

Is This You?

Very few readers can confidently skip this chapter. Unless you’ve had the good fortune to be working with an insurance agent or broker who understands the residential rental business and is familiar with your particular situation, you’ll recognize yourself in at least one of the descriptions, below, of landlords who are courting disaster by not paying sufficient attention to the matter of insurance . Take a moment to scan the list of risky attitudes and behaviors and check off those that apply. If you finish with more than a couple of check marks, read on.

Take Action!

Do you recognize yourself among the landlords in the descriptions above? Even if you only remotely resemble one or two, consider the following strategies that will reduce the risks that each landlord is courting. These strategies will help you tackle insurance issues head-on and get the protection you need to achieve your goal of running a safe property and a successful business.

The chart below gives you a thumbnail sketch of the various policies available to landlords. Don’t be overwhelmed—you probably won’t need every one! But after you read about each insurance type in more detail in the rest of this chapter, you’ll be well schooled in insurance for landlords. What’s more, you’ll be able to talk confidently with your broker about exactly which policies or coverage you need.

Insurance At A Glance

Try to imagine an unpleasant scenario involving your property or your tenants—chances are, there’s an insurance policy you can buy to cover your losses. Here are the main types of available policies or coverage.
Insurance type	What does it cover?
Property insurance	Buildings and other physical structures on your property
Contents insurance	Items of personal property that you keep or store inside your buildings and structures, such as office equipment and furniture
Demolition insurance	Clearing debris or hauling away the remains of any destroyed structures on your property
Boiler and machinery	Losses that your boilers, air-conditioning units, compressors, steam cookers, electric water heaters, and other machinery in your buildings may cause
Inland marine	Outdoor fixtures, such as fences, signs, pole lights, and equipment such as lawn mowers, gardening tools, and snow plows
Builder’s risk (cost of construction)	Losses that occur to parts of your building that are under construction or undergoing remodeling or repair
Basic coverage (a type of "named-peril coverage")	Named perils, typically including fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, and sprinkler leakage, sinkholes, and volcanoes
Broad coverage	Named perils included in basic coverage plus additional perils, most notably breakage of glass (from your buildings), falling objects, weight of ice, snow, or sleet, water damage (associated with your building’s plumbing), and collapse from certain specific causes
Special form coverage ("all-risk coverage," "all-peril coverage")	All perils except for any exclusions, such as loss resulting from civil riot, war, earthquakes, and floods
Terrorism insurance	Losses your property suffers as the result of a terrorist act
Flood insurance	Property damage caused by water accumulation in your building(other than water blown in by wind)
Earthquake insurance	Loss caused by earthquakes and tremors
Sewer backup insurance	Damage that flows from clogged sewers
Ordinance or law insurance	The unexpected costs that compliance with new building codes can add when rebuilding or even repairing parts of your building
Liability insurance	Your legal obligations to pay for others’ injuries and property loss that you cause
Commercial general liability insurance	All liability exposures (except for any exclusions), most notably, claims based on libel/slander, discrimination, unlawful and retaliatory eviction, and invasion of privacy
Loss of rents coverage (business interruption coverage, business income coverage)	Typically, the fair rental value of apartments that stay vacant due to a loss, for up to 12 months
Commercial automobile liability insurance	Accidents involving automobiles you own in connection with your business
Inflation guard insurance	The increase in construction costs in your area that are due to inflation
Blanket insurance	Allows for properties in different locations to be covered under one policy
Umbrella insurance (excess liability insurance)	Bolsters the limits of your liability insurance policy in return for a relatively small additional premium

Property Insurance: Protect your building and structures

You probably already have property insurance. It’s not only the most basic and common type of insurance, but is required by banks and other financial institutions that lend you money or extend a mortgage. Property insurance covers the buildings and other physical structures on your property, such as stand-alone garages and storage sheds. It also covers "permanent fixtures," which are personal property items that have been bolted, screwed, nailed, cemented, glued, or attached to the property in any other way such that removing them wouldn’t be possible without causing serious damage. Common examples of permanent fixtures include sinks, toilets, and installed appliances such as dishwashers and dryers.

