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Apartment living pricier as increased insurance costs trickle down to renters

A recent warning from the FBI that terrorists may be renting apartments for storage of explosives is pushing up landlords' already-rising commercial insurance for apartment buildings, which may in turn get passed on in higher rental rates.

Premiums already jumped by as much as 60 percent this past year, due in large part to a growing number of tenant claims for harm or injury. The increase in insurance rates for owners of apartment buildings was exacerbated by the events of Sept. 11, and analysts say projected increases for the coming year are between 50 and 100 percent.

The need to rent out empty units has prevented many landlords from raising the rent to offset costs, but that's about to change.

In addition to an increase in tenant claims, landlords are facing more and more categories of potential liability. The biggest impact last year was from mold claims, triple the number of mold claims in 2000. Mold has been related to health problems and the court settlements of lawsuits in the last 12 months have been in the millions of dollars.

However, landlords typically haven't passed on the cost of insurance premium increases to tenants the way an office-building owner would. In the past, landlords were more concerned about renting out empty units. About one-third of Americans rent apartments or houses and 15 percent of all U.S. households reside in apartments, according to the National Multi Housing Council (NMHC). Since Sept. 11, occupancy rates for apartments have dropped, though not dramatically, but the threat of apartment buildings becoming terrorist targets and the ensuing increases in insurance may finally force owners to raise rents.

Insurance rates and deductibles for apartment buildings had already increased twofold without the recent terrorist threat. According to insurance broker Marsh, a unit of March & McLennan Co. in New York, the cost of liability insurance for a 5,000-unit apartment complex in 1999 averaged $100,000 annually with no deductible required. Currently, that same complex would average $250,000 in premiums annually with a minimum $5,000 deductible. Most deductibles average closer to $25,000.

According to Jay Harris, Vice President of Property Management for the NMHC, there are numerous commercial property owners, including owners of apartment buildings, who have elected to go without specific terrorist insurance. "Many of the lenders on these properties have accepted that, but some have insisted that property owners carry terrorist insurance. It's a very fluid situation."

Presently there doesn't seem to be any consistency among lenders; Harris says he believes everyone is waiting to see if Congress adopts any sort of backstop policy for any future terrorist events. In the interim, some property owners have found terrorist insurance either too expensive or that the coverage they can afford doesn't provide enough protection to make it worth the cost.

"The one good thing that has come out of this is the increase in purchase of renters insurance," says Harris. "Less than 25 percent of renters have renters insurance," in part because insurance agents didn't push the product because "there isn't much money in it." While an owner's property insurance on a building will protect the building itself in the event of damage, it doesn't cover what is inside apartments. Renters need their own insurance to protect their belongings and to protect them in liability cases. For instance, if you rent an apartment and accidentally leave something on the stove too long and cause a fire, you are liable for the damage and any injuries that are caused. Renters insurance protects you.

"I think there's been a very weak understanding of insurance by people who rent housing," says Harris. "I have to say I'm glad to see renters insurance being promoted and people buying it more frequently."

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