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DGS 23: Tenant Liability Insurance for Property Management

Picture this: One of your tenants is making dinner and accidentally starts a small grease fire in the kitchen. No one gets hurt, but wading through the homeowner’s insurance claim, the tenant’s security deposit, and all the paperwork and red tape is completely overwhelming. IS there an easier way to deal with tenant mishaps?

Brad Larson, CEO of Larson Property Management and a key player at the National Property Management Network has a solution. Learn how tenant liability insurance protects the homeowner, the tenant, and the property management team and how to begin implementing it in your business!

You’ll Learn…

[3:00] What is tenant liability insurance?
[4:45] How tenant liability insurance protects the homeowner, the tenant, and the property management team
[6:45] Making a revenue by mandating insurance
[7:50] The legality of tenant liability insurance
[12:15] Opt-in rates and conversion rates for renewals
[15:10] How tenant liability insurance saves property managers time
[17:35] Frequently asked questions
[19:10] Admin fees
[20:25] Is there any reason why a property manager wouldn’t want to implement this insurance?
[22:40] Implementing peace of mind and using insurance as a marketing tool
[25:30] The difference between renter’s insurance and tenant liability insurance

Tweetables

Resources

National Property Management

Transcript

Jason: Welcome DoorGrow Hackers to the DoorGrowShow. If you are a property management entrepreneur that wants to add doors and expand your rent roll, and you are interested in growing your business and life, and you are open to doing things a bit differently, then you are a DoorGrow Hacker.

At DoorGrow, we are on a mission to grow property management businesses and their owners. We want to transform the industry, eliminate the BS, build awareness, expand the market and help the best property managers win. If you enjoy this episode, do me a favor, open up iTunes, find the DoorGrowShow, subscribe, and then give us a real review. Thank you for helping us with that vision.

I’m your host, Property Management Growth Hacker, Jason Hull, the Founder of OpenPotion, GatherKudos, ThunderLocal, and of course, DoorGrow. Now, let’s get into the show.

This is episode number 23 of the DoorGrow Show. In this episode, I’m hanging out with Brad Larson. Brad runs Larson Property Management down in San Antonio. He also is a major player here at National Property Management Network. We’re gonna be talking all about that today, specifically, tenant liability insurance–this new idea that lowers your liability. It makes the tenant safer, makes the owner feel safer, adds value, and it’s an additional revenue source you can add to your business very quickly. I think you’ll find this fascinating. Let’s get into the show. Brad, welcome to the DoorGrowShow.

Brad: Hey, thanks for having me, appreciate it.

Jason: I’m excited to have you on because I’ve seen you around for a while. I remember you came out to me at the NARPM Broker/Owner Conference and you’re like, the first thing you ever said to me was, “You have an effing–” because this is a podcast, “awesome mustache.”

Brad: You did back then and then you grew it and you parlayed it into a full beard.

Jason: We’re gonna talk about today tenant liability insurance.

Brad: Yeah, yeah. We’re gonna talk a few things about the insurance as a whole, kind of give you a few tidbits from both tenant liability insurance and from some of the other insurance things that I think could be useful to the audience, because what I’m assuming we’re gonna be doing is angling this conversation towards our peers, is that correct?

Jason: This is for property management business owners, yeah. Why don’t we start with what is tenant liability insurance?

Brad: Sure. Tenant liability insurance in a nutshell is essentially where you augment the tenant’s insurance status when they first rent a home. What it does is it covers the tenant screw-ups. If the tenants cause a fire, if the tenants cause a water backup, this is going to be something that covers their screw-ups. But the beautiful thing about it, it does not affect the homeowner’s insurance. Let’s take a couple examples just to illustrate this point to really hone in on it, let’s say, great one is here in San Antonio, folks will barbeque on the back porch, they lift up their barbeque lid and the barbeque burns up the siding of the home. Have you ever seen this or heard about this? This could be coming throughout because people don’t even think about it. Next thing you know you have a big flame going up the side of the home causing damage to the siding.

