When managing rental properties such as condominiums and apartments, it is necessary to enroll in fire insurance to prepare for the unexpected.
As the name suggests, fire insurance is often thought to cover only fire damage, but the types, coverage targets, and contents vary widely.
In this article, we will explain whether rental property managers need to enroll in fire insurance, as well as the coverage targets, contents, and key points for choosing a policy.
We will also cover the advantages, disadvantages, and precautions regarding fire insurance enrollment, so rental property managers should use this article as a reference to review their fire insurance coverage.
What Is Fire Insurance in Rental Property Management?
If you are managing rental properties such as apartments or condominiums, you may be wondering whether fire insurance enrollment is necessary.
Tenants living in rental properties enroll in fire insurance to protect their personal belongings, but it is also common for property managers themselves to enroll to protect the rental property and common areas.
Even with the same fire insurance, the areas covered differ between rental property managers and tenants.
By enrolling in fire insurance, rental property managers can receive compensation not only for fire damage but also for natural disasters such as typhoons and floods, as well as damage caused by theft or water leaks.
Basically, the property manager enrolls in fire insurance to cover the building, while tenants enroll in fire insurance to cover their personal belongings.
Enrollment is not legally required, so there is no problem if you choose not to enroll, but since it is often a condition of tenancy, it is useful to be familiar with the contents of fire insurance.
Types of Fire Insurance
It is clear that fire insurance is necessary not only for rental property managers but also for tenants.
Here, we will explain the types of fire insurance.
Residential Fire Insurance
Residential fire insurance is a policy that includes the most basic coverage.
It covers residential buildings and the personal belongings inside.
The coverage target can be chosen from: building only, personal belongings only, or both building and personal belongings.
Since the coverage range is limited, the insurance premiums are relatively affordable.
The coverage includes: fire, lightning strikes, explosions, bursts, wind damage, snow damage, and hail damage.
Comprehensive Residential Insurance
Comprehensive residential insurance covers a wider range than residential fire insurance.
It covers residential buildings and the personal belongings inside.
The coverage target can be chosen from building only, personal belongings only, or both building and personal belongings, just like residential fire insurance.
However, since the coverage range is broader, it allows for coverage tailored to your risks, but the premiums tend to be higher compared to residential fire insurance.
The coverage includes: fire, lightning strikes, explosions, bursts, wind damage, snow damage, hail damage, water leaks, flooding, above-floor inundation, falling objects, collision, flying objects, civil unrest, group actions, labor disputes, water damage, and theft.
Standard Fire Insurance
Standard fire insurance is different from residential fire insurance and comprehensive residential insurance.
The coverage targets are buildings and contents, so it applies to residential-commercial properties, stores, offices, warehouses, factories, and similar facilities, as well as merchandise, products, equipment, fixtures, and facilities inside the buildings.
It targets general properties that include commercial spaces rather than purely residential ones.
The coverage includes: fire, lightning strikes, explosions, bursts, wind damage, snow damage, and hail damage.
Not Just Natural Disasters? Fire Insurance Coverage Targets
As explained so far, fire insurance does not only cover fire damage.
Even with fire insurance, it can cover disasters other than fire, and the range can vary greatly depending on the insurance company's plan.
Furthermore, you can attach only the coverage you need, providing a high degree of flexibility.
A major backdrop for this is the increasingly severe natural disasters occurring year after year.
Since it is impossible to rule out the possibility of unexpected disasters in the future, it is recommended to review your fire insurance coverage once more.
Here, we will explain the coverage targets of fire insurance, so please understand the contents and choose the appropriate insurance.
Natural Disasters
Natural disasters covered by fire insurance include fires and damage caused by lightning strikes, wind damage from typhoons, water damage from flooding, and snow damage from heavy snowfall.
Every year, large amounts of fire insurance are paid out due to disasters caused by typhoons and heavy rains.
In response to such situations, insurance coverage ranges have been expanded, and it is required to have comprehensive fire insurance in place for unpredictable natural disasters.
Under fire insurance for natural disasters, direct fire caused by a lightning strike is covered, but damage to electrical appliances caused by lightning, or damage resulting from a lightning strike on a nearby utility pole, is also covered.
Lightning that occurs due to a typhoon is also covered under lightning strike coverage.
Also, damage such as a sign blown off by a typhoon breaking a window, roof tiles flying and damaging an exterior wall, a nearby river overflowing and causing flooding, or being caught in a typhoon-induced landslide is also covered.
