Will Your Property Insurance Protect You If You Rent to a Bad Tenant?

It took just 45 minutes for an Escondido, California home to burn to the ground. The home, valued between $250,000 and $300,000, was a rental unit that had been occupied for about four years by the same tenant. Although the home’s owner had more than enough property insurance to cover the loss, most insurance experts are saying the insurer probably will not reimburse for the loss. (If you’re a landlord, you may want to check the exclusions and limitations on your property insurance policy after you read this, and then maybe call your insurance agent.) If you need home insurance, please go to EINSRUANCE.com.

The home’s tenant, George Jakubec, is currently being held without bail for, among other things, possessing “destructive devices, making a destructive device and the unlawful possession of explosives.” That’s putting it mildly! Authorities claim Jakubec had the largest stockpile of homemade explosives ever found in one location in the United States.

San Diego County and California State officials deemed the place too dangerous to clean-up and, after declaring a state of emergency, obtained legal permission to destroy the home as a threat to public safety. On December 9, 2010, after evacuating the neighborhood, shutting down a stretch of the nearby freeway and carefully setting detonators, the home was deliberately blown up. And therein lies the rub for the home’s owner.

The owner is not protected by eminent domain laws that say a private property owner must be compensated if, for instant, the government decides to build a road through the center of your bedroom. But eminent domain doesn’t apply here because the detonation was a police action. If the home had blown up accidentally, it might have been covered under a standard homeowner’s policy or other property insurance. But this was a deliberate police action, undertaken in a declared state of emergency. Typically, property insurance excludes damages resulting from government action. However, if any of the surrounding homes had been damaged as a result of the intentional detonation, their own homeowner’s policies would generally be expected to cover the loss.

The owner is said to be in negotiations with the insurance company and it remains to be seen if he or she will ever see a penny in compensation. While you may never have a tenant from hell of Jakubec’s caliber, there are steps you can take to make sure you don’t become the unwitting victim of the lesser variety:

• Do thorough background checks to the extent allowed by law before you sign a rental agreement or lease. Call the references, do the credit check, call the employer.
• Consider a shorter-term lease (6 month vs.12) for a new tenant.
• Have any legal agreement between you and a tenant drawn up by an attorney or at minimum use a reputable do-it-yourself service.
• Understand your rights as a landlord as well as your tenant’s rights. Laws vary from state to state, so don’t assume, find out.
• Check with your insurance company before you rent or lease any residential property to be sure you have adequate coverage. Your personal homeowner’s policy is not sufficient.
• Don’t just rent it and forget it because the checks come on time. Do the regular property inspections allowed by law.
• If you have a problem tenant, seek professional advice for dealing with it.