Having a good property policy in place is essential, but it’s not the end of the matter. It’s important to have the right policy limits—the money available to you to satisfy a settlement or judgment. Ideally, you’ll want insurance that covers the full cost of repairing or replacing your property. High policy limits are reassuring, but naturally they will cost you more in premiums. Lower limits are cheaper, but those savings may evaporate when you’re facing a loss that the policy will only partially cover.

["Property Insurance policy Limits: How Much Coverage Do You Need?" Checklist] omitted for online sample chapter.

Property Insurance: Protect against what’s likely to happen

You might think that a property insurance policy will spring to your rescue whenever—and however—your property is damaged or destroyed. Quite the contrary. The insurance industry limits coverage to damage resulting only from specific causes (called "perils") unless you request broader coverage, which you can purchase for a higher premium. If you check the wording in your policy, you’re likely to find one of three types of peril coverages: "basic," "broad," and "special form" (also known as "all-risk"). What are the differences?

• Basic coverage. With basic coverage, your property is insured against only the "named perils" that are mentioned in the policy. These typically include fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkholes, and volcanoes. If you have basic coverage, read the policy carefully, looking for the definition of each peril so you understand any limitations. Don’t assume the definitions are the same as everyday jargon or that they match the definitions in an older policy you once had with a different insurer. Also, if you choose basic coverage, make sure this limited coverage is all you need and that you can confidently do without coverage for unlisted perils such as falling objects (like broken glass falling from your building).
• Broad coverage. Broad coverage, like basic coverage, is a "named peril" policy. The difference is that broad coverage includes more perils than basic coverage, such as breakage of glass (from your buildings), falling objects, weight of ice, snow, or sleet, water damage (associated with your building’s plumbing), and collapse from certain specific causes. Again, make sure you understand how each peril in your broad coverage is defined and that you’re covered for all the perils you need.
• Special form or "all-risk," "all-peril" coverage. Special form coverage will cost you more, but for good reason. Instead of covering you for loss resulting only from named perils, special form coverage takes the opposite approach: It protects your property against all perils—except for perils that are specifically excluded (such as nuclear hazards, earthquakes, and floods). Because there are so many ways your property can suffer a devastating loss or even a minor one, landlords should strongly consider all-risk coverage.

Contents, or Personal Property, Insurance: Insure what’s inside

Landlords commonly assume that their property insurance covers "personal property," or items that they use or store inside their buildings. Alas, this is not the case. For example, should a fire damage the lobby of your apartment building, your property insurance may cover the costs of rebuilding the lobby, but you’d have to foot the bill for replacing any sofas, chairs, plants, mirrors, artwork, and other items of personal property destroyed by the fire.

It’s often worthwhile to cover the contents of your buildings, especially if you have an on-site leasing office that houses your computers, desks, and filing cabinets. If you rent any furnished apartments (which contain couches, beds, and other furniture that you own), you’ll definitely need to insure these contents separately.

Contents Insurance policy Limits: How Much Coverage Do You Need?

Use this form to help you determine how much contents insurance you need. check off the descriptions that fit your situation, then take your conclusions to your agent or broker.
You may want lower policy limits—and lower premiums, if:	You may want higher policy limits— and higher premiums, if:
You only rent unfurnished apartments	Many of the apartments you rent are furnished
You have a community room in your apartment building with nothing other than an old table and chairs	Your community room has state-of-the-art audio-visual equipment, along with a kitchen containing top-of-the-line-appliances
You have a "study room" that’s nothing more than a room with some old sofas where tenants may quietly enjoy a book	You have a "business left" that houses brand-new computers, printers, faxes, and other expensive equipment for tenants’ use
There is no leasing office or non-rental space in your building	You have a leasing office and other areas that are open to the public and see regular use
Your leasing office has nothing but old furniture and framed posters on the wall	Your leasing office has nice furniture and an expensive painting donated by a former tenant
You store your valuables in a safety-deposit box at the local bank	You store your valuables in a safe located in the model apartment on your property