Cases where a building collapses due to heavy snow, the roof falls, or gutters break may also be covered by fire insurance.
Bursts and Explosions
Bursts and explosions covered by fire insurance apply when personal belongings are damaged by the explosion of a spray can or portable gas stove.
This covers cases such as personal belongings being destroyed or partially damaged when a gas leak ignites and causes an explosion.
A fire caused by a gas leak is treated as a fire accident.
Theft
Fire insurance also applies in cases of theft and burglary, not just natural disasters.
Many people assume theft is not covered since it is not fire, but even attempted theft is a covered target.
Cases such as a window being broken during a break-in, or a lock and pole being broken in an attempt to steal a bicycle left on the premises, are also included in the coverage.
However, please note that high-value artworks and precious metals may not be covered in some cases.
Water Leaks
Fire insurance also covers damage caused by water leaks.
This includes water leaks due to malfunction or deficiency of water supply and drainage equipment, and in the case of condominiums, damage to walls or ceilings caused by water leaks from an upper-floor resident is also covered.
In addition, if household items such as a microwave or television are damaged by a water leak, these are also covered as damaged items.
One important point about water leaks is that they differ from roof leaks.
If damage is caused by a roof leak due to age-related deterioration, it cannot be determined that the cause was an accident, so compensation for the damage may not be possible.
Other
Fire insurance also covers damage caused by collision, contact, or collapse from objects flying or falling from outside the building.
Cases such as cargo flying off a vehicle, a flying object hitting and damaging an exterior wall, or a car crashing into a residence are also covered.
While these are not frequent occurrences, fire insurance may provide coverage for such damage.
The coverage range can be selected at your discretion, but choosing carefully with various scenarios in mind will give you peace of mind when the unexpected happens.
Enrolling in Fire Insurance Is Not Mandatory
While fire insurance is a reassuring safety net covering many eventualities, some people may feel they "won't cause a fire" or "see no benefit in enrolling in fire insurance."
To get straight to the point, enrolling in fire insurance is not mandatory, so if you feel it is unnecessary, that is not a problem.
However, when purchasing an apartment or condominium to become a rental property manager and obtaining financing from a financial institution, fire insurance enrollment may be a mandatory condition.
Also, when renting a property, the rental property manager or real estate company may make fire insurance enrollment a condition of the tenancy, and although neither party has a legal obligation to enroll, it has become something of a standard practice.
Rental property managers in particular face the possibility of unexpected risks arising from fire insurance alone, including compensation for disaster damage and damage or destruction caused by tenants.
Fire insurance is what covers these sudden risks, so enrolling allows you to be prepared for a variety of risks.
The main risks include the following.
・Risk of injury from accidents caused by fire or natural disasters
・Risk of property damage caused by fire or natural disasters
・Risk of liability for fire or water damage caused by tenants
・Risk of the property becoming stigmatized due to a tenant's death
If a fire breaks out in a rental property such as an apartment or condominium, there is a possibility that not only the room that was the source of the fire, but also the people living in the building and the building itself could be engulfed, resulting in major damage.
This fire could also spread to neighboring homes.
Conversely, there is also the possibility that your property could be completely destroyed by fire spreading from a neighboring home.
In Japan, there is a law called the Fire Liability Act, which means that even if a building you own catches fire due to a neighbor's fire without any major negligence on your part, you cannot seek compensation or restitution from the person who started the fire.
In other words, unless there is negligence that can be judged as a fire risk, such as playing with fire or smoking in bed, you cannot claim damages from the other party even if your building burns down from a fire that spread from next door.
Even if you become a rental property manager and have all the facilities and fire prevention equipment in place, you could still suffer damage from fire spreading from neighboring properties or from a tenant's accidental fire, and no one will compensate you for a fire that spreads from next door.
Therefore, enrolling in fire insurance is necessary to protect your real estate assets.
On the other hand, it is also important for tenants to enroll in fire insurance.
You might think that since the rental property manager has insurance on the building, you personally do not need it, but if you start a fire in a rental property, in addition to the Fire Liability Act, you may be subject to an obligation to restore the property to its original condition and could bear liability for damages.
Most rental agreements contain provisions regarding restoration to the original condition, stating that you must restore the rented room to its original state before moving out.
If you completely burn down the room, you have an obligation to restore it to its original condition before moving out.
