By Clark Sanchez, State Farm Insurance
Most landlord insurance policies include some type of “Loss Of Rents” coverage. Now would probably be a good time to review this coverage and when and how it applies.
The standard loss of rents coverage is triggered by a valid insurance claim that makes it impossible or very inconvenient for a tenant to live in the property. Since Arizona is not home to frequent tornadoes or hurricanes, by far the most common insurance claim that triggers ‘loss of rents’ coverage, is a bad fire. When damage, smoke smell, and/or lack of utilities makes the property un-livable, ‘loss of rents’ will usually become a part of the claims settlement.
Landlords are always interested in knowing how much and how long. The amount of money that is paid for ‘loss of rents’ is based upon the owner’s Federal Income Tax Return and the applicable lease. Rental property owners who cheat on their taxes, and do not report the full amount of rent being collected, will only collect what they have historically reported. Amended tax returns, to ‘correct an oversight’, are usually not accepted. (Everyone who pays their fair share of taxes, can applaud here.)
The length of time that the landlord/owner will receive the ‘loss of rents’ payments is based upon the reasonable amount of time that repairs are expected to take. Owners who decide to make modifications or improvements with the repairs…at their own expense… need to understand that ‘loss of rents’ is not extended just because they need additional time to have plans prepared and approved for the changes they are making. The maximum for all ‘Loss of Rents’ payments varies by insurance company, but is typically a time period, such as 12 months, or a dollar amount, such as 20% of the insured ‘Dwelling’ amount.
‘Loss of rents’ does not apply when a tenant has difficulty or hardship keeping current on their rent payments. ‘Loss of rents’ does not make a ‘bad check’ a good one. ‘Loss of rents’ does not apply when the property is available, but vacant (the insurance company does not guarantee the owner will always have 100% occupancy.) Lastly, ‘loss of rents’ does not apply when the government modifies the landlord-tenant relationship by extending the amount of time allowable for rent payments to be made.
Keep in mind that most business and commerce in the USA is built on a system where risk takers are rewarded for taking that risk. Risk management teaches that you may have the option to transfer certain risk, such as when you purchase an insurance policy. But not every circumstance offers the opportunity to easily transfer risk, and inevitably you will have situations where you must assume certain risk yourself. In part, the U.S. Tax Code rewards risk takers by allowing them to take a tax deduction on their income tax return, when they engage in certain business ventures, including being a landlord with rental property.
CLARK SANCHEZ has been an Arizona insurance agent for 40 years. Also, a Vendor- Affiliate with AZREIA for over 16 years. You can contact Clark if you have any insurance related questions at firstname.lastname@example.org or (602) 803-2179.