Replacement Coverage: Get paid for the cost of a new building or item, not the market value of the destroyed one

If your apartment building is damaged beyond repair, don’t assume your insurer will pay you to rebuild it—no matter how much property insurance you may have. Under some policies, insurers pay "actual cash value" (ACV) for destroyed property. ACV is the value of the property that was destroyed, taking into account its age and condition. In other words, it’s the market value of the property just before it was destroyed, which is probably far lower than what it will cost you to rebuild.

An alternative payment approach, known as replacement cost coverage, is widely available and a much better option. With replacement cost coverage, your insurer must pay you for the cost of replacing your destroyed property with a new building. Yes, replacement cost coverage costs more than ACV, but it’s usually worth it because you’ll get paid what you need to rebuild after a catastrophe.

TIP: Replacement cost coverage doesn’t cover the cost of clearing debris or hauling away the remains of any destroyed structures on your property. To get coverage for this, ask your insurer about adding a "demolition endorsement" to your existing policy.

The choice between ACV and replacement cost coverage also comes into play with a contents policy. Because an ACV policy takes depreciation into account, you won’t get much compensation for computers and other equipment destroyed in a fire unless that equipment happens to be quite new. Choosing replacement cost coverage for your contents is wise because you’ll get the money you’ll need to replace your old equipment and other items with new products that rely on today’s technology or standards.

TIP: If you get replacement cost coverage for your contents, make sure you’re aware of any limitations. Very often, insurers cap recovery under a replacement cost policy for contents at a certain percentage, such as 40%, of the total value of your property.

Flood and Earthquake Insurance: Depending on where you live, you may need it

Floods and earthquakes can cause serious damage to rental property across the country and are more widespread than you might think. Although California is widely known for bearing the brunt of earthquake damage, earthquakes have occurred in 39 states and have caused property damage in all 50 states, according to data from the Insurance Information Institute. Floods, which occur in all 50 states, are dangerous because even an inch of water can cause serious damage to your property. Because earthquake and flood claims are often huge, insurance companies minimize their own financial risk by typically excluding these perils from property insurance policies. (Many California landlords and other business owners learned this lesson the hard way following the 1989 Northridge earthquake.)

If you want flood or earthquake insurance, you must ask for it and buy separate policies. In certain situations, such as when your property has a mortgage from a federally regulated lender and is located in a high-risk flood area, your bank or other mortgage lender will require you to buy flood insurance.

• Earthquakes. If your property lies near a fault line, it’s worth spending the extra money for earthquake insurance, which is available as an endorsement or separate policy from your insurer. Earthquake insurance provides protection from damage caused by the shaking and cracking that earthquakes cause. Note that you should already have coverage for other earthquake-related damage, including fire and water damage from burst gas and water pipes, under your regular property policy.
• Floods. If your property lies in a moderate or high-risk flood zone, give strong consideration to flood insurance. You can get flood insurance if your community is one of nearly 20,000 communities that participate in the National Flood Insurance Program (NFIP), which is administered by the Federal Emergency Management Agency (FEMA). If your community participates in the NFIP, it means it has adopted and enforces floodplain management ordinances to reduce the risk of flood damage. In return, homeowners and businesses in these communities can get a standard, federally backed flood insurance policy through participating insurers.

For more information about earthquake insurance, check with your property insurance agent. Californians should visit the website of the California Earthquake Authority, a publicly managed, largely privately funded organization that provides catastrophic residential earthquake insurance (www.earthquakeauthority.com). For information on flood insurance, visit the National Flood Insurance Program on the Web at www.FloodSmart.gov. You can enter your property’s address to learn its flood risk, find participating insurers and flood insurance agents, estimate your premium, and more. To check whether your community participates in the NFIP, visit www.fema.gov/fema/csb.shtm.

