INSURANCE: An Empty Pool Could Put a Big Hole in Your Finances

empty-poolIf you’re thinking about renting out your home, waiting for housing prices to further rebound off their recent lows, you might have hit on a winning financial strategy.

But before you put on your landlord’s hat, you should know that renting out your home involves more than just finding good tenants who will pay their rent on time and treat your property as their own. You need to worry about liability.

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For example, if you own a pool that is currently empty, you need to fill it with water; otherwise, no standard insurance carrier is going to write you a policy.

“The one insurance requirement is that your pool be filled with water,” said Barbara Larkin, owner of the Allstate insurance agency in La Verne. “If it’s an empty pool, it’s a very serious liability hazard, and they [preferred insurance carriers] won’t even touch that.”

The owner of a home with an empty pool might be able to obtain structural coverage through the California Fair Plan, insuring the actual home (structure) against damage from fire, wind, storm, hail or vandalism. No liability coverage will be offered, however.

Oddly, lenders usually don’t require that their borrowers carry liability insurance.

“They don’t care about your liability, they don’t care about your personal belongings,” Larkin said. “They only care about the house, so the Fair Plan works as far as satisfying a lender.

“The Fair Plan is a last resort; it is not a first choice,” Larkin added. “It would only be an option if someone had an empty pool because they’re not going to get coverage from a preferred carrier.”

If the owner rents his or her home with a filled pool, Larkin recommends a Landlord Package Policy, which provides not only liability coverage and structural coverage, but also a host of other insurance protections.

For example, the policy covers the landlord in the event he or she is sued by a tenant for unlawful eviction. It also might cover the policy holder against injury claims allegedly caused by the landlord’s negligence (Perhaps, the tenant fell and broke his hip, claiming he tripped on a curled lip of linoleum tile that was coming up in the kitchen.)

As part of any rental agreement, Larkin advised that landlords insist that their tenants take out a renter’s policy, providing protection against liability claims or the loss of personal belongings.

“Let’s say the tenant holds a party at their house, and somebody slips and falls, then the tenant is likely to be served and the owner of the property is likely to be drawn in [to the legal suit for damages], as well,” Larkin said.

Typically, maximum liability coverage is $1 million, but in the event of a drowning or some other horrific accident, that amount of coverage might not be enough.

To protect against such a scenario, many landlords will also carry an umbrella policy, which shields their assets and future income more broadly than their separate home, auto, life and other insurance policies.

“If the $1 million on the landlord policy was exceeded, because of a catastrophe,” Larkin said, “then the umbrella would kick in.”

What landlords don’t want to happen is to kick themselves for having insufficient insurance coverage when they face or file a claim.

Lately, Larkin has been writing several “vandalism” policies for landlords. Under such a policy for which an extra premium is usually required, if tenants tear up their rented home after receiving an eviction notice, the owner would be protected financially.

“Some people say, ‘I don’t need it. I’ve known my tenants for 20 years and I love ‘em, so I don’t want to pay the extra money,’ Larkin said.

Ultimately, as a new landlord, you should discuss with your insurance agent exactly how much insurance coverage you feel you need to protect your assets.

As housing prices continue higher, you may decide to rent out your home for another year or two before selling. This could be a hot strategy. Just don’t get burned by being under-insured!