insure this!
Bedbugs Begone
by Various Authors
Q. Will insurance cover bedbugs in my building?
A. Bedbugs have been around forever, but just in the last 10 years they have made a big come back. The problem is, when they come back they are very hard to get rid of, and they travel well. There are a variety of ways to remediate the problem, some more effective than others. You can use chemicals, heat treatment or freeze them to death. Depending on the extent of the infestation, the costs vary greatly.
Not only do the eradication methods vary, the consequences of each method have repercussions that affect your tenants. All of the methods can result in the tenant (or tenants) having to move out for a short period of time, depending on the extent of the problem.
Typically, insurance does not offer a remedy for pests such cockroaches, termites, bedbugs, or ants, nor will it pay for any loss of income or litigation related to these problems. Depending on the circumstances, the landlord may be held responsible for relocating the tenants and other expenses.
However, there is a new insurance product that will address a bedbug infestation in lodging rooms. This program is designed for apartments, hotels and motels. The basic coverages for this program are: decontamination expenses, first-aid administration costs, business interruption (loss of revenue), assistance with regulatory authorities and their requirements, and third-party litigation.
Of course, there are costs associated with this coverage. The minimum premium is $1,800, with additional amounts possible based on the size and number of units being covered. However, multiple properties can be added to one policy for pricing considerations, and there is no deductible for loss of revenue and the first $5,000 of decontamination costs.
These are the main features of the program. Contact your insurance agent for more information about this product.
—Dan Buick
Q. How will an insurance policy differ between a standard apartment building versus a mixed-use apartment building?
A. A commercial property insurance program provides a minimum of property and liability coverage. In some cases, other lines of coverage may apply—for example, workers compensation, commercial auto, inland marine, directors and officers, and even employers practice liability. When underwriting any type of investment property, we look at the overall use or risk profile of the property. Based on the risk profile, a rate is determined and used for quoting both the property and liability. If a building’s risk profile is thought to be too “risky,” some carriers may not be able to offer terms or exclude/endorse the policy to remove specific types of coverage.
In considering your property coverage, there are many factors that come into consideration beyond the physical attributes of the property. If the commercial tenants tend to be of higher risk, such as a restaurant or an onsite dry cleaning facility, this could affect the premium and the number of insurance companies able to quote. If the tenant type is considered to be of higher risk, then the construction type and life safety systems (like sprinkler systems and fire alarms) become of higher importance.
The general liability is also based on the type and use of the property. An apartment building has a predictable risk characteristic. Residential buildings typically have a low to moderate risk profile, based on standard residential activity. When you add the mixed-use component and commercial tenants to the underwriting equation, it tends to increase the nature of the risk. A commercial tenant can generate a higher volume and different type of activity within and around the building, thereby creating a different risk profile. If the nature of business for a commercial tenant is considered a higher risk, such as woodworking, auto repair, bars/restaurants and nightclubs, some carriers may not be able to offer terms.
In summary, when underwriting any type of investment property, we look at the overall risk profile of the building. Based on the risk profile of the property, we work with carriers that have an appetite for your type of building. As a standard apartment building, the risk is predictable. As you add the mixed-use component into the underwriting equation, it can affect which insurance companies are willing to quote and the rates that will be applied to accommodate the increased risk. In some cases, the incremental cost for the mixed-use building is negligible compared to a standard apartment building. However, if the mixed-use component creates a higher risk profile, it will increase the cost of insurance and maybe reduce the number of carriers available. In considering your insurance policy, make sure you understand all aspects of your building to ensure you receive the right type of coverage.
—Paul C. Tradelius, Jr.
Q. Under what circumstances would my building insurance cover my tenants’ belongings in the event of a disaster?
A. My first thought is: why would you want to cover your tenants’ belongings? That is a job for their personal tenants’ insurance. Usually you can’t insure property you don’t own unless you have a legal obligation to do so, you are “processing” it (for example, a dry cleaner) or if you are negligent. Since this is an apartment-related magazine, I’m going to assume you either have a legal obligation (perhaps through the lease) or you have been or worry about being negligent.
Let’s look at legal obligation in the lease. You will need to modify the property portion of your building insurance to meet obligation you took in the lease. Specifically, the personal property portion of the policy needs to be amended. (Remember, building insurance means property and liability.) You should proceed by giving a copy of the lease to your insurance agent (which you should always do anyway for professional input). The insurance agent can help you determine the best way to insure the property. Usually an insurer can issue a “property of others” endorsement with a specific amount of coverage. This is relatively inexpensive, but don’t be surprised if the insurance company is puzzled by your request.
Now, what if you are negligent? Your question supposes a “disaster,” so I assume you are talking about a huge fire or something of that nature. How could you be negligent for a fire that destroys a tenant’s property? Well, perhaps there was wiring that you knew was faulty and you failed to repair it in a timely fashion. Perhaps you stored paint rags too close to the heaters. In that case (and assuming your lease with the tenant does not address this issue), the “general liability” section of your building insurance will respond and protect you both against the allegation of negligence and the amount of damages you are required to pay.
A quick, but complicated warning: there will not be coverage in the liability portion of your building insurance if you have the tenant’s property in your care, custody or control. This exclusion for property in your care, custody or control would be a good excuse for an insurance company to get out of paying a negligence loss. I can only imagine this coming into play if you agree to store property for your tenants or you take their property and put it in a special room. I’m not saying that that circumstance would trigger the exclusion, but it could. Get a written opinion from your insurance agent/company if you are in a strange situation like this. And, get out of this situation!
But, there are easy ways to prevent having to do these insurance gymnastics. The lease with the tenant should be very clear that belongings of tenants are the responsibility of the tenant to insure or bear the risk of loss. In addition, the tenant should hold you harmless and waive insurance subrogation. The tenant’s insurance should be primary. In short, everyone’s insurance should be required, in advance, to pay the property losses that are incurred by the owner of the property.
Now the short answer to your question: there is no coverage in the property section of your building owner’s insurance. There is coverage in the liability section of your building owner’s insurance, but only if you are negligent.
—Ann Krilanovich
Dan Buick is a fourth-generation San Franciscan active in the property and casualty insurance industry for the past 15 years. His area of expertise is providing innovative insurance solutions for real estate/investment property interests in the Bay Area. He can be contacted at 415-493-2506. Paul C. Tradelius Jr. is the president of Commercial Coverage Insurance Agency, which works with over 100 insurance companies on a national basis. He can be contacted at 415-436-9800. Ann Krilanovich is a risk and insurance consultant working in the Bay Area since 1979. Coverage and savings are her specialty. She can be contacted at 415-452-8664.