Finally, be aware that flood insurance doesn’t cover water damage when the water gets blown into your apartment building by the wind, such as from a hurricane or wind-driven rain. Fortunately, such damage (which the insurance industry calls "windstorm" damage, or damage from wind-driven rain) is normally part of a property insurance policy (unlike flood damage). Take a minute to look at your policy and make sure your policy will cover you.

• Basic or broad coverage. If you have this coverage, look for the term "windstorm" in the list of covered perils and read the definition.
• All-risk coverage. Read the section that describes what the policy covers, and make sure that "windstorm" (or something very similar) isn’t identified as an exclusion.

TIP: Ask about coverage for sewage backup. Flood insurance doesn’t cover the cost of fixing sewage backup problems, which can lead to costly damage. Your agent or broker should be able to add "sewer backup coverage" to your policy for a nominal charge.

"Ordinance or Law" Coverage: Cover the costs of rebuilding up to code

Hopefully, you’ll never have to rebuild. But if you do, even if it’s only to repair part of a building, the work must meet current building codes and other applicable laws. These probably impose tougher standards (which cost more to meet) than codes required when your building was first constructed.

Don’t expect your property insurance policy to cover the costs that new building codes and other laws can add. Even replacement cost coverage won’t take into account any additional costs needed to bring your property up to more stringent standards imposed by law.

For a small additional premium, you can remove this risk by getting an "ordinance or law" endorsement that covers the added cost of rebuilding or repairs that comply with new applicable laws.

Make sure the endorsement also covers you with respect to rebuilding and recouping the value for any undamaged parts of your buildings that are affected. Very often, local building codes require that if a significant portion of a building is destroyed (for example, 50% or 80%), the entire building must be demolished before being rebuilt. Also, as a practical matter, you may need to reconstruct certain undamaged portions of your building along with the damaged parts to meet new code requirements or comply with other laws.

Ordinance or law coverage is tricky to understand, there’s no doubt about it. Perhaps an example will help. Suppose a fire ravages 40% of the stand-alone clubhouse at your property. Your local building code doesn’t require you to demolish the clubhouse, but the code was amended recently (following a particularly damaging hurricane season) to require structures to be built with at least six feet of clearance from the ground. If repairing the damaged portion of the clubhouse in compliance with the new code while keeping the undamaged portion out of compliance is unrealistic, you’ll want to make sure your "ordinance or law" endorsement covers you for the expense.

Liability Coverage: Don’t let a "slip-and-fall" wipe you out

You’ve probably heard about victims of accidents or crimes who have won staggeringly high judgments or settlements against landlords or other business owners. Astronomical verdicts and settlements are not the norm—most of the time, such cases are resolved for far less. That’s not to say that you can weather them without cost, however.

Fortunately, you can protect your business and personal assets by purchasing liability insurance, which covers you against claims from tenants, their guests, and other visitors who suffer injury or loss or damage of personal possessions while on your property. It also covers the cost of defending and settling personal injury claims, including attorneys’ fees.

How much coverage do you need? Understand that liability exposure is not tied to the value of your property. So, if your property is worth $800,000, you’ll have different property insurance needs than if your property is worth $8 million. But a tenant who is paralyzed after falling from a collapsed deck could win a million-dollar judgment against you regardless of the size or value of your property. Play it safe by getting a high level of liability insurance coverage. Ask your agent or broker about the typical coverage level for a business and property like yours.

It Won’t Happen to You…

What happened. After a 19-year-old tenant drowned in a swimming pool at her New Jersey apartment complex, her family sued the landlord, claiming the two lifeguards on duty weren’t paying attention. One lifeguard allegedly was sitting in a lawn chair ten feet from the pool and the other was repairing a car. The landlord settled with the family for $900,000, which was paid by the landlord’s insurer.