In previous incidents, something like that would have to go against the homeowner’s insurance. The homeowner would be stuck paying the deductible, they’d be stuck paying for an increase premium, and they’d have to file a claim. All of that’s going to create a lot of headache on that owner. At the end of the day it’s gonna basically either increase your premiums or get them canceled. That’s really a negative deal.

What this tenant liability insurance can do for property management companies that implement this is it gives them an opportunity to first, protect the owners, second, protect the tenants, and third, create a revenue stream for themselves. Let me talk about all the sides of that.

From the owner’s perspective, it covers them for the obvious reasons. They’re not going to have to make a claim on their insurance for a tenant screw-up. From the tenant’s side, this avoids them being sued by the property manager and/or the owner for that type of a screw-up. Because there’s a fancy term called subrogation in the insurance world which basically means pointing fingers. If a homeowner’s insurance has to payout a claim like that, they’re going to point the finger at the tenant and say, “Mr. Tenant, we’re going to come after you for a claim of $20,000, $25,000, $30,000, $80,000.” Tenant liability insurance from several of the vendors that provide this will cover that tenant incident up to $100,000 per incident with a minimal deductible, if any deductible at all.

The way this works for the property managers, to give you a long explanation about this, because I think that’s what your listeners wanna hear, because where I’m going with this and I want a volunteer to talk about this topic for a couple of different reasons. We’re seeing more and more vendors put this out at the NARPM conventions. We started looking into it, meaning we as a company, and thought, “This is a great idea.” Several of the vendors that are putting it out, I don’t know if you really want me to mention vendors, I can if you want. But what do you think?

Jason: That’s up to you, you wanna call them out, I don’t care.

Brad: Okay. But I didn’t wanna cross your boundaries here. You have good vendors out there, there’s Renters Legal Liability (RLL), AppFolio has a similar product, and then a company I am a part of, National Property Management. All of us put out tenant liability insurance as a product.

It’s a situation to where choosing one of these vendors is gonna be basically dependent on what you’re looking for, who you’re comfortable in dealing with. From our perspective, we take the time because we are founders, we’re all property management company owners that have founded National Property Management to create tenant liability insurance and several other products that are coming down the road.

Assuming that once a property management company chooses a vendor, they want to implement this tenant liability insurance into their systems of procedures, this is where they can make a revenue from because the tenant liability insurance is gonna run from $9-$10, whatever it could be from the certain vendors, that’s going to be the cost of the insurance. The management company would force mandate that insurance unto every tenant. Every tenant that comes in, applies for a home, they’re going to see that in the screening criteria, they’re gonna see it on the lease application, they’re gonna see it on a lease addendum, all those places the tenant’s going to see that tenant liability insurance as a mandated part of leasing that home in addition to potentially paying an admin fee. This is where the management company can charge $1, $2, or $3 admin fee and generate revenue from mandating that insurance to be paid for by the tenant.

Jason: Quick question, with tenant liability insurance, mandating, and putting it into your processes, is that legal in every state? Is that okay?

Brad: Yes, it’s legal in every state. It is okay. Let me tell you the truth about this–there’s no lies about it–but the truth is, we’re behind the times, meaning you and I as property management company owners, we’re behind the times on this because insurance has bled-in to apartment communities for years, for like a decade. Apartment complexes, big apartment communities have been doing this for a long time. If you don’t believe me, go around and look at your apartment communities around where you live and find out what the costs are to lease one of their properties, lease one of their units.

We just saw one of our founders in Florida, his daughter had to go rent an apartment and guess what she had to pay? Tenant liability insurance. It was mandated. It was a separate addendum that she was forced to pay to get into this. This is a good thing all around, it’s good for the tenant, it’s good for the owners, it’s good for the management company. It really is a smart procedure to get into. I just want to let you know that single-family home property managers are behind the times. We’re playing catch-up.

Jason: The multifamily guys are already doing this, it’s already standard practice. Single-family are missing out on this additional revenue stream, and they have increased liability and finger pointing going on, and struggles and challenges because they don’t have this yet.

