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Paying renters liability insurance can be tricky for tenants

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Renters may cringe each year when they open their mailbox to see how much more their real estate providers are charging them for rent. The lucky ones get two-year agreements so there's a little bit of room to be comfortable. But when real estate companies, such as Urban Equities in Chicago, set new rules in 2014 for tenants that a $100,000 rental liability insurance policy is required, tenants have to make a frustrating decision: Is it worth renewing the lease?

In the case of a worst-case scenario, renters insurance covers a tenant's personal property (clothes, jewelry, furniture, technology equipment, etc.). But renters liability insurance covers bigger damage, such as fire, water, sewer and/or at-fault property damage. For a renter who has never been required to pay rental liability insurance, it may look like the real estate company is trying to get over on them. Tenants don't own the property so why should they be treated the way owners are?

To answer this in the simplest terms, imagine letting someone borrow a car. They wreck it, and then come back to the owner and say, "That car isn't in my name. Why should I have to pay for the damages I created?"

Or, say that same car accident happened to the owner with someone who is uninsured. If a car owner has property damage insurance and medical damage insurance for her own car, and insurance for physical and medical damage for someone else's car who is uninsured, what is the purpose of the other car owner getting insurance? Sounds like other drivers will always have the uninsured covered, right?

Not exactly. From all the hoopla in the past few years about the Affordable Care Act, insurance customers know that in order for the system to work effectively, everyone has to participate. And those who choose to bail on health (and rental, home or automobile insurance) end up being a financial burden on those who are covered.

Car owners without insurance still risk the $500 fine for being caught without insurance in Chicago. And if the accident is their fault, they may still get stuck with all of the medical and property damage expenses. When someone gets into a car, there's no promise that a car accident will never be their fault.

Same goes for tenants. According to a post on ChicagoEviction.com, "No Illinois law requires landlords to have insurance, (although any landlord without insurance is probably crazy)." But let's just assume that the landlord has insurance. The owner of a building has insurance for the building, but actions within each apartment may be the responsibility of the tenant unless there are signs of neglect.

A tenant's guest cuts herself on a knife. A party inside the apartment results in a fight and someone breaks a window. A tenant's candle falls off of a coffee table and burns the carpet. One evicted tenant gets mad at the real estate owner, turns the water in the bathtub on and floods the apartment below. These are all tenant-related damage incidents, and the real estate company may not cover it. That's when renter's liability insurance comes in.

According to Chicago's Residential Landlord and Tenant Ordinance's Municipal Code Chapter 5-12-170, if a fire damages the unit to an extent that it is in material noncompliance with the Code and the tenant, tenant's family or guests are not responsible for the fire or accident. The tenant may: 1) provide written notice within 14 days about moving out; 2) try to negotiate a rent reduction due to a portion of the unit that has been damaged and still stay in the same location; 3) choose to stay but notify the landlord if repairs are not carried out within 14 days. If the landlord still isn't making reasonable repairs within that time, the tenant can legally move.

Of course if there's damage to an apartment and it's the cause of another tenant, the tenant with damage could always try suing the guilty tenant. But if the guilty party moves out, the tenant with damage will have to go through their real estate company to track down the new address for the guilty tenant. That cat-and-mouse game can last far longer than it would take to get the damage repaired and get a reimbursement later.

In the case of Urban Equities, tenants are required to send a copy of proof that they have $100,000 rental liability policy. And if tenants choose not to get it, their leasing agreement also states that Urban Equities has the right to purchase rental liability insurance on their behalf and then bill the tenant for the costs. In the long run, it's probably a better idea for the tenant to control the pricing and the rental location.

But for those tenants who try to get over on real estate companies, the next question may be: "What if I send in proof and then cancel my rental liability insurance afterwards?" When signing any legal contract, all of the terms are agreed to. And although it may be unlikely that a real estate company will contact each tenant's insurance company to verify that the rental liability insurance is still active, if the tenant takes that risk then the tenant should be prepared for the ramifications (extra charges for months unpaid, eviction, etc.).

For a tenant who can barely afford the rent increase or parking increase, adding on $10 to $20 for renters insurance and/or renters liability insurance is a big deal. But the price of moving vans or trucks, finding a new apartment, gas expenses and making sure to have a possible security deposit is probably more than the guesstimated $120 to $240 new annual expense.

There is no right or wrong answer on this. Some tenants may choose to decline the ultimatum to get rental liability insurance. The real estate company who makes renters liability insurance mandatory is clearly willing to take the risk of losing long-term renters and short-term renters. And a tenant can always shop around for real estate companies who don't require insurance. But there are no promises for renters that their new real estate company may not tack on the same rate the next year or years later. And even if they don't, no one can foresee future accidents in their own living domain or control the behavior of other tenants while uninsured. If they could, there'd be no such word as "accidents."

Source: This information was compiled by the Chicago Personal Finance Examiner after speaking at length with lawyers from NOLO and GEICO insurance company, in addition to an Urban Equities leasing agreement. For official legal advice, contact a certified lawyer directly.

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