Managing a property is one of the most multi-faceted jobs anyone can ever do. In a single day in the life of a property manager, they may be called upon to solve some problems with the home’s physical structures, find tenants for a vacant apartment or pacify a disgruntled tenant.
Property managers are responsible for meeting the needs of tenants, the expectations of owners, and the requirements of the law. But these are not the only challenges they have to deal with; they also live with the constant risk of lawsuits from tenants or random strangers.
Given the highly litigious nature of society, there is a real possibility that at some point you will be sued. You could be sued by a tenant, former tenant, prospective tenant, or anyone who has suffered some real or imagined injury as a result of your actions. What can you do to protect your business from these attacks?
As with all things in managing a rental property, the best approaches are preemptive. The most effective and affordable option for dealing with this issue is to be ready for the events before they happen. How do you do that?
How to protect your property management business
The first thing to know is that conflicts will happen. They may occur with the owner of a property you are managing or a tenant in the rental. As a first step to prevent, minimize or resolve conflicts, you must use management contracts.
Management contracts are vital because:
- They let you identify and validate the terms of your agreement with a property owner.
- Without a management contract in place, there will be ambiguity in the event of disputes.
- A well-written contract lowers the risk of disagreements because it creates clarity.
- When conflicts arise, it’s easier for the insurer to reach a verdict if there is a contract.
- The management contract contains an indemnification clause to protect you.
What risks are you exposed to as a property manager?
The type of property you manage determines your liability exposure. Your exposure level will be different if you manage vacation rentals compared to someone who manages multifamily rentals or a condo association.
Exposure usually comes in two forms:
- Property managers may be exposed to liability as a result of their negligence.
- They may be named along with the property owner in a lawsuit.
In most cases where there is a lawsuit against the owner, you can expect the lawyers to drag the property manager into the matter.
How can property managers protect themselves?
The first way to protect your business is with a management contract prepared by an experienced attorney. The second is to have the right kinds of insurance; you must have two types of insurance policies as a property manager. These are:
- General liability insurance
- Errors and omissions insurance
General liability insurance
This is designed to protect you from exposures that come from the day-to-day activities of your business. It covers issues like employee misconduct and consumer liability. General liability insurance will typically include the following:
- Bodily injury: Such as when someone – tenants, customers, visitors, maintenance workers, or delivery person – is injured on your property.
- Property damage: For those times when someone’s property is damaged on the property.
Errors and omissions insurance
This provides coverage for exposures specific to real estate and property management. There is a broad swathe of liabilities included under this policy. An errors and omissions (E&O) policy covers exposure to liabilities like:
- Failure to dispose of lead-based paint in a property, the presence of radon in the rental, or anything a tenant may deem to threaten their wellbeing.
- Litigation citing fair housing violations. These exposures come from running credit checks and deciding who will rent a property. Property managers may face claims of discrimination or wrongful eviction.
- Claims of mismanagement by the owner, such as when an owner thinks the manager’s actions have diminished the property’s value. Claims could also be about a breach of contract or neglect of fiduciary duties.
- Additional risks exist for managers of condo associations involved in collecting fees or enforcing the applicable laws for the organization. These property managers face higher levels of liability exposure because of their broader fiduciary duties.
Every single day, thousands of lawsuits are brought against property managers. This is easily the number one reason why property management businesses go bankrupt. But the real issue is not the lawsuits, but the fact that those property managers are not adequately insured.
Without the right insurance, the legal fees and claims that follow a lawsuit could easily wipe out a property management business. Do not make the mistake of thinking this cannot happen to you. That’s what the owners of those now-bankrupt property management companies thought too.
Protecting yourself doesn’t cost a lot; get the right insurance today.