Brad: Correct. I can tell you a quick tidbit for what we have done. We looked at tenant liability insurance from a vendor, this was at the October conference in Minneapolis, I believe you were there.

Jason: Nope.

Brad: Maybe not, maybe you were.

Jason: I was just in Vegas.

Brad: Okay. That’d be October NARPM Conference…

Jason: I was undercover when I was there in Vegas. I’m actually just a property management vendor, really, but my dad though just started his property management business and so him and I went because I wanna see what went on.

Brad: Point being is we saw that RLL product, the tenant liability insurance product, we saw that in Minneapolis a year ago. This was a year and a half, we call it October. We came back and implemented it in November, December and had full implementation going at that point for all the new lease agreements coming in. Fast forward a year, we’ve made $14,000 in revenue from those admin fees, after one year and only about 1/3 implementation.

Jason: This is with how big of a portfolio?

Brad: We manage about 600 single-family homes.

Jason: Okay.

Brad: Let’s say we put that into at the year-end it was close to 200 lease agreements that we implemented that into by year-end because you have to give the tenants a means to opt-out.

Let’s go back a little bit, tenants have the means to opt-out of this mandated insurance. We don’t really care who they carry insurance from, we just demand that they carry the insurance. If they wanna opt-out, they simply provide us proof that they have coverage and they name us additionally interested. Once they do that, then we allow them to opt-out of that $X per month admin fee and liability insurance charge. We always have to give them the option to get out of that if they want. But you’re free to mandate it as mandated cover to the option to get out of it provided they show us adequate coverage for that $100k in liability and name us additionally interested.

Those two points are gonna be key points for anybody looking to mandate that because they just build it right into their lease agreement, they put it right into their addendums and away to go.

Jason: Yeah. I doubt tenants ever push back on that if they’re wanting to get into place…

Brad: Here’s what we’ll see. We’re seeing personally about an 80% buy-in. Only 20% of the tenants are actually opting-out. The crazy part is when they opt-out, they’re spending more because they have to send us their declaration page from their insurance and we’re seeing what they spend on it and it doesn’t make any sense because they’re spending more and it’s all credit-based. Because the insurance company is not insuring the tenant, the insurance company is insuring us. Then we’re passing the insurance down to the tenant.

Jason: This is a side note but have you implemented then your business some sort of video or explanation so people are aware of this 20% to get them to convert?

Brad: Absolutely. The conversion rate is not really a big thing because we can’t go back in time and make them choose the right path.

Jason: Right.

Brad: We could educate them on what they’ve done as far as you spent $20 a month on this tenant liability insurance, $240 a year is what I’m seeing, $250 a year, $240 a year, versus what we’re asking which is a lot less. Sometimes, you just don’t play into their logic but 80% often is pretty good. That’s higher than what we’ve been told we could get, we are told maybe 60% would be the norm but we’re getting as high as 80%.

Jason: Those numbers are originally quoted to you or probably more based on the multifamily industry?

Brad: Correct, correct.

Jason: Yeah. I think that’s a factor, when you’re single-family residential property manager, I think there’s a higher level of trust and connection to your owners.

Brad: You make it easy for the tenants because it’s just added on their tenant ledger, they pay it every month, they don’t have to worry about it, we pay the tenant liability insurance to our vendor, and away they go. That’s very simple, when they opt-in at lease agreement time. Of course, you fully disclose this.

The other part of this when a property management company is implementing it, they start with the new lease agreements. That’s pretty much standard fair, start with the new lease agreements then go back and start working on the renewals. The tenant’s coming up on renewal, you’re going to have to give them good 30, 60, 90 day notice that, “Hey, we’re putting this mandated insurance in place, here’s how you’re gonna have to go ahead and agree to pay it or agree to opt out-of it, but this is a mandated party renewal. If you wanna renew your lease agreement, you have to do this.

Jason: Okay, you just build in into your process, put it in your lease agreement, and make sure you give the right notice and then you’ve got an additional revenue stream.

