Under-insured house can spell ruin

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You've purchased the coveted house, you've converted the old cellar into a basement suite and maybe even gone the extra mile with radiant-heat floors in the bathroom and a gas fireplace in the living room.

After a thorough search for the perfect tenant or tenants, you sign the lease, collect the damage deposit and sit back and start collecting the monthly rent that will go toward paying down your mortgage. But hang on – what about obtaining documentation that your tenants have paid for their own property insurance? If you're like most homeowner-landlords, you probably haven't gone to the bother.

Don Campbell, president of the Real Estate Investment Network (REIN), usually gets asked to forecast housing markets. However, that shouldn't be a homeowner's most pressing worry, he says.

"Due to the large number of people who are buying investment properties, or renting out their basement suites, a lot of untrained landlords are hitting the market and the biggest risk they are putting themselves in has nothing to do with which direction the average selling price is going. It is having the completely wrong property insurance," says Mr. Campbell.

"I know people who have gone into seriously deep financial trouble by not having the right coverage. And I don't sell insurance. I don't care if they buy it. But it's my job to educate."

Last year Aviva Canada insurance company released statistics that show water damage is the leading home insurance claim, partly due to the high number of basements that are being finished to make livable. Nationwide, B.C. had the highest increase in average claim cost due to water damage, at 205 per cent. I'm guessing that increase reflects the fact that almost every homeowner in Vancouver depends on the income from a basement suite to get by. For Vancouverites, basement dwelling is a fact of life. We even forget that's not the case for every city.

A friend from Portland once said to me, rather smugly, "You know, we don't have people living in our basements."

I guess we're not so much like Portland, then.

A flooded basement in today's Vancouver is more than the minor headache it was back when we used basements only for storage and laundry. Now, it can be a major headache as well as a major insurance claim.

Mr. Campbell wants consumers to pay close attention to something as boring as house insurance to mitigate risk, to protect their biggest lifetime purchase. He takes a hard-line approach and wishes other homeowners would follow suit.

Mr. Campbell is to property investment what Deepak Chopra is to personal development. To his 2,700 REIN members, he's guiding the way through all the talk and theorizing about property markets and when is or isn't a good time to invest. He isn't a realtor, economist, developer or builder. He is a researcher, author, speaker and investor.

REIN members will show up en masse in a town or suburb somewhere in Canada and investigate the current and future infrastructure, the economic forecast, the potential for job growth, government policies, travel time to urban areas, and population forecast, to help determine whether it's an investment-worthy area.

Mr. Campbell has released top 10 lists on investment worthy cities and written books on Canada's real estate cycle, and he's a go-to guy for television interviews on the topic. And with 170 tenants of his own, he knows a thing or two about being a landlord. And an under-insured house is the kind of risk that can put a homeowner into financial ruin.

"I like to mitigate risks wherever possible. I don't give [tenants] the keys until I have proof of insurance."

The other mandatory action homeowners must take – and often don't – is informing their insurance provider that they've got a basement suite. Mr. Campbell advises that you not communicate this important detail by phone. Ensure that you have a written record of it, and that you receive acknowledgement. You don't want the insurance company claiming that it never knew about your rental suite should you need to make a claim.

Chris Westrop, Park Insurance's Commercial Department Manager, concurs that communication is vital.

"Definitely it's important to let your insurance company know everything that's going on. Renting a secondary suite is considered a material change in risk, and it does have the potential to void your insurance policy," he says.

A void insurance policy would be a nightmare scenario. Any reduction in coverage simply because you failed to inform the insurance company of your suite is a nightmare scenario. At minimum, should your basement suite be flooded and the tenant has to temporarily move out, you wouldn't be covered for the monthly rental. To protect yourself, purchase rental replacement insurance, which is extra coverage to make up for the lost rent. It makes sense if you depend on that rental income to cover your mortgage and, as I mentioned, nearly every Vancouver homeowner with a rental suite depends on that income for his mortgage.

While tenant insurance is mostly to protect the tenant's own property against theft or damage, it also protects the homeowner, says Mr. Westrop.

"It involves the homeowner from a liability point of view. If someone is visiting your tenant in your suite, and trips over an electrical cord and is injured, for example, there is the possibility of a lawsuit. Typically, lawyers will take a shotgun approach and if the tenant doesn't have insurance, chances are he won't have any money either, so they will quite likely name the landlord in the suit as well."

And make sure your policy covers the cost of rebuilding the entire house if it burns down. You want the words "guaranteed replacement cost," says Mr. Westrop. If your policy says it will cover only the cost of rebuilding for a specified amount, such as $300,000, you could be required to pay out thousands of extra dollars.