If it is determined that you are unable to fulfill the obligation to restore the property, it may constitute a breach of contract, and you may be held liable for damages.
Since the amount of damages is expected to be substantial, enrolling in fire insurance will likely be essential for emergency situations.
When enrolling, it is important to confirm the coverage targets, range, and period.
Advantages and Disadvantages of Enrolling in Fire Insurance
While fire insurance is beneficial for both rental property managers and tenants, there are also aspects of enrollment that may feel disadvantageous.
Here, we will explain the advantages and disadvantages of enrollment.
Advantages
・Prepare for unexpected risks
The primary reason for enrolling in fire insurance is to prepare for risks.
Fire insurance allows both rental property managers and tenants to receive compensation when damage occurs.
In the event of unpredictable natural disasters such as flooding or typhoons that cause damage to the entire building or common areas, the fire insurance you have enrolled in will provide coverage.
Similarly, if your property is damaged by fire spreading from a neighboring home and the person who started that fire was not at fault, you cannot claim damages from them.
However, if you have your own fire insurance as a rental property manager, you can receive compensation.
In Japan, which is prone to natural disasters, having fire insurance allows you to prepare for unexpected risks.
・Becomes a condition for financing
Fire insurance is not just about protecting the building.
When obtaining bank financing for land acquisition or construction of rental properties such as apartments, fire insurance enrollment may be a mandatory condition.
This is because if a rental property is lost in a disaster, not only will you be left with only debt, but there is also a high likelihood that repayment will stall as tenants leave and income disappears.
However, if you have fire insurance, there is rental income compensation during the period of reconstruction or repair of the apartment, eliminating the risk of non-repayment.
For these reasons, it is often a condition for financing.
・Special riders can cover areas of concern
Fire insurance comes in standard forms, but by adding special riders, various areas can be covered.
Since the coverage range and targets can be expanded, adding riders will provide comprehensive coverage.
Disadvantages
・High premiums
While fire insurance covers many risks, the high premiums can feel like a disadvantage.
In recent years, fire insurance and earthquake insurance premiums have risen by more than 10%, and in regions where a major earthquake is predicted in the future, premiums have risen by nearly 50% in some areas.
Adding many special riders on top of this can make it considerably more expensive than conventional fire insurance.
・No long-term contracts for earthquake insurance
Fire insurance previously allowed for long-term contracts of up to 36 years, but currently the maximum for new contracts is 10 years, and long-term contracts are not available.
Furthermore, earthquake insurance was changed to a maximum of 5 years starting in January 2022, and an effective increase in the burden is expected.
As fire insurance shifts to shorter contract terms, this leads to increased running costs.
・Complex calculations
In addition to cost, another disadvantage that rental property managers may feel with fire insurance is that the calculation of premiums is complex.
The mechanism by which fire insurance premiums are determined varies depending on the type and materials of the building, the coverage content, the period, and other factors.
Since long-term contracts are no longer available, the fact that the assessed value of the building must be calculated each time an application is made is also likely to feel like a disadvantage.
Fire Insurance Premium Benchmarks
Many rental property managers probably consider "cost" when choosing fire insurance.
However, it is said to be difficult to provide benchmark fire insurance premiums for rental property managers.
The reason is that premiums are determined by detailed conditions.
Fire insurance premiums are determined by the following conditions.
・Building structure
・Building age
・Number of units
・Total floor area
・Location
・Rental income
・Contract period
・Coverage content
Regarding building structure, there are differences in premiums depending on whether the building is a condominium structure, fire-resistant structure, or non-fire-resistant structure.
Since disaster risk differs by location, even similar properties will have different premiums depending on the prefecture where the property is located.
In recent years, there has also been a movement to differentiate premiums based on hazard maps.
These various conditions and reasons make it difficult to establish benchmarks.
However, without knowing the benchmarks, it is difficult to commit to enrollment.
It is a good idea to budget for at least around 200,000 yen per year, and around 600,000 yen per year if earthquake insurance is included.
Key Points for Choosing Fire Insurance
Here we will explain key points for those managing rental properties when choosing fire insurance for their properties.
Coverage Target
The coverage target for fire insurance can be selected at the time of contract.
・Building only
・Personal belongings only
・Both building and personal belongings
There are these three types, and the premium varies depending on what is targeted.
In general, rental property managers tend to choose "building only."
However, if you manage rental properties that come furnished with furniture and appliances, selecting "both building and personal belongings" as the coverage target will provide compensation for both in case of an emergency.