Brad: Absolutely. It’s a thing of beauty, you’re protecting all sides. The tenant’s being protected from their own selves and the owner’s being protected from tenant liability which is why it’s called tenant liability insurance, and the managers are being protected from the owners because if there’s a major claim, let’s say there’s a fire in the kitchen and it costs us $75,000 of damage because the tenant started it, that’s a major deal. The homeowner’s gonna have to file a claim, and they’re going to be very upset, potentially legally upset with the property manager and try to go after us and the tenant to–that magic word again–subrogate their loss.

Jason: Right.

Brad: That’s what we don’t want.

Jason: For me, myself as an entrepreneur, and I would say most entrepreneurs, the real issue isn’t just the money, it’s time. If anything is trying to take away my time, that’s what I guard against the most. I would imagine this just reduces the red tape, and the overhead as well.

Brad: Because there’s a separate claims process for this. For example, we filed a claim, and I’ll give you the example. A tenant left on a Friday, they pulled out their washing machine hose. The behind of the washing machine, pulled the hose out, they thought the little knob was turned all the way to the right to close it, but guess what, it wasn’t. Yeah, the slow dripping leak, and they moved out. That was on a Friday and we discovered it on a Tuesday, through normal procedures. By the time we discovered it, the water had gone up about two inches in the pantry where the washing machine and the dryer was, guess what, it destroyed all of the baseboards and some of the drywall that was in there.

We made a claim, the claim was settled at I think $1,600. It was sent directly to the management company, we put it straight into the owner’s account and we paid for that expense to repair and everybody was happy. The tenant had no problems, the owner had no claims, the management company was able to fund the repair, we were able to fund the repair very quickly. That’s an example of the benefits of the tenant liability insurance. Now you could have taken out of the deposit, you can always make that claim, but what if it’s more than the deposit?

Jason: Right. Let’s back it up. Imagine you didn’t have the tenant liability insurance, what would that have looked like then?

Brad: We would have had to definitely take it out of the deposit and that could have caused a little bit of an issue. Luckily, the deposit was enough to cover it but we just went ahead, made the claim. The deductible that was there, we charged the tenant. The tenant paid for their own deductible to make that claim and it was all settled and done very quickly. We’re able to make the repair, move in a new tenant, the owner lost minimal amount of time as far as any sort of lost rent and it worked out very well. We’ve been very happy with this product, this idea, since we’ve implemented this into our business.

Jason: Fantastic. What are the most common questions that property managers ask you about this when you start telling them about tenant liability insurance and it’s new to them?

Brad: First thing they wanna know is some are devious like they’re all entrepreneurs as we say, they wanna know what’s in it for me, what can I make money from. We have to explain to them you’re allowed to charge an admin fee–$2 or $3 is normal. You have to do the aggregate in your head if you have 100 policies and you charge $3 a policy, and you take that by 12 months, that’s where the aggregate comes in and you can make a fairly decent amount of revenue as the aggregate builds overtime, as you implement it. Because you just can’t really plop it onto your entire rent roll and say you’re all paying me this now. You have to build it into your lease agreement slowly, you have to build it through your renewal slowly.

But after let’s say 24 months of full implementation, you should have 60%-80% of your rent roll all on tenant liability insurance. That’s where you can make some good money, that’s where you can make four figure revenue just by one little policy change. It’s very easy as far as the accounting side in most software. Any software that our peers are using–we don’t have to name any but they’re all fairly easy to do this, it’s all just a recurring charge that goes on to the tenant ledger.

Jason: Okay. The admin fee, is there any sort of guidelines as to what the charge for this or it’s up to them?

Brad: That’s a good point because you could get silly with this and try to charge, “Oh, let me charge a $40 admin fee or $80 admin fee. I don’t really know if I’m allowed to talk about fees but going something really high is just asking for trouble. We, as the vendor, recommend a $1-$3 admin fee. You’re gonna hear that throughout, all the vendors will say that, all the ones that are doing this correctly are gonna say that.

Jason: That’s kind of the industry norm is between $1-$3.

Brad: Correct, correct.