How you can avoid it. This tragedy could have been avoided by properly training and supervising the lifeguards. But even with the best practices, accidents can happen. Make sure that the type and extent of your insurance meet the risks at your residential rental.

Commercial General Liability Coverage: Cover all your liability exposures

Personal injury and damaged property lawsuits brought by tenants, guests, or others aren’t the only sources of liability lawsuits. A landlord can be sued for libel or slander, invasion of privacy, and retaliatory or unlawful eviction. Charges of discrimination, in particular, can have very expensive consequences. Does your liability policy cover you in these circumstances? The narrow liability policy described above won’t.

You can get broad protection under a commercial general liability (CGL) policy (also known as "comprehensive general liability coverage"). With a CGL policy, your coverage won’t be limited to claims arising from physical injuries to people and their personal property. Instead, like its "all-risk" property policy relative, it will cover all your liability exposures except for any that are specifically excluded.

Make sure you understand and accept any exclusions listed in a CGL policy before you sign on the dotted line. Don’t be like the Pennsylvania landlord described in "It Won’t Happen to You," below.

It Won’t Happen to You…

What happened. A tenant’s ex-boyfriend illegally entered the tenant’s apartment at a Pennsylvania complex, assaulted the tenant with a knife, and threw the tenant to her death from her fourth-floor window. The deceased tenant’s family sued the landlord, claiming that the landlord failed to protect its tenant from the attack. A judge ruled that the landlord’s commercial general liability policy specifically excluded claims based on assault and battery by any person—not just by the landlord (as the landlord tried to argue).

How you can avoid it. Read your policy and discuss any questions with your broker. Make sure you understand what each exclusion covers. For example, ask whether an assault-and-battery exclusion applies to claims based on others’ criminal acts. In all cases, if you learn that you are lacking coverage, find out what it will cost to add it and decide whether you need it.

Limits of Liability: Do you have enough coverage?

It’s one thing to have the right kind of liability coverage, but you’ll be disappointed if your policy won’t cover the size of any claims or judgments. In a money-saving move that must be sadly familiar to you by now, insurance companies have designed their liability policies so that they have two dollar limits:

• a limit for each occurrence or claim—for example, the policy will stop paying after a claim exceeds a specified amount, such as $400,000, and
• a total limit for the policy year—for instance, the company will stop paying when the sum of all the claims made on the policy in that year exceeds $1.5 million.

Here’s how the limits described above play out: Suppose you submit four $500,000 liability insurance claims to your insurer within one policy year. To avoid exceeding the per-occurrence limit, your insurer pays $400,000 of the first three $500,000 claims, or $1.2 million. To avoid exceeding the per-year limit, your insurer can then pay you no more than $300,000 for the fourth claim (even though the per-occurrence limit is $400,000).

CAUTION: Don’t confuse "policy year" with "calendar year." Unless the term of your policy happens to begin on January 1, your policy year will be different from the calendar year. For example, your policy year may run from April 25 through midnight April 24 the following year. This is important to keep in mind because annual limits and deductions are based on the policy year.

It Won’t Happen to You…

What happened. A 22-year old California tenant suffered serious burns after criminals threw Molotov cocktails from the street into her apartment. Although she managed to get her babies out the window safely, she remained trapped in the living room because she couldn’t find her key or escape through the barred windows. The tenant sued the landlord, claiming that she couldn’t escape the fire because the landlord violated building codes by having an illegal double-keyed deadbolt lock on the apartment door and non-release security bars over the windows. The tenant settled with the landlord for $1 million, the amount of the landlord’s policy limit.

How you can avoid it. First, be sure you know and comply with local building and safety codes. If you mistakenly violate them (this landlord probably thought he was doing his tenants a favor by giving them secure apartments), have enough insurance to cover a claim.

