Smoke pouring from broken windows. Fire trucks in the parking lot. It’s frightening to experience a fire at your property. Even if no one’s hurt, the cost to repair the damage from a simple fire from a resident’s stove can easily top $50,000. And if the resident responsible for the fire doesn’t carry renter's insurance, the nightmare may just be beginning.

You might think your property insurance policy would cover the cost of damage to your apartment community. But insurance companies are getting tougher. Rising deductibles can often reach $25,000, or even $100,000.

“Property insurance companies don’t want to get into these attritional losses,” says Steven Sachs of the Willis Group, an insurance brokerage firm based in New York City.

Most apartment leases hold tenants responsible for the full cost of any damage they cause to their residence, whether they have renter's insurance or not. It can be difficult, if not impossible, however, for managers to collect on that obligation. After all, few renters have $50,000 or more sitting in their bank accounts. Managers can offer installment plans, true, but such an approach is often unrealistic.
“It’s difficult to create an installment plan that exceeds the lease term,” says Scott Woodward, risk manager for Dallas-based Trammell Crow Residential (TCR). If the resident moves out in the middle of the night, the property manager can obtain a lien, but the odds of ever collecting are slim: “One in 50,” he says.

Leading the Horse to Water
All this turmoil can be avoided if the resident has an insurance policy covering both the loss of his or her personal property and the damage to the building. Unfortunately, the landlord’s property insurance usually won’t cover damages caused by residents. Regulations also prevent property managers from buying insurance on behalf of renters and billing them for it.

Today, 84 percent of apartment companies say they require residents to buy renter's insurance, according to the National Multi Housing Council’s 2012 Apartment Cost Risk Survey. That’s up sharply from 62 percent in 2011. (Fifty-five leading apartment companies that among them operate more than a million apartment units responded to the 2012 survey.)

But the battle isn’t won yet. Of the respondents that said they require renter's insurance, 40 percent don’t require it at all of their properties. Managers at some communities worry that requiring prospective residents to pay an extra $10 to $15 a month in insurance may drive them to the competition.

Many property managers have tried to gain more control by partnering with companies that provide insurance to their residents. Firms like Atlanta-based Assurant Specialty Property can work through a property’s website to offer insurance policies and may even collect the monthly premium as part of the rent. The property management company may sometimes collect administrative fees from companies that provide the insurance.

Other apartment firms offer such insurance themselves. If you decide to follow suit, however, beware of area laws. “You have to make sure it’s legal,” says Sachs.

Local laws often prevent landlords from offering insurance directly to residents. Certainly, property managers aren’t allowed to require residents to buy insurance from their preferred provider—or do anything that might be construed as “steering” under local laws.

“In some states, [requiring tenants to buy renter's insurance from you] may qualify as racketeering,” says TCR’s Woodward. “A lot of management companies have backed off it a little bit. Everyone’s trying to regroup and find another way to deal with this.”

At least it seems safe for managers to provide residents with a list of “preferred providers” for renters’ insurance, though many residents choose to obtain a policy from their auto insurance underwriters.

“We’ve partnered with a firm that’s agreed to cover everyone,” says Heidi Much, vice president of risk management services for Farmington Hills, Mich.-based Village Green.

At the luxury apartments Village Green manages, more than 90 percent of residents keep their insurance current. Elsewhere, however, lower-income residents may be under steeper financial pressure and are less likely to prioritize making policy payments.

To help monitor potential payment problems, trade groups like the NMHC are working to create data standards that may one day allow property management software systems and insurance companies to communicate with one another, so that managers will know when policies lapse.

In the meantime, good communication is one way to make a positive difference. Managers should explain why renter's insurance coverage is mandatory—and helpful to the resident, experts say.

Woodward says that because of his managers’ ­efforts, half his residents have current renter's insurance. “That’s definitely better than five years ago,” he says, when only a fraction were covered.