Jason: Okay.

Brad: Because you’re taking in money on their behalf, you’re saving their money, then you’re paying out that vendor out of your profit and loss account for that insurance policy to be covered. Couple key points here is what if the tenant vacates? What if the tenant doesn’t pay rent? The insurance is still in place because the manager is paying for the insurance. The property management company themselves are paying for that insurance, not the tenant. The tenant is augmenting and paying their property manager, the property manager’s paying for the insurance. If there’s a vacancy or if there’s an eviction, that insurance is still being paid to cover any of those potential damages from the tenant.

Jason: Okay. Great. What are the downsides?

Brad: Downsides, I have never been asked that question before.

Jason: If there are other any negatives about this, is there any reason why a property manager would not want to do this?

Brad: A lot of property managers have a tough time of implementation. Would you agree that’s true?

Jason: Yeah.

Brad: Okay.

Jason: That’s right. They’re just there running around like chickens with their heads cut off, they’re busy, they’re in overwhelm and they’re like, “It sounds great but I just don’t have time to do it. It sounds like a one more thing on my to-do list.”

Brad: Exactly. One of the things we’ve always told people when I talk to other property managers–and you’ve seen me maybe with some of these other podcasts–is prioritize what you wanna implement after going to these great idea fairy conferences.

Jason: Yes.

Brad: All of these broker/owner stuff. The first thing you wanna prioritize is what’s easy and what’s gonna make you money.

Jason: Yeah.

Brad: Implementing this is fairly easy. We walk through all the steps needed with our property managers that we bring in to tenant liability insurance. We are property managers ourselves, we get them all the addendums, all the verbiage, all the assistance, all the implementation, all the handholding they need to get that going in.

The only downside is them having to force themselves to actually implement something new. Sometimes, people run scared, “Oh, my owners are gonna freak out and leave me if I do this.” “Oh, my tenants are gonna revolt and they’re gonna crucify me if we do this.” No, they’re not because this benefits owners, this benefits tenants, and once you understand the merits behind it, they’re going to agree with, “Hey, this really does make sense. I wanna do this and implement this now.”

Jason: Great. It sounds like a no-brainer.

Brad: We think so. When I put it into my business, it was a no-brainer. It was fairly easy to implement. I don’t ever have to worry about it at this point because we’re 14 months later that we’ve implemented this and it’s working like a clock, it’s very easy.

Jason: You’re an example of actually using this. Before you had tenant liability insurance in place, and as you mentioned, it’s protecting the owner, protecting the tenant, and it’s giving you a new revenue stream. Before you had that, what was different in your business as far as your peace of mind and the stuff that you were dealing with versus having it?

Brad: Really, we’re always worried that if a tenant screwed-up a home, we’re gonna basically force the owner to go file a major claim with the insurance company, that’s gonna take off the owner and the owner’s gonna guess who, they’re gonna fire us, and will sue us.

Jason: And blame you.

Brad: That was our major concern, always lingered in the back of our heads, it was like okay, what happens if the tenant has that kitchen fire? Are we gonna be accused of not screening the tenant properly? Are we gonna be accused of allowing the tenant to cook in their own home? What craziness is gonna be brought back on us? But what this allows us to do is, “Okay, let’s talk about the marketing side of this.” This tells the owner, “Mr. Owner, you’re not gonna have to worry about this because we mandate this as a point of difference in our company that our competitors are not doing.” This is a huge benefit for marketing standpoint to the owner.

Then just for peace of mind, to not get sued over something you can’t control as a property manager but mandating this coverage, I think that’s a huge peace of mind deal for all the property managers looking at it. That’s always been our big concern, is, “Okay. What is gonna take-off an owner to one, sue us, or two, fire us?”

Jason: Yeah. That’s the thing, if you’re losing customers, it’s far more difficult to get a new customer than to maintain an existing one. Client retention becomes a really significant factor for growth. Yeah. I love it. It’s a selling point. If you can sell against your competition–right now there is an opportunity because in the single-family space, not everybody, very few, seem to have this tenant liability insurance. If you get it in your business, then you have a selling point to sell against your competition. What’s their number one concern as a homeowner is peace of mind. That’s their biggest thing they want, that’s why they’re coming to you. Tenant liability insurance sounds like a natural fit to a peace of mind and it gives you peace of mind in your own business.

