This is a subject near and dear to my heart, as I’ve been chasing insurance companies for the better part of the last two weeks, struggling to get proper evidence of coverage for my owner/clients’ properties. What continues to surprise me, is the fact that the insurance companies often play as though they don’t understand what we want.
In part, our property management agreement (PMA) states,
“LIABILITY INSURANCE – Owner shall obtain and keep in force adequate insurance against damage and against liability for loss, damage, or injury to property or persons which might arise out of the occupancy, management operation, or maintenance of the Premises. Liability insurance shall be adequate to protect the interest of both Owner and Agent. Owner shall furnish Agent with proof of fire insurance policies in force and shall obtain adequate vandalism coverage for the Premises. The deductible required under all such insurance policies shall be Owner’s expense. Owner agrees to name Agent as an “additional insured” on its liability and fire insurance policy, and furnish Agent with certificates evidencing such insurance within ten (10) days of the execution of this Agreement. In no event will such liability coverage be less than $500,000 in value. Said policies shall provide that notice of default or cancellation shall be sent to Agent as well as to Owner, and shall require a minimum of ten (10) days’ written notice to Agent before any cancellation of or changes to said policies.”
There’s a good reason for this provision, and I understand it’s a common clause in PMAs across the country. Yet, property managers often tell me they aren’t able to obtain the certificates and endorsements to evidence the required coverage. Instead, they receive certificates naming the property management company as having “additional interest” in the policy. Good enough, right? Wrong.
In my search for articles on this topic, to help explain the necessity of this provision to my owner/clients, I ran across this great piece by Dallin Wall. In part, he states:
“[Additional Insured] is probably the single most misunderstood insurance term that is misused and misapplied on a regular basis. An “Additional Insured” is a party listed on an insurance policy that has some type of liability interest in the property. The “Additional Insured” has absolutely no right or authority to make any policy changes or to cancel the policy. Also, contrary to popular belief, an “Additional Insured” is ONLY afforded liability protection under the liability portion of the policy and there is no coverage whatsoever for physical losses resulting from such things as vandalism, theft, fire, wind and hail, and so on.
However, if there was litigation involving the property or its use and the “Additional Insured” was named in the suit for any reason, the policy provides liability protection for legal and defense costs for the “Additional Insured” and the insurance company issuing the coverage would have a ‘duty to defend’ any and all “Additional Insured parties” listed in the policy.”
Bingo. And, no wonder the insurance companies aren’t overly anxious to add us to our owner/clients’ policies as “additional insureds!” It means they’d have to pay to defend us, if and when somebody files a lawsuit in connection with the operation and management of the property. Yet, doesn’t that requirement make sense, from a property management perspective? It sure does, and I’ll explain why, in just a moment.
Even if someone tells you “additional interest” means the same thing, don’t take their word for it. In his article, Mr. Wall goes on to say:
“An “Additional Interest” is nothing like the “Additional Insured” though they sound similar. An “Additional Interest” is a party listed in an insurance policy that has an “interest” in being notified whenever a policy cancels or has a major change made to it. In other words, this party is simply being made aware of the change – nothing else. There is absolutely no coverage whatsoever afforded to an Additional Interest.”
Being made aware of changes to the policy is a good thing, yes. But, as property managers, we need the liability coverage, too!
Why is it so important for the property manager to be named “Additionally Insured” on the owner’s liability policy?
The example I’m about to share is a very recent, true story. Although I was not a party to either the PMA or the lease agreement discussed in this example, I’m quite familiar with the case. It’s just one of many such cases, I hear of from property managers all over the country. Perhaps, you might be able to identify with the property management company, in this one.
A full-service real estate brokerage managed several units for its investor-clients, as part of the company’s business model. Although the company’s primary real estate focus was listing and sales, the property management accounts brought in a stable income, and helped maintain client loyalty. Several of the company’s agents were managing a handful of properties, here and there. One such agent happened to manage a small 3-bedroom home with an attached garage. The home was pretty standard for the area, with a compact design. Natural gas central heat, gas water heater (located in the garage), all appliances, newer carpet, average-sized rooms, and a laundry area/mud room just off the garage. The renters the agent placed in the home seemed to like the floor plan and amenities, were in agreement with the company’s non-smoking policy and other rules, and everything was humming along nicely.
One of the renters was fond of older cars. He liked to work on them – just tinker, really – in his spare time. The garage of this home provided the space he needed for that purpose. Until one day, the unthinkable happened. A huge explosion and fire; it’s center, in the garage. The home was nearly destroyed, and the tenant who was in the garage at the time was very badly injured. (Remember, I mentioned the location of the water heater?)
The tenant sued. He named the owner and the property management company in the lawsuit. And, although the PMA required the agent’s company to be named as “additional insured” on the owner’s liability policy, that coverage did not exist. The owner’s insurance company defended the owner’s interests, and the agent’s Errors & Omissions policy stepped up to defend the agent. Two different insurance companies, defending against the tenant’s claims.
Does it matter who was at fault?
Was the tenant smoking, in violation of his lease agreement? Was the water heater malfunctioning and leaking gas? Was the tenant mishandling gasoline he had stored in the garage? Again, I have to ask, ‘Does it matter?’ No, it really doesn’t. Not for purposes of this example. You see, as the litigation ensued, instead of pointing a single focus toward the interests of the owner and his agent (the property management company) in defending the Landlord’s interests, the two insurance companies on the defense side scattered their efforts toward not only the case with the tenant, but toward each other! Litigation costs were easily doubled, by having two different companies defending the same action. And, the end result for the real estate brokerage was marked by considerably higher premiums for Errors & Omissions coverage, at the next renewal. Had the owner’s insurance covered the property manager’s liability, the Errors & Omissions carrier would likely never have been involved in the litigation, at all.
The next time an insurance agent tells you that your company doesn’t need to be named as “Additional Insured” on the property owner’s liability policy, I hope you will remember this story. Have you had difficulty getting evidence of “Additional Insured” coverage on your owner/clients’ policies? Please share your best practices for handling this important task, by leaving a comment on this post.