If you also have your own residence or a manager's room in the property, it is also safer to select "both building and personal belongings."
Coverage Range
When choosing fire insurance, pay attention to the coverage range as well.
Looking only at the name "fire insurance" might lead you to think it only covers fire, but as introduced above, damage from various events is included in the coverage range.
Since anything can happen in daily life, broader coverage provides peace of mind, but note that broader coverage also means higher premiums.
However, it is common practice with fire insurance to "attach riders for additional coverage."
Coverage for wind damage from strong winds has become standard, but water damage and earthquakes may require separate riders to be covered.
If you want to keep premiums as low as possible, it is better to remove unnecessary riders.
However, in that case, you will not be covered in an emergency.
Since hazard maps are provided by region, it is recommended to adapt flexibly, such as adding water damage coverage if your property is in an area with high flood risk, such as where above-floor inundation may occur if a nearby river overflows.
Insurance Coverage Period
When choosing fire insurance, also confirm the coverage period.
Previously, the maximum contract period was 35 years, but it was revised to a maximum of 10 years in 2015 due to the increase in disasters.
Therefore, the current fire insurance coverage period ranges from a minimum of 1 year to a maximum of 10 years.
With a 1-year policy, you need to renew annually and pay premiums each year.
A 10-year contract has the advantage of being more cost-effective than a 1-year contract in terms of premiums.
However, it has the disadvantage of not being able to change the coverage target or range mid-contract.
Premium payments can be made monthly, annually, or as a lump sum, with lump-sum payments being the most cost-effective.
Some people may wonder "Won't paying in a lump sum result in a loss when selling the property?"
However, mid-term cancellation is possible with fire insurance.
Since there is a high possibility of receiving a refund upon cancellation, this should not be a major issue.
With annual renewals, you need to complete the renewal procedure before the coverage period ends.
Some may find this cumbersome, but the ability to reduce unnecessary coverage with each renewal is an attractive feature.
Being able to keep premiums down and review regularly are significant advantages.
Note that the contract period is scheduled to change from a maximum of 10 years to 5 years in the future.
A premium increase is also planned at the same time, so it is recommended to enroll in fire insurance or review your existing policy before the reduction takes effect to avoid being affected by the price increase.
Premium
When deciding on fire insurance, you need to look at various points such as coverage range, coverage targets, and coverage period.
However, many rental property managers will inevitably be concerned about costs.
In such cases, it is recommended to focus on the premium when making your selection.
By understanding the minimum required coverage and then choosing the most affordable option, you can continue rental property management without having to spend a lot of money.
Compare various insurance products and prepare for risks.
For Risk Preparedness! Attach Fire Insurance Riders
If a fire breaks out in a rental property you manage, there are risks beyond damage to the building.
If the fire makes it difficult for tenants to continue living there, rental income will be lost and your livelihood will change significantly.
If the building's exterior wall collapses and hits a passerby, compensation costs will also arise.
To prepare for these risks, you must continue managing your property with the appropriate riders attached.
Building Management Liability Rider
The building management liability rider provides compensation when damage is caused to people or property due to building deterioration or deficiencies.
Depending on the insurance company, it may also be called "facility liability insurance."
Cases where it applies are as follows.
・When an exterior wall falls and injures a passerby
・When an exterior wall falls and damages a car or motorcycle
・When a building handrail deteriorates and a tenant falls
・When the entrance area breaks and someone trips and gets injured
・When an accident occurs due to an elevator malfunction
These are risks more likely to occur in older properties, so attaching this rider provides peace of mind.
A key feature of facility liability insurance is that it provides substantial coverage at a low premium.
Even for an entire apartment or condominium building, the premium may only amount to a few thousand yen, making it easy to attach.
Even if repairs and renovations are made, it is impossible to guarantee that there is absolutely no possibility of injuring a tenant, passerby, or damaging property.
Please consider enrolling in anticipation of being faced with a large liability claim.
Rental Income Rider
The rental income rider compensates for rental income losses when a rental property suffers damage due to fire or other causes.
Enrolling in fire insurance covers the building and personal belongings.
However, if restoration takes a long time, it will be difficult for tenants to move in, and rental income will be lost.
If you have a loan on the property, repayments may stall and it may become impossible to continue managing the property.
This is a rider that is worth having to continue rental property management.
With the rental income rider, you set the compensation period at the time of contract, such as 3 months, 6 months, or 12 months.