Brad: Exactly, because you’re tackling one of their biggest objections. Their fear is an objection basically, “I don’t want a tenant to tear up my home. I’m really, really nervous about that.” “Okay, Mr. Owner, here’s what we have, we have tenant liability insurance in place and we have all those good screening processes that allow the NARPM vendors and community folks use but having that extra tenant liability insurance as a point of difference for your business, when talking to owners on why they should hire you from a marketing standpoint, that should be all you need to hear.” But then the other benefits aside the revenue generating, again, it’s one of those no-brainer things that when we saw it and truly understood it, it made a lot sense. What we also should do is clarify the difference between renter’s insurance and tenant liability insurance.

Jason: Yeah.

Brad: Let’s spend some time talking about that because that can be a point of confusion. Real simply put, renter’s insurance covers the tenant contents. Tenant liability insurance covers the tenant screw-ups. If that makes any kind of clear sense, the tenant liability insurance would cover them causing the damage to the home with water or fire or sewage backups or something to that effect.

Jason: Right.

Brad: Renter’s insurance covers their stuff. If their door is kicked in and their big screens go missing, that’s on their renter’s insurance because that’s covering the content. Tenant liability insurance is covering the major issues that they would cause from their own screw-ups.

Jason: Which inevitably happen and so they need both. Are both mandated?

Brad: We don’t mandate renters insurance but that can be in a lot of states. A lot of folks do put that in the lease agreement that they mandate it. But here’s the thing, you can mandate renters insurance, but if you’re not collecting on the policy, they’re not sending you a proof of insurance page, how are you gonna police that?

Jason: Yeah.

Brad: In reality, how are you gonna police 600 homes for renters insurance, because they can give you a declaration page that says, “Yeah, I got renter’s insurance,” walk out the door and cancel it. Are you gonna know?

Jason: Right.

Brad: It’s a huge drill. I would just caution anybody about trying to police renters insurance for what value. What are you getting out of that?

Jason: Yeah. Don’t worry about it.

Brad: You can put it in your lease agreement that we highly encourage renters insurance or you can put in your lease agreement that you mandate renters insurance, but at the end of the day, I don’t know if anybody really wants to go and police that. Let’s say, making sure that every single tenant carries that forevermore, but with tenant liability insurance, you’re putting it on the tenant ledger, they’re paying it, so it’s very easy to police.

Jason: Brad, what else should anybody know about tenant liability insurance that we haven’t already chatted about then? Is there anything that we’re missing? Any other common questions?

Brad: Some carry a deductible of 250 or more, some people don’t have a deductible at all. But typical charges are between $9-$10 a month. The admin fees we talked about, the coverage limits are typically up to $100k per incident. Really that’s the bottomline big parts of it. When somebody comes to us and asks us to help them implement this into their business, we have four founders, they’re all property management company owners, and we jump into action and make sure that we do the handholding to put it there, put this in other business and fully implement it.

Jason: Great. I guess the final question is how do people find out about this, get more info and connect with you?

Brad: Yeah, it’s very easy. They can go to nationalpropertymanagement.com. It talks all about the tenant liability insurance. There’s a couple of videos in there, there’s forms in there they can look at to see what they need to have ready to put into their lease agreements and add all the addendums and verbiage.

Feel free to have it vetted by their local attorneys. We feel very strongly about this, we’re not recreating this wheel, we’re following the path that has already been placed for us by several other vendors. The difference is that we are property managers providing answers for property managers.

Jason: Right. Makes sense. Brad, I think this is a great topic. I love that you bring something to the table that the industry needs right now which is useful and helpful. I appreciate you coming on the DoorGrow Show.

Brad: Been a pleasure, hope we can do it again sometime.

Jason: Absolutely.