Roommates increase insurance risk

Linda Melone

As a homeowner, renting out a room of your home makes it easier to handle a large mortgage payment. Or if you rent, splitting the monthly payments with a roommate or two cuts down on your expenses.

Whichever way you work it, taking on a roommate if you're renting or allowing a boarder to move into your home can cause problems with your homeowner's insurance if something goes wrong.

Experts weight in on what you need to know before your open your home to others to avoid increased insurance premiums — or being dropped by your insurer.

Rental roommate requirements

You're not legally required to take out insurance if you rent a room or apartment, but it's a good idea, says Bruce Robins, president of Robins Insurance Agency in Tennessee.

When you buy a renter's policy, an insurer offers you a policy based on you - such as your credit rating and whether you've filed claims in the past, Robins says.

Siblings are an exception, says Tim Dodge, a spokesman for the Independent Insurance Agents & Brokers of New York, a trade group. "Automatic coverage applies to family and siblings," Dodge says. "Both homeowner's and renter's policies cover a relative of the person named on the policy if the relative lives with that person."

A homeowner's policy and a renter's policy differ only in that the renter's policy does not cover the dwelling or any unattached structures, such as a garage or toolshed.

A typical homeowner's policy includes liability and property coverage. A renter's policy covers your property in the event of fire or theft, but not the property of your roommates, Robins says. For this reason, every renter should carry his or her own rental insurance.

Liability provides coverage for accidents, such as if the building accidentally catches on fire. "Even if your roommate is responsible, your liability still covers you," Robins says. "The insurer would have to cover you, no matter what."

Because of the liability issue, insurers don't typically like it when renters take on roommates, although they won't usually deny coverage because of it, Robins says. Insurance companies write insurance for risks they know about and don't like dealing with unknowns, such as other people moving into your home without their knowledge.

Some apartment owners do require renters to buy renter's insurance, Robins says.
"This way, the renter's liability kicks in if an accident occurs and people are injured," he says. "The damage is covered by the liability portion of the renter's policy, so the landlord's policy doesn't have to provide coverage."

Renter's insurance typically costs $10 to $20 a month.

Taking in boarders bumps up risk

In some cases, homeowners take in a boarder or two to offset housing costs. However, renting a room to a stranger boosts the homeowner's risks, such as becoming vulnerable to lawsuits, Dodge says.

"As the homeowner, you now have legal liability for any activity that happens in your home or on your property," he says.

Insurers have different levels of tolerance, Dodge says. For example, if you don't tell your insurer you're taking in a boarder, it may put you at risk for policy cancelation.

"Some companies may do nothing, others may increase your rates and still others may not renew your policy if they find out you have a boarder," Dodge says. To avoid potential problems, check with your insurer before renting to a tenant.

Typically, if a company isn't comfortable with your situation, it won't renew your policy when it expires. However, some circumstances can cause your insurer to cancel your policy before renewal time rolls around.

"Fraud, lying on the application and nonpayment of premiums give the insurer legal rights to cancel your policy, as does operating a meth lab out of your basement," Dodge says.

Limited coverage for stolen items

If you discover missing items when your roommate moves out, whether you're covered depends on the part of the house where they were taken.

If your renter lived in your basement and stole the microwave from his living area, you're not covered for the loss, Dodge says. However, "you are covered if he stole the item from a part of the house outside of his designated living area," he says.

Most homeowner's policies pay up to $2,500 for appliances and household furnishings used by the tenant. "So if your renter has a small kitchen fire and damages the carpet, it's covered up to $2,500," Dodge says.

If you have a renter's policy and own the appliance, you're covered for the same amount, Dodge says.

Keep in mind all homeowner's and renter's claims are subject to a deductible, which typically is $250 to $2,000 or more.

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