Illegal Basement - Will my insurance company cover any damages?

Question

Hello,

I have a 2 family property in New Jersey. I am renting out the basement illegally. Question - Will my insurance company cover me for any damages that happened to the property and is not related to the tenant in the basement? Can they still claim that they don't have to pay anything because I have an illegal tenant in the basement (even if he is not the cause)?

Josh Russell · Answer

Manshi Mehta

It sounds like you're trying to make as much money as possible and minimize risk.

Speaking of risks and money:

http://www.bostonglobe.com/metro/2014/08/19/family-student-killed-fire-prepares-wrongful-death-lawsuit/CFhp5A0XzHVu77s7vfMFuI/story.html

http://www.nytimes.com/2012/06/15/nyregion/manslaughter-charges-for-landlords-in-brooklyn-fire-that-killed-5.html?_r=0

http://www.junipercivic.com/juniperberryarticle.asp?nid=263

So, in the event of a fire, you're concerned about getting a few thousand dollars from your insurance company. Do you think that few thousand will make any difference if you're facing a wrongful death lawsuit or manslaughter charges?

From that last link:
"Look at the risks the owners take to collect illegal rent: civil and criminal charges in the event of death, that certainly means possible incarceration; no insurance coverage because of misrepresentation to the insurance company and income tax evasion charges from the IRS and [state] taxing authorities. Income tax evasion charges usually carry heavy monetary penalties Also, since the other legal tenants in a building with illegal rentals can withhold rent they, too, have recourse to refunds on any rent already paid while there was an illegal rental in the house. You have to ask, is it worth it?"

If you want to minimize risk, stop putting yourself in a position where your life might be destroyed: stop renting the illegal apartment. See what it would cost to turn it into a legal apartment if you still want to rent it out.

Gilbert Ross Jr · Answer

Manshi Mehta As a former insurance agent for State Farm I can tell you that there is little coverage for the basement. The tenant will not be able to get renter's insurance on an illegal apartment. The tenant will not have any coverage for there personal items.

Judy Parker · Answer

@Manshi M., my suggestion would be to stop leasing the illegal basement space.  If the local building department catches you, or the Tenant reports you to the authorities, it's going to cost you big time.  If a fire does, indeed, occur, and there is loss of life, you are going to be in major trouble.  The risk is not worth the minimal rent you are getting for the illegal basement space.  Just my two cents worth.....

Colleen F. · Answer

For basements they cover very little.  If you flood and have flood insurance they would cover collapsed foundation (personal experience) and some appliances/mechanicals but contents would be minimal coverage.  For non-floods I am not sure what they would pay, I assume fire damage if it occurred.  Liability wise if you have an illegal apartment in the basement particularly if you do not have egress windows I would say you are running a liability risk.

Account Closed · Answer

Manshi - seems like your question is unanswered in this forum.

What you're asking is: God forbid there's a fire in the property and one or more of the two legal units is damaged, will the insurance company deny the claim due to the fact that there is an illegal basement apartment in the property.

I'm in the same boat as you, and I'm wondering if you were able to find the answer through your research.

Jon Holdman · Answer

If the tenant causes a fire (tenants burnt my great grandma's house to the ground) the insurance may very well not pay.  Get out your policy and read it. That's the little booklet printed on thin paper the insurance company sends you.  See what their exclusions are.  They are outlined in detail.  Read it with the mindset of an insurance adjuster who is trying to use that policy to deny your claim, not with the mindset of trying just justify paying a claim.

Manshi M. · Answer

Got it. I am okay with them not replacing the basement unit. Will they replace the other units (which are legally bult and rented)?

Colleen F. · Answer

They won 't  pay to replace the apartment if they are anything like the flood people.   It is not legally in the structure so it doesn't exist.   If you  have insured a 2 bedroom two bath home they won't pay for an extra apartment that isn't on the tax rolls and not on your policy.  If I put in an extra bath and I have three bedrooms one bath insured they aren't paying for the extra second bath.  Will they pay at all - read the policy, what invalidates it?  Maybe they will pay but they may also cancel your insurance.

Manshi M. · Answer

I understand that. I just want to understand my risks besides liability. Can anyone throw some light on whether insurance company pays for the property damage (with basement rented) if there is a fire or not?

Manshi M. · Answer

I have liability insurance that covers me upto $2M. My concern is whether the insurance company will cover me for fire insurance (if that happens).

Illegal Basement - Will my insurance company cover any damages?

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