Imagine a Monday filled with worse-than-normal traffic, spilled coffee and another meeting that could have been an email. Now, let’s top it off with a lawsuit filed against your business! How could this be? We do everything by the book! There is no way my company will be liable for this. These are all common responses for property managers who live that awful Monday morning reality. What happens next is a defining moment for any company.
You are prepared. You have a trusted insurance agent who helped develop a comprehensive risk transfer program built for your needs. As a team, you and your insurance company work through this – together.
You are overwhelmed with attorney’s fees, consumed by a timely defense process, worried for the financial stability of your business, among other demanding requirements. You work through this – alone.
Whether you are a property manager who would face this scenario alongside an insurance partner or navigate these waters alone, you are exposed to specific risks and will be held liable.
Understanding Your Risks as a Property Management Company
Do your homework.
We have all heard that phrase too many times to count, and I get it. Business is busy. Life is busy. We spend so many busy days, months and even years contributing to business development and chasing company growth. That doesn’t leave much time for the “homework” associated with your company’s risk analysis. (This is when a licensed insurance agent with industry expertise can really come in handy!)
Before you dive into your risk analysis “homework”, let’s list a few of the most common errors and omissions liabilities among property managers.
– Pollution – Property Management E&O policies are available with pollution coverage sub-limits. These sub-limits would be valuable in the event that a property manager fails to disclose their knowledge of some kind of contaminant on the rented property.
– Owned Property – If this applies or will apply to your business within the policy period, be intentional about purchasing an E&O policy that allows coverage for properties where 100% ownership interest in properties managed and/or leased is included. It is a common practice among commercial property management companies. Claims often arise from the conflict of interest caused by their ownership in the property and then subsequent services rendered to their owned property.
– LockBox Coverage – Coverage is available for third party property damage claims due to improper maintenance or use of lock boxes.
– Owner Representation Services – Property Managers can sometimes provide construction consulting services for projects occurring at properties they manage. This can be part of the property management service provided to their property owner clients. Construction services rendered often include site/progress inspections, bid selection, scheduling, preparing punch lists and more. Companies who provide these services for their clients have a significant exposure. E&O policies with owner representation coverage are available, so be intentional about purchasing one that covers your exposure fully.
– Loss of Income – Property upkeep is an important responsibility of property management companies that can have financial consequences if not managed properly. If a property is not properly maintained, then tenant satisfaction and overall building value will decline over time. At a certain point, rent will need to be lowered in order to keep tenants in the space. Property owners are losing money in this scenario due to the negligence of the property management company. In this case, a suit could be brought against you as the property manager for the loss of income.
– Tenant Discrimination & Harassment – Property managers have a laundry list of ways to find themselves in a discrimination or harassment lawsuit. When purchasing an E&O insurance policy, be mindful of coverage for a variety of tenant discrimination claims. These claims can be brought by current tenants or even potential tenants that allege you did not rent a property to them based on a discriminatory reason. If you have one tenant, you have exposure for tenant discrimination.
Federal laws prohibit discrimination of a tenant based on race, religion, familiar status, age, disability, national origin, or sex. A few of these federal laws include the Fair Employment and Housing Act (FEHA), the Civil Rights Acts, the American with Disabilities Act (ADA), and the Rehabilitation Act of 1973. Sometimes to consider highlighting in your own policies and procedures is handicapped parking and accessible restroom availability. These are the most common ADA violations for commercial properties. (ADA.gov)
Based on the U.S. Department of Housing and Urban Development (HUD), tenant harassment is another illegal action that can be seen in many forms. Examples include sexual harassment, verbally or physically threatening a tenant, intimidation tactics in efforts to make the tenant move and the list goes on. Property managers can be held liable when an applicant, resident or tenant are harassed by any of their employees, agents, or contractors.
As the main enforcer, HUD oversees programs such as the Fair Housing Act which governs most of the housing market and prohibits discrimination based on race, color, national origin, religion, sex, familial status or handicap when renting, selling, or applying for a mortgage. All of these areas of discrimination highlighted by the FHA require attention within your risk management plan. E&O policies do not always include coverage for specific regulatory violations, so you must be attentive with your policy purchase and work together with an agent who can provide what you need.
HUD investigates any suspicious action that could be the result of discrimination. Per the (NFHA) National Fair Housing Alliance’s 2017 Fair Housing Trends Report, you may be surprised to know that 55% of all fair housing complaints filed are based on one specific type of discrimination claim – disability. This should be a wakeup call for those without an effective, non-discrimination policy. In addition to having a non-discrimination policy, employees should be trained to implement it before it can be effective.
Federal agencies may send a mystery tenant to complete a housing application at your establishment. This mystery tenant will report back to the federal agency with any discriminatory behavior experienced, resulting in fines or other regulatory action. Certain insurance policies will provide coverage for these mystery tenants and the resulting damages.
Another hot topic in tenant discrimination is the Fair Housing Act’s stance on blanket management policies for refusing to rent to anyone with a criminal record. Sanctions have been used in recent cases based on the denial of a rental application for this reason alone. Property managers should alter blanket policies to provide additional consideration, such as identification of specific criminal charges that will be grounds for denial. These charges can often include manufacturing of meth amphetamine due to severe damages which the property manager would assess if the renter repeated the criminal activity. There are serious dangers imposed by hazardous chemicals, deadly vapors, and fine dust – all produced by the production of meth. These are contaminants that cause layers of damage to the interior and exterior of a rental property. Contamination can affect other tenants, and there will be an extensive downtime for hazardous material cleanup by certified professionals. This poses a lengthy business interruption for preparation of a new tenant. Barring sex offenders and people with assault convictions can also be justified. Revise those policies and educate your staff!