Extra liability coverage doesn’t have to mean sky-high premiums. You probably don’t want to pay for a $5 million liability policy if $1 million is all the coverage you’re likely to need. For those rare (but still possible) very large losses, consider getting an umbrella policy (also known as an "excess liability policy"). Umbrella policies kick in only after a liability policy has been exhausted. Claims under umbrella policies are rare, so the premium for the extra coverage is less than you would pay for the same coverage under a liability insurance policy. With an umbrella policy, you can add $1 million, $2 million, or more in coverage without breaking the bank.

Loss of Rents Coverage: Keep your business going after a loss

When there’s a fire or other loss at your property, your property insurance should cover it. But property insurance won’t compensate you if tenants must live elsewhere during the repair period and stop paying rent. The last thing you want is an interruption in your rental income stream.

Prepare for this situation now by purchasing "business income coverage" (formerly known as "business interruption coverage"). For landlords, this is more commonly known as "loss of rents coverage," and it normally covers the fair rental value of apartments that remain vacant due to a loss for up to 12 months. Your agent or broker can tell you how much of a premium you should expect to pay, based on factors such as the number of apartments covered, your apartments’ fair rental value, and the desired number of months for coverage.

Automobile Liability Insurance: Cover the vehicles your business uses

If any vehicle that you use—or let others use—in connection with your business gets involved in an accident, the victims can sue you for the harm they suffer. If you don’t have the right automobile liability insurance coverage, you could be on the fast track to financial ruin. Evaluating your auto insurance involves:

• looking at the policy you currently have for personal use (will it suffice?)
• making employees authorized drivers for any policy that covers vehicles they use, and
• supplementing employees’ policies (when they use their own cars while doing your business).

The sections below explain these concerns.

Determine whether your personal insurance will suffice

If you use your car only occasionally in connection with your business, and don’t require employees to use any vehicles for your business, then your personal automobile insurance policy might very well provide you with all the protection you need. To be sure, though, you should run your situation by your agent, who can tell you whether your personal automobile policy will do the trick. However, many landlords find they rely on one or more vehicles so much for their business that they need to buy a commercial automobile liability insurance policy to ensure adequate coverage.

Commercial automobile liability insurance covers cars, trucks, and other vehicles you own that you use primarily for your business. Unlike the case with a personal auto policy, having a commercial policy means you don’t risk having a claim denied simply because you were using the vehicle for business purposes when you got into a serious accident. Your insurer can advise you on how much auto liability coverage you need. A $1 million limit is standard for businesses, but you should not go under $500,000.

If you own multiple vehicles that you use in connection with your business, you can cover them all under the same commercial auto policy. Your policy must identify all the vehicles along with coverage amounts, so if you start or stop using certain vehicles primarily for business, notify your insurer immediately to update your policy.

Make your employees authorized drivers

If you let any of your employees drive any company-owned vehicles for business purposes, provide your insurer with their names, ages, and driver’s license numbers so they may be listed on your policy as authorized drivers. Employees should also be covered if you let them use such vehicles for personal use, but confirm this with your insurer before granting your employees permission to do this.

Never let anyone operate your vehicles until you know they have a valid license and a good driving record. If you don’t check an employee’s driving record and he gets into an accident while using your car, the accident victims may sue you for negligence (entrusting the car to a poor driver)—on top of any loss they suffered from the accident itself! To check an employee’s driving record, talk to your employee screening company or search the National Driver Register (NDR ). To search the NDR for an employee, visit the National Highway Traffic Safety administration at www.nhtsa.gov. Type "National Driver Register" in the search box and follow the instructions.

Beef up your insurance when employees use their own cars

Do you rely on employees to drive their own cars for your business? For example, does a maintenance employee drive her car—and not a vehicle that you or your business owns—to pick up tools or supplies for your property? Or, does your resident manager routinely transport files from your office to an off-site storage facility? Don’t assume that because these drivers have their own insurance, you’ll never face a problem.

