In this second of our three-part series on risk mitigation for property managers, we address how to avoid habitability claims and why property insurance is not enough protection.
$1.6 million. The amount a California court awarded one family for a habitability claim.
$2 million. The amount a superior court issued tenants for breach of implied warranty of habitability.
233%. The increased payout amount of jury awards and settlements in many U.S. jurisdictions for habitability claims. In recent years, awards rose from around $15,000 per plaintiff to north of $50,000.
Are your per-home margins positioned to incur a loss of this size? Probably not. Yet habitability claims filed by a tenant or group of tenants based on substandard living conditions present one of the greatest risks to property managers and owners. Add in the perceived “deep pockets” of institutional investors and corporate property management companies and habitability awards keep climbing.
These claims are not just growing in size. Thanks to the habitability claim’s power to protect a renter from paying rent or being evicted, claim frequency has also increased. Not all habitability claims are legitimate, but they are all costly.
Does your company have a sound habitability risk mitigation strategy in place? After reading this article, the answer might surprise you.
What Is an Implied Warranty of Habitability?
Every U.S. state but Arkansas has an implied warranty of habitability. This is a warranty applied to residential leases that requires landlords to keep their property “habitable,” even if the lease does not specifically require they make repairs. A warranty of habitability guarantees the right of a tenant to live in a safe and comfortable home.
Every state’s implied warranty of habitability differs slightly. As a general rule, the landlord or property manager is responsible for keeping the electrical, plumbing, sanitary, heating, ventilating, and air conditioning systems operational.
What Violates the Warranty of Habitability?
A landlord or property manager breaches the implied warranty of habitability when their inattention or negligence creates a problem that causes a reasonable concern for a tenant’s health or safety. The amount of time an owner or property manager has to resolve the issue varies by state but usually is around 30 days. However, serious issues such as lack of heat or running water must be addressed in three to seven days.
What happens when repairs are not completed on time also varies by state. Tenant remedies include monetary damages, early lease termination, court-appointed third parties for repairs, and landlord fines—all on the dime of the owner or property manager. In Connecticut, a tenant can withhold rent until a repair is made. In California, tenants can make the repair and then deduct the cost from their rent.
The worst possible remedy for habitability claims is a court decision. Habitability claims are difficult to defend because of vague regulations, jury bias, and the subjectiveness of tenant suffering. In addition to the repair, tenants can request punitive damages and attorney’s fees beyond any statutory penalties. That generally leaves landlords and property managers with big bills to pay.
Property Insurance to the Rescue?
Property insurance offers little to no help in habitability claims. Policies generally cover resulting damages, not the cause of the habitability issue itself. Let’s say a plumbing issue caused raw sewage to back up into a home. Insurance might pay for the sewage cleanup and associated damages but likely would not cover repairs to the plumbing system.
Other liability policies that address habitability claims have exclusions for jury awards, punitive damages, and attorney’s fees. That creates a significant risk for property owners and managers.
When it comes to habitability, it’s important to check your policy closely. Many insurers exclude habitability claims completely because they represent an “actual or alleged violation of any federal, state or local law, code regulation, ordinance or rule relating to habitability of any premises.” Notice the “alleged” language there.
Even when property insurance applies to damages, frequent or severe habitability claims still hurt financially. An insurance provider may choose to not renew the policy, create future habitability exclusions, push up premiums, or lower coverage. High claims also affect lender and investor confidence and can result in a loss of funds to fuel business growth.
Does a Rental Property Warranty Address the Risk?
Rental property warranties fill in the biggest gap that property insurance creates. PWSC’s HomePRO covers every major system and appliance within a home that falls under the habitability definition. This includes electrical, plumbing, HVAC, water heaters, kitchen appliances, and more.
HomePRO not only covers the cost of many of these repairs, PWSC’s expert team also manages the work orders through to completion. Renters can contact PWSC directly to submit a claim. We source the vendor through our network of highly qualified, licensed, and insured vendors. Our average time to complete a work order is about one-third the time of the industry average!
As mentioned above, not every habitability claim is valid. Sometimes renters tie habitability to less critical repairs to avoid eviction or when looking for financial gain. PWSC provides an additional layer of protection against those illegitimate claims by giving renters a direct, no-cost resource to call for repairs, removing the opportunity to accuse the property manager of ignoring the issue. PWSC also ensures legitimate issues get resolved quickly, accurately, and away from the courtroom. All this with a simple annual fee and no deductible.
PWSC’s HomePRO Rental Property Protection stands as the industry’s only warranty specifically designed for property managers and institutional investors. Other home warranties exclude rental homes or fall short when it comes to service for large property management or investment groups. We designed coverage specifically for them.
Don’t let habitability claims ruin your reputation or return on investment. Add HomePRO as a powerful risk management strategy to keep tenants safe, comfortable, and happy in every one of your homes.