There are consequences when property managers are in violation of HUD regulations. Civil and/or criminal penalties can be enforced on a variety of levels based on the violation.
– Wrongful Eviction – Insurance coverage is available to protect property managers from allegations of wrongful eviction, even if you haven’t done anything wrong. This is a common claim filed against property managers, so check your coverage.
Of all the responsibilities of a property managers, evictions sound like the least amount of fun. If a property manager does not follow the proper eviction process, a wrongful eviction claim is a likely result.
Wrongful eviction should be a hot topic for the residential property managers of Alabama – especially with the recent amendment to the Alabama Uniform Residential Landlord Tenant Act. Obligations to residential tenants of Alabama were changed, effective June 1, 2018. There were several changes made by the amendments, but one that caused important changes to leases and rental agreements state-wide can directly apply to improper termination of lease. Per the amendments to § 35-9A-421, the requirement for notice of terminating a lease due to failure to pay rent is seven (7) business days – different from the seven (7) calendar days previously required. Continue your research on how these amendments changed Alabama law.
Staying up to date with news affecting your business and the real estate industry should be a priority.
– Cyber Liability – Many property managers may think of their cyber liability exposures as unlikely or less scary than other claim scenarios. This is far from the truth.
Are you responsible if you don’t actually store the data? What if you hire a third party company to do that cyber stuff for you? The answer is YES – you are still liable. Your clients and tenants trust your company with their data – not some company they have never heard of who happens to be on your payroll.
So many of the major data breaches in the news are related to retail establishments or the healthcare industry, which may have given property managers a false sense of security. In reality, a cyber attack can happen to anyone. Any organization with records of Personally Identifiable Information (PII) should understand their legal obligations in protecting that data and requirements in response to an incident.
Of course, companies with more PII have more to lose in the event of a cyber attack. The rental applications, banking information, credit history, among other personal information collected by property managers could be a gold mine for a hacker and a nightmare for a tenant.
In addition to the wide variety of personal information collected by property managers, the industry is booming which means business growth and more tenants who trust you with their information. After the housing crisis in 2008, home ownership was a scary and traumatizing event for a lot of families. As a result, the rental environment thrived with an increased number of renters. According to the Pew Research Center, the percentage of households currently renting their home is the highest since 1988. The movement to renting provided growth opportunities for property management companies, but that growth is accompanied with increased risk.
– Legal Responsibilities – Property managers should be hyper aware of the many federal and state laws applicable to their daily business transactions.
According to the Alabama Association of Realtors, the Alabama state law provides that landlords have certain responsibilities to tenants with the Landlord-Tenant Act. This Act obligates a landlord or property manager to ensure all leased premises are habitable and kept in good repair. These obligations bring risk exposure for losses due to negligence by property managers when providing these professional services. A previously discussed and common claim example is the loss of income based on the property manager’s negligence in keeping the property in good repair. The Landlord-Tenant Act directly speaks to the responsibility of this service provided by property managers.
Remember, federal laws are applicable to property management business too.
As discussed under Tenant Discrimination & Harassment, residential property managers are affected by the regulations of the US Department of Housing and Urban Development (HUD). This government agency’s mission is to provide assistance in community development and homeownership. This group also ensures everyone has access to fair and equal housing. HUD manages a number of federal housing programs in efforts to accomplish the department’s overarching goal of “expanding opportunity for all Americans.”
During the qualification process of a potential tenant, the property manager will create a responsibility under the Fair Credit Reporting Act (FCRA) if they choose to run a background check. The Federal Trade Commission enforces the FCRA, and there are specific requirements to meet before you can get a consumer report and after adverse action is taken because of that report. Using consumer reports to make tenant decisions is not an uncommon practice among property managers. Background checks are happening all the time by property managers, but they do not always educate their employees or fully understanding the liability assumed with each consumer report. Studying the article by Federal Trade Commission, Using Consumer Reports: What Landlords Need to Know, will be a great start for property managers to equip themselves with the necessary tools to comply with FCRA.
Unlike a grade school homework assignment, this activity doesn’t end after your company’s risks are identified. The job of risk analysis and management is an ongoing investment in the future of your business.
Managing Your Risks as a Property Management Company
Does your company have a real risk management strategy? You know – the kind of “real” that is written down, up to date, tried and true, and the staff is aware of its existence.
Proactive risk management strategies are the way to go in this business. Reactive behaviors will cost you way more money in the long run – not to mention the tiresome recovery that awaits any unprepared business after an incident.
Knowledge of the new, emerging risks for your business can help allow opportunities to be proactive in your risk management approach. Regardless of how busy you may be, staying current with the latest risks affecting your industry will be well worth your time. Many property managers utilize membership in professional associations to stay abreast ever-changing industry risks. Building Owners & Managers Association (BOMA) and the National Association of Residential Property Managers (NARPM) are examples of professional associations that could prove to be valuable resources.
Bottom line – your business has a multitude of risks that need to be addressed. Property management companies can effectively manage these risks by pairing a proactive risk management strategy and insurance solutions for coverages like Property Manager’s E&O, Tenant Discrimination, and Cyber Liability.
Property managers owe it to themselves to be prepared for any possible incident. So, prepare for that awful Monday when you learn a lawsuit has been filed. Insurance and Risk Management can bring so much peace to what may seem like the worst day your company has ever seen. If you have doubts in your current insurance policy or risk management plan, now is the time to act. Purchase a new policy or damage control the one you current have. Partner with an experienced insurance agent and work out a plan. Educating yourself on the severity and multitude of risks facing property managers can be a daunting task, but you will not regret the investment in your future. I urge you to ask yourself an important question. Should you risk it all?
Of course not.
Call us today at 334-273-7277 and one of our Risk Advisors would be happy to help ensure you have the proper coverage in place.