Here’s what might happen. Suppose your manager drives her van to the hardware store to pick up a part for a repair at your property. On the way, she causes an accident. The accident victims sue the manager and you, as the manager’s employer, for their injuries. You’ll want to refer this problem to your insurance company—but will they handle it?

To be confident that your insurer will step up, you’ll need to add a "non-owned auto liability endorsement" to your commercial auto policy. This coverage will mean you won’t have to hire a lawyer in a lawsuit brought by someone injured by an employee driving his own car (your insurance company will supply the lawyer). It will also help you if you’re found partly at fault. If you wish to cover this situation (at the price of a small additional premium), ask your insurer to add coverage for "employees as additional insured."

TIP: Make sure your business will be covered. If title to a vehicle you own and use in connection with your business is in your name, you are the only person covered by the policy. If a claim is filed against your business, however, you’ll want to make sure the business gets covered, too. Ask your agent to add your business’s name (assuming it’s different from your name) as an "additional insured" to the policy. Adding an additional insured to a policy is a common request that insurers typically honor at no additional charge.

Inflation Guard: Automatically update your policy limits

Because of inflation, the cost of products and services rises nearly every year. This means that it will cost more each year to, say, repair your building after a fire. Over time, the rising cost of labor and materials can creep dangerously close to, or even surpass, the limits of your insurance coverage. To make sure your coverage limits rise with the cost of repairs, consider adding "inflation guard" coverage to your policy. It will automatically adjust your coverage limits to reflect the increase in construction costs in your area that are due to inflation.

Buy Smart: Be a savvy insurance consumer

You want nothing less than the best insurance coverage for your property and business—and you want to get it at the best price. You can be a savvy insurance consumer by

• paying for coverage you really need, and
• not trying to cut costs by declining coverage you do need.

You can be a smart consumer even when you’re already insured. Although you may believe you have adequate coverage, it doesn’t hurt to explore options with other insurers, especially when renewal time comes around. You may find that you need different or greater coverage. Sharing the results of your shopping with your current insurer may help you negotiate lower premiums. Or, you might decide to do business with that more attractive competitor. If you switch, be sure that your coverage periods overlap—it’s too risky to let yourself be exposed for even a day or two.

Use a highly rated insurer

Insurance companies are rated according to their financial strength. A low-rated insurer is likely to face financial trouble if the marketplace changes and competition heats up. A low-rated company may need to limit the types of coverage it provides or may even become insolvent, leaving you suddenly unprotected. Your homework isn’t hard when it comes to researching an insurance company’s rating—first you need to understand how the ratings game works, then it’s time to check out the rating for any company you’re considering.

Five major outfits, whose websites and rating range are described below, do insurance rating. Companies such as A.M. Best, Standard & Poor’s, Fitch Ratings, Moody’s, and TheStreet.com Ratings (formerly Weiss Ratings) each have their own system for rating insurers. Ratings companies may have different opinions of an insurer’s financial strength, so check at least two companies’ ratings to get a more accurate picture of a particular insurer.

Fortunately, you may be just a minute away from getting the ratings you need about a particular insurer you’re considering. Each ratings company lets you search for ratings on a particular insurer through its website (listed in the chart above). Searches are free, but you may need to register first. Another useful third-party Web resource, http://info.insure.com/ratings, lets you search Standard and Poor’s ratings and Fitch Ratings without registration or charge.

Who Rates the Insurance Companies?

