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Biohazard Insurance on Rental Property Protects Owners, Tenants

The call I recently received from a distraught client dealt with a disturbing question I’d never heard in all my 45 years of owning and selling real estate and my 35 years in financial planning. “Rick, my tenant committed suicide in my rental house. He shot himself. It was such a shock. And then the biohazard clean up and repairs cost $30,000. My insurance only paid $10,000. What can I do to cover the difference?”

This client, who does not earn a high income, saved for several years to buy her first rental. One year ago she proudly put $30,000 down and borrowed $120,000 to buy a two-bedroom home for $150,000. Like most rentals financed with a loan, excess cash flow is nonexistent; her expenses and loan payment basically equal the rent. Her intention was to eventually have a paid-off rental property to help provide her retirement income.

We explored some options. She could borrow $20,000 with a five-year loan and monthly payments of $377. This would definitely mean reducing her lifestyle. She could sell the house and probably net enough from the proceeds to pay the difference. This would seriously impact her future retirement income goal. She could consider asking the estate of the deceased to cover the costs. The phone went silent as she pondered this idea. “That would be hard.”

The thought of who is legally liable for the damages of such a terrible tragedy is not a pleasant subject to ponder. Compared to the emotional costs for the victim’s loved ones, of course, the financial costs are insignificant. Yet they still must be dealt with.

In a home where a violent death occurs or a natural death goes undiscovered for some time, the owner of the property faces significant biohazard cleanup costs that must be done by specialists. In addition, repairs and replacement furnishings are often required.

Bringing an action against someone’s estate to recover such costs is a choice anyone would be reluctant to make. The estate may not have the means to pay such costs. Even if funds were available, asking for payment could seem cruel, callous, and heartless.

As my daughter said to me, “Put yourself in the shoes of that man’s family for a moment. Imagine the expenses you already have to take care of: the funeral, a casket, a headstone, a cemetery plot, and other duties that you have to carry out while you’re still grieving—only to be told you need to cough up an additional $20,000 dollars on top of it all.”

Certainly, my client is in an unenviable lose/lose position. Through no fault of her own, she either suffers a significant financial setback or faces the possibility of filing a lawsuit against the estate of the deceased.

Sadly, all of this could have been avoided if my client had purchased the proper insurance. She thought she had, because her policy had a rider covering damages from a crime scene and biohazard clean-up. Unfortunately, the coverage capped at $10,000.

I asked Amy Borella, a property casualty agent with Great Western Insurance, what the industry standard is for this kind of coverage. She said, “Every policy can have different endorsements and every company can cover claims differently. There is no standard for how a claim like this would be handled.”

It was a relief to learn that my homeowners and rental policies did have coverage, with no cap. I strongly suggest, if you own rental property, to be sure the same is true for your policies. In case a tragedy should happen, adequate insurance provides protection for both you and your tenants.

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