Transcript: “Every investment incorporates an aspect of risk. And wise investors are always going to try and manage risk. Well, the first part of risk management is identifying the different risks. Once they’re identified, then you can think about ways to avoid them, transfer them, use insurance to cover the cost or reduce the risk in some ways. The category that a lot of investors miss is a whole aspect of premises liability. And you’re probably familiar with, might have heard somebody describe to you this aspect of you own a house, you have a yard, the neighbor’s kid walks across your yard without your permission and falls down and breaks their leg. And now you’ve got liability because it happened on your property. Well, the same aspect is true related to all the rental properties that you own.
And where you’ve got exposure is when you’re sending a contractor out to work on your property who does not have workers comp insurance. Because if that worker gets injured on your property, and I’m talking about a more serious injury, then the probability of you having to defend a premises liability lawsuit is really pretty high. It’s a simple thing. I just wanted the contractor to go out and clean out my gutters, but then he falls off the ladder and he breaks his neck. Or I just wanted her to go out and clean the unit between tenants, but then she fell down the stairs and broke her back.
You may think these things are pretty remote. In the same way, you’ve got car insurance, and I hope that you’ve got enough insurance so that if you’re the reason for the accident and if the other driver is injured, that you have enough insurance to protect you or defend the lawsuit or to pay for all of the medical bills in addition to the pain and suffering and all of these issues that come up with a ⁓ personal liability sort of event. Well, that’s what’s going on here have a contractor go out to the property who does not have work comp insurance, if they get seriously injured on the property and they can’t pay their bills, then you’re likely to face a premises liability lawsuit. Even if you’ve got insurance, well, most landlord policies start with a general liability cap of about $300,000. For a few dollars a year, you can raise that liability up to a million dollars. But if you really did have a contractor fall off a ladder and break their neck or back. Can you anticipate that the total claim is going to be above $1 million? And who’s going to be on the hook for the balance of it? So even if you just run out of money, you’re also losing that rental property as a part of this lawsuit. And if you own that rental property in your personal name, you’ve also exposed your own personal property, your own personal retirement account, your own personal savings. All of that is now at risk of a contractor getting seriously injured on your property. Well, like the car, you may think the risk of that is very low and you’re willing to take that risk. You’re willing to accept that risk from a risk management perspective. Well, bear in mind that workers comp insurance is very expensive. Years ago, before Excalibur adopted the aligned interest fee structure we have, we used to have a maintenance operation. And in those days, my maintenance
Employees cost me about 15 to 20 % of payroll. Meaning that if you’re trying to save money on maintenance and one of the ways you’re doing that is using this cheaper contractor who doesn’t have work comp insurance, they can be 15 to 20 % less than the insured contractor because of the cost of insurance. Now think about why it costs so much for that kind of insurance. Because people in the business of doing maintenance get injured a lot. They get injured seriously a lot. And so if that happens on one of your properties,
It could be a catastrophic event as far as you’re concerned financially. And the easiest way to transfer that risk is to make sure that all the vendors that you hire and send out to the property have work comp insurance. Our company makes sure that that isn’t the case because every time we sign up a new contractor, we have this memorandum of understanding that we make them sign to make sure that they comply with how we’re going to manage the property and the maintenance related to the property.
But we also get a copy of their what’s called a declaration page, the deck page from their insurance carrier to confirm that they not only have general liability insurance, but that they also have work comp insurance. And the expiration dates for those insurances, insurance coverages are in our system. And so they’re monitored. And as soon as that data is coming up, if a new policy has not been put in place, that vendor is not getting any more work until they can show us that they have insurance. Now you need to be careful about
When you talk to a vendor and you ask, are you insured, the typical vendor is going to say yes, and that vendor is referring to the fact that they have general liability coverage. That’s not work comp insurance. General liability insurance means that the contractor who is up on the ladder cleaning out your gutters, when that ladder fell and they fell, the ladder that went through the sliding glass door, the general liability insurance for the vendor is going to cover the replacement cost for that sliding glass door.
The personal injury that happened to the contractor that would have been protected under workers comp insurance. But if that contractor doesn’t have work comp insurance and now they’ve got huge medical bills they can’t pay, they have every incentive in the world to sue you for premises liability and you might have a real problem. So make sure that you have fully insured contractors. It’s worth paying the difference to make sure that you don’t lose everything as a result of somebody else getting injured seriously on your property.”