These are the five top outfits that rate insurance companies. You can learn more about them and their rating scheme by visiting their websites.
Ratings company	Website	Ratings range	Accept nothing less than this grade
A.M. Best	www.ambest.com	A++ (Superior) to B and lower (Vulnerable)	A-
Fitch Ratings	www.fitchratings.com	AAA (Exceptionally Strong) to BB+ and lower (Vulnerable)	AA-
Moody's Investor Service	www.moodys.com	Aaa (Exceptional) to Ba1 and lower (Vulnerable)	Aa3
Standard & Poor's	www.standardandpoors.com	AAA (Extremely Strong) to BB+ and lower (Vulnerable)	AA-
TheStreet.com Ratings (formerly, Weiss Ratings)	www.thestreetratings.com	A+ (Excellent) to D+ and lower (Vulnerable)	A-

Compare insurance offers

Don’t take shortcuts when vetting insurers. Take the time to consider a few companies, ask questions, talk about your needs and options for your property, and negotiate. Use a worksheet like the one shown below to record and compare the various companies’ positions on each type of insurance coverage you intend to purchase (such as property, CGL, and so on).

Begin by making sure you’re talking with companies that have experience insuring residential landlords. These companies may already have package deals that will fit your needs and have attractive prices. Then, tell the agent or broker about your business—its size (how many properties do you own? How many tenants live there?), its location, and the challenges you’ve faced in the past (for example, you may have a recurring problem with burglaries, vandalism, or flood damage). Although you don’t want to paint a negative portrait of your property or give the impression that your business is claims prone, you do need to be honest and complete. Accurately describing your business’s needs will allow the insurer to assess your risk and recommend appropriate coverage; hiding the ball could result in no coverage where you need it.

Once you’re satisfied that you’re talking with a company that regularly does business with residential landlords, and appears willing to design an insurance package that fits your profile, consider the following issues.

Deductible

You can save a lot on premiums by increasing your policy’s deductible, which is the amount you must pay toward claims before your insurer will. For more information, see "Understanding the Deductible," above.

Discounts

Ask insurers about any discounts they may offer. An insurer may give you a break by packaging together multiple policies (into a "business owner’s policy" or "landlord’s policy," for example). Or, by increasing your coverage (and premium) on one policy, your insurer may give you a discount on another policy. You may also be eligible for a discount if you insure multiple vehicles (such as more than one or more than five vehicles) under your commercial auto policy.

Discounts vary among insurers and are subject to change. So, don’t miss out on possible savings—ask your insurer about what discounts it offers that may apply to you and your business.

Blanket insurance for multiple properties

If you own more than one rental property, ask your insurer about buying one blanket policy that covers all of them. By pooling all your properties together in this way, there’s more of a chance you’ll have enough coverage if a loss occurs at any one of them.

The following examples show how you can save with a blanket policy. Suppose you own two buildings with a coverage limit of $150,000 and $350,000, respectively. You suffer a $400,000 loss at the second building. If you had separate policies for each building, you would be covered for only $350,000 of the loss. If you had one blanket policy covering both buildings for $500,000 ($150,000 + $350,000), you would be fully covered for the $400,000 loss.

In addition to providing more coverage, a blanket policy can save you money because you’ll pay only one premium (which should be lower than the total of two separate premiums). You’ll also have only one deductible to meet for all properties covered under the blanket policy.

It Won’t Happen to You…

What happened. In 2001, Tropical Storm Allison flooded a 23-unit Pennsylvania apartment complex. As the floodwaters rose to the ceiling in the basement laundry room, a gas dryer became dislodged, triggering a gas leak. The building exploded, killing and injuring several tenants. The injured tenants and the estates of the deceased tenants sued the landlord, claiming that the explosion could have been avoided had the landlord used just a few more bolts to properly secure the dryer’s gas line. The landlord settled for $27.5 million—all of which was reportedly paid by the landlord’s insurer.

How you can avoid it. This owner may have cut corners by having untrained workers install his appliances. The explosion undoubtedly resulted in multiple insurance claims, for injuries and property loss.

Advance payment options

Instead of paying your premiums by the month, find out whether you can pay in lump sum payments covering, for example, a six-month period. Lump sum payments may save you money, because many insurers charge a processing fee for individual monthly payments. Paying in advance is also more convenient and helps ensure continuous coverage (there are fewer opportunities to forget to write that check).

["Insurance Comparison" Form] omitted for online sample chapter.