Lost rental income: use reserves or insurance?

Question

Good afternoon, BP.

When you start out and buy that first duplex (or other multi-family property), would you rather A) save enough in your reserves that you're covered for at least 6-months' worth of lost rent? or B) use an insurance company that covers for lost rent and let the tenant pay for it?

Anthony Wick · Answer

@Nicholas Jose

I have lost rent insurance, but that is for something like a fire. It doesn’t cover basic vacancy.

Nicholas Jose · Answer

So reserves are a must. Got it. But I still need insurance. I'm doing some digging here at BP and found some prospective companies: All-State and Liberty Mutual are some potential candidates. But I could probably hire an insurance broker to help me find the best deals and save hundreds of dollars in the future.

Rich Somers · Answer

Always enter every deal with 6 months of reserves, it's just good business practice.  In addition: $250-$300 per unit per year should be allocated to fund your reserve account-look at it as an additional expense.

David M Trapani · Answer

Reserves are a must. 6 months is best, or more if possible.

The insurance companies are denying claims for "business interruption" or lost rents.They fear opening of the floodgates and an avalanche of cases, if they find coverage. Of course they're denying coverage.

Most people won't make claims. Others who make claims are being denied. Still far fewer will press their claims. That is where we may see coverage found or settlements (confidential) made.

So, the issue is in flux. Some policies have a virus exclusion. In those instances, coverage will be very difficult, if not impossible.

Next, if no virus exclusion, the carriers will claim there's no "physical damage", hence no coverage. This argument may not ultimately carry the day. There's some helpful  language on this point in the recent case of Devito v. Pennsylvania, Wolf (currently on appeal to the US Sup Ct - Justice Alito ordered the State of Pennsylvania to file their brief by 12:00 Noon ET today - Incidentally Devito may have National implications regarding efficacy of Governors denying Constitutional rights during the pandemic).

In some jurisdictions, like CA there is excellent authority favoring policyholders. For example, any ambiguities in a policy or its language are strictly construed against the carrier and in favor of coverage. Also, if there is potential (arguable) coverage under a policy, some courts will find for coverage.

Some states have strict Bad Faith insurance laws. The carrier must act with good faith and fair dealing. If they fail to do so, or make other mistakes or unreasonable delays in claims handling, they may be liable in damages, whether there's coverage for the underlying claim or not.

More than one way to skin a cat.

There's also good case law out there suggesting coverage: See - Authorities & article below.

As the old saw goes, often the squeaky wheel gets the grease. Hang in there all! We will get through this soon!

**********************

131 Fed.Appx. 823 (3d Cir. 2005) (coverage for bacterial contamination of a house);

,

311 F.3d 226 (3d Cir. 2002) (“Where the presence of large quantities of

asbestos in the air of a building is such as to make the structure

uninhabitable and unusable, there has been a distinct loss to its

owner.”);

2014 WL 6675934 (D.N.J. 2014) (holding ammonia discharge at packaging

facility constituted physical damage triggering business interruption

coverage even absent structural damage because it “physically

transformed the air…so that it contained an unsafe amount of

ammonia…[and] rendered the facility unfit for occupancy”).

See also:

https://www.law360.com/article...

Theresa Harris · Answer

Talk to your insurance provider.  Where I am homeowners insurance is for your home and covers your contents.  Insurance for rental properties is different as it doesn't cover contents (aside from appliances if they are yours). For me, insurance for rentals is a lot less expensive.

Bill C. · Answer

@Nicholas Jose

Hi Nicholas,

Good question. I looked this question up a month ago and looked at our commercial insurance agreement, pandemics/disruptions from viruses are specifically excluded. Regular

vacancies are obviously never included in such insurance agreements, so overall, reserves would be the best bet.

Nicholas Jose · Answer

You're correct. My line of thinking when I stared this thread was whether or not there was insurance that covered lost rent *from vacancies. Now I understand that there isn't and I must have reserves ready to cover the months where I don't have a tenant in a unit. However, I still do need Landlord Insurance. Or homeowner's insurance. Still debating on which one to use as my first property.

Theresa Harris · Answer

I don't know of any insurance that covers that  except in case of fire or something similar.  If there was, there would be a catch, so I'd opt for reserves.

Steven Ko · Answer

Your basically asking if you should depend on yourself or others.  Depend on yourself man!!!

Nicholas Jose · Answer

Didn't know lost rental income didn't apply to vacancies or pandemics. Thanks for the clarification, guys.

Lost rental income: use reserves or insurance?

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