Insurance payments for lost rental income are made up to the set period.
Depending on the type, there are cases where the rider cannot be attached if the vacancy rate at the time of contract is 50% or more, so confirm this in advance.
Landlord Expense Rider
This is a rider that compensates for expenses such as cleaning, deodorization, renovation, and estate clearance when a fatal accident occurs in a property you manage.
The possibility of suicide, criminal death, or solitary death is never zero.
If such an event occurs, the property manager bears the costs of clearance and cleaning.
In such cases, the longer the vacancy period, the more rental income decreases.
Such rental income losses are also covered if you have the landlord expense rider.
Japan's aging society is advancing, and topics related to solitary death are frequently covered in the news, so this is insurance that is well worth having.
However, please note that fatal accidents due to crime in vacant rooms are not covered.
How to Receive Insurance Payments
When enrolling in fire insurance, confirm in advance how insurance payments will be received.
Full Insurance
Full insurance is a type where the full amount of fire damage is compensated as insurance payment.
Some people may find the mechanism complex, but this system is easy to understand and provides peace of mind.
However, since the coverage range is broad, the downside is that premiums are higher.
Excess Insurance
Excess insurance is insurance where the insured amount exceeds the insured value.
When a fire occurs, the insurance payment will cover the entire damage range.
In addition, the excess amount is pooled to prepare for the next potential incident.
While it provides a higher sense of security than full insurance, the excess amount will not be paid unless the next incident occurs.
Partial Insurance
Partial insurance is when the insured amount set is less than the value of the insured property.
Since you may only receive an amount less than the damage incurred, there is a possibility that you will need to pay out-of-pocket for the portion not covered by the insurance.
About the Calculation Method
Fire insurance payment patterns come in two types: "actual loss compensation" and "proportional compensation."
Actual loss compensation applies when the insured amount and the value of the insured item are approximately equal, meaning if 1,000,000 yen in damage occurs, 1,000,000 yen in compensation is received.
Proportional compensation is a mechanism where, when damage occurs while the insured amount is less than the building's value, the insurance payment is reduced "in proportion to the shortfall."
For example, if you own a building with an assessed value of 40,000,000 yen and have insurance for 30,000,000 yen, and suffer 10,000,000 yen in fire damage, only up to 7,500,000 yen will be paid out.
Precautions for Fire Insurance
Finally, we will explain the precautions to keep in mind when enrolling in fire insurance.
Differences in Benchmarks Based on Building and Location
Fire insurance premiums vary depending on the type of building, coverage range, and coverage content.
You may think that insurance with a broader coverage range provides more peace of mind, but keep in mind that premiums will also be higher.
As mentioned above, costs also vary by location, and areas with frequent fires or regions where damage is expected to spread significantly in the event of a fire tend to have higher premiums.
Since it is difficult to judge such areas on your own, it is also recommended to consult with a fire insurance specialist or real estate company before considering enrollment.
Additionally, if you are planning to purchase a property and start rental property management, purchasing a property in an area with few natural disasters or low damage risk can help keep fire insurance costs down.
Insurance Premiums Are on the Rise
While fire insurance covers all kinds of damage including fire, explosions, water damage, and theft, premiums have been increasing in recent years.
The reason is that disasters are occurring frequently within Japan.
When natural disasters occur, the risk of damage to buildings also increases.
In fact, the Non-Life Insurance Rating Organization of Japan announced in June 2021 that it would raise the reference pure rate for fire insurance by a national average of 10.9%.
Regarding premiums, prices have been raised three times in the past five years alone, with a further increase scheduled for October 2022.
Since it is difficult to stop natural disasters, it is expected that premium increases will continue in the future.
If you want to keep costs as low as possible, please consider enrolling in fire insurance before the premium increases are implemented.
Summary
We have explained various points regarding fire insurance in rental property management, including its role, coverage targets, the advantages and disadvantages of enrollment, benchmarks, and precautions.
Fire insurance provides compensation for damage from various disasters beyond fire, such as typhoons and flooding, so enrolling allows you to prepare for unexpected risks.
While high premiums are a disadvantage, removing unnecessary riders allows you to receive coverage at a more affordable cost.
Enrolling in fire insurance is not mandatory, but if a fire actually occurs, you will face significant expenses.
Having fire insurance to cover those expenses allows you to continue rental property management with peace of mind.
Consult with experts such as real estate