Why does my Chicago property management company require me to add them as additional insured?
This is a super common question we get from our potential clients, and we've found that most of the time there is a need for it. People are often confused about what additional insured status means for you and your property manager. Being a property manager comes with an inherent risk of being sued, as we are often in the middle of landlords and their tenants.
Let's dive first into what an additional insured is and isn't, and a few other terms that often get confused with it.
Adding additional insured to your insurance policies spreads your liability coverage to a third party. What this means is that if your property management company is named in a lawsuit after someone slips and falls at the building, the property management company can open a liability claim under your policy.
Why do property management companies in Chicago have potential liabilities for your property?
The truth is, we are the face of the property. One of the reasons to hire a property manager is to keep your identity hidden from the public and tenants because unfortunately, we live in a sue-first society in America. Let's give an example: lightning hits a tree, and the branch falls onto a car. The neighbor comes outside to see their new Benz is wrecked, quickly looks at your home, sees the property manager's sign, and calls their insurance or lawyer to file suit against your property manager. In this case, if we were listed as additional insured, your insurance policy would cover the claim, and there would be a unified defense to win the case between the property manager and the homeowner. If your management company was not listed as additional insured, it would look different. We would have to defend the case through our insurance, who would see the easiest path to victory as subrogating the loss to the homeowner. This means your insurance would now have to defend against our insurance as well as the neighbors, and financial losses would be more likely. Plus, at least with our property management agreement, you would then be responsible for any legal fees or insurance deductibles we would incur on the case. Adding your Chicago property management company to your insurance policies as an additional insured is a great risk management strategy for you and your management company, and will help keep legal expenses low.
A common misconception is that adding a property management company as additional insured will allow a property manager to be negligent. The theory is that if they get sued, they can just use your insurance to defend them. That is not how it works. The additional insured is only something that is allowed to be used when a lawsuit names the property manager where negligence on behalf of the management company is not the cause. If your management company was to file a claim and negligence was found, the loss would subrogate the claim back over to the management company's general liability policy. This is why it is vital also to make sure your management company is appropriately insured with general liability insurance, E&O (Errors & Omissions) insurance, and workers comp. These policies allow them to be properly covered to rent and handle maintenance on your rental property.
What does it cost?
A good insurance company that is willing to work with landlords shouldn't charge you anything to add someone as an additional insured. We are aware of a few insurance companies that, although they do work with some investors, oftentimes do not have an actual landlord insurance policy and thus cannot add your property manager as additional insured.
Some common terms are confused with an additional insured endorsement:
Additional interest or interested party: this is just so the insurance company has a note to send a postcard to the person listed if you cancel, or to send them an updated policy when it renews. It does not offer any insurance coverage to the named interest.
Loss payee: from time to time, we get new owners whose insurance agent adds us as loss payee. This is mind blowing to us. This kind of insurance addendum has them cut the check to us instead of you, if for example, your building was to burn down. As much as we are your business partners, you do not want the insurance to send your money to us. The actual use for this is for your mortgage company. This is so that you can't use the funds to go on vacation and not fix your home, leaving them without an asset to foreclose on if you stop paying.
Named insured: this is the actual policy holder; the person who can change policy and is responsible for the policy. This should always be you, the landlord.
Your homeowner's insurance policy doesn't cover your management company, and your management company's insurance doesn't cover you. Just because you list your property manager on your insurance does not mean they are properly insured. Please make sure your management company has proper insurance for themselves and that you are not working with a single agent that is not properly set up. They should have:
1. E&O insurance: this means if there is an error in something they told a tenant and you get sued, they are covered to have their insurance cover the claim.
2. General Liability: This allows them to work on your property, and if anything happens like they cut into a pipe and water gushes everywhere ruining the floor, GL insurance will cover the loss.
3. Workers comp: this insurance covers workers in case they are injured. When a property manager delivers a 5-day notice and a tenant attacks them, workers comp will cover the costs of the employee's injury and not you. Make sure they have it, and also make sure the people on your property are employees, not 1099 contractors, and that they have workers' comp.
Insurance premiums have been on the rise in Chicago, and legal costs are at an all-time high. Your insurance agent must be on top of your coverage so that you have adequate coverage and that they can align coverage with your property management contracts. If you're not sure if your scope of coverage is right for your investment, give Chicago's premier property management company a call to get a free review and make sure you have an insurance provider that is ready to provide if property damage or liability claims come your way.
