The rising cost of insurance premiums and deductibles has taken their toll on landlords and property owners. Adding to their woes is that owners struggle to verify tenants’ insurance status, current beyond the initial certificate of insurance (COI) renters present upon signing a lease.
But what if the property itself is a low risk, especially for events that residents cause? Many owners of large, multi-family housing have relatively low risk, yet tenants are shelling out hundreds of thousands of dollars every year in insurance.
These property owners can instead turn to tenant liability captive insurance. In such an arrangement, property owners can self-insure their units and find themselves with a significant new revenue stream in the process.
How tenant liability captive insurance works
Renters pay an additional $12 to $14 in rent each month in exchange for a $100,000 deductible-free waiver of liability. This allows them to move in immediately without producing a COI and satisfies the insurance requirement of the lease.
When a property has traditionally industry low claims, the residential property owner stands to retain revenues from the captive: Landlords with 10,000 units stand to earn an average profit of $825,600 per year.
Of course, the other major benefit of a tenant liability captive insurance is the ability to transfer risk. Compared to a renter security deposit, which doesn’t cover much in case of a claim, the captive covers the owner with a large insurance policy.
The captive also means property owners don’t need to chase after tenants to check that their COIs are up to date, as the tenant liability captive insurance manager does that for them, as well as training, onboarding and customer service.
Tenant liability captive insurance is not for everyone
While tenant liability captive insurance can be an excellent option, it’s not for every building owner.
The key to a cost-effective captive policy is the ability to spread risk, which requires a large residential complex or portfolio of properties. For example, a 10-unit building with each renter paying $100 a year only yields $1,000 for a captive. Even with 200 units, the captive would generate only $20,000, which is a woefully inadequate amount to call insurance coverage.
Generally, tenant liability captive insurance makes sense for owners or managers with at least 2,000 rental units. Note that all the units do not have to be in one building or complex: Tenants from multiple properties with a single owner or management company can be insured in a single captive.
Another case where traditional property insurance will be the better option is for owners of low income or Section 8 housing, or those with a history of high claims.
Even with a portfolio of many properties with an excellent claims history, owners might be wary of captives and the possibility of many claims hitting at one time. However, reinsurance can minimize the financial risk of multiple claims. Once the captive refills, the owner can cancel the reinsurance.
For owners interested in enrolling in a tenant liability captive insurance program, it takes 45 days to implement, at a cost of between $12 and $14 per month for residents (as noted above), and there are no start-up fees.
If all goes well, the building owner can cash in the captive at year-end, essentially converting their tenant’s insurance into profit.
Contact your HUB Real Estate expert for more information on how tenant liability captive insurance can help reduce your tenant risk and generate revenue.
