Many assume that ANY kind of damage done by a tenant will be covered. This is simply not the case. Though coverages vary, certain types of damage done by tenants are excluded from standard property policies.
While Intentional tenant damage and wear-and-tear are excluded, accidental tenant damage is covered by most property policies. For example, an accidental kitchen fire caused by inattentive cooking would generally be covered. If the policy includes Water Damage, there may also be coverage for water discharge. An example of this would be a tenant’s child sending their stuffed fish for a swim in the “local bowl”. Your client’s policy will most likely exclude Sewer and Drain Backup.
The cost of tenant damage depends on the time and resources needed to repair the damage and get a unit renter-ready again. Based on claims data, we’ve seen damage amounts equal anywhere from $5,000 to $30,000. On top of repair cost, investors must keep in mind the lost rental income, unless they have Loss of Rents coverage. Interruptions like this can wreak havoc on an investor’s cash flow and profits, but there are ways to avoid it!
There are two main types of tenant damage that are excluded: Intentional Damage and Wear-and-Tear
An example of Intentional tenant damage would be a tenant purposefully causing harm to the property during the eviction process or shortly thereafter; it is usually a sudden, one-time event. This could include damage such as broken doors, missing appliances, spray-painted walls, smashed mirrors, and a host of other nasty surprises. Damage like this is reimbursed through the security deposit or through a civil suit.
Wear and tear can look severe in some cases but is caused by the daily stresses of living over time. For example, broken blinds, marks on walls, worn/stained carpet, nail holes, scratched up hardwoods, damaged bath fixtures, and the like.
This tenant damage is also addressed through the security deposit. Some types of wear may be reserved to the cost of doing business, but it is up to the investor to decide which items would constitute normal maintenance versus those items for which the tenant will be held responsible. Investors should check local laws and ordinances regarding security deposits.
Intentional tenant damage and Wear and tear are NOT: Damage done by tenants is not considered Vandalism or Theft according to some insurers. Though damage done to the unit may be similar to Vandalism or Theft, the difference is that your investor client has a written contract (i.e., the lease) entrusting the tenant with the care of the property. That contract should stipulate the penalties for any misuse of the property.
To combat Intentional Tenant Damage: Two words – thorough screening. There is no substitute for placing a reliable tenant. If the relationship turns sour during their stay, Cash-for-Keys may be a good alternative strategy. Lastly, investors shouldn’t be tempted to waive a security deposit to place a tenant. Placing someone that may end up needing to be evicted will likely cost much more than foregoing one or two more months of rental income it will take to find a tenant.
To keep Wear-and-Tear to a minimum: During the check-in walk through, investors should give the tenant a detailed list of the cost to repair or replace specific items in the property. The investor’s goal should be to help the tenant get back their full deposit – they should let them know that up front, too. Also, investors or property managers showing up for regular maintenance visits demonstrates that they care for the property and that may inspire tenants to take better care of their home.
If your investor client would like additional protection for tenant-caused negligent losses, consider adding the Tenant Protector Plan. Not only does it provide more coverage, but also gives investors $1,000 per residence premises of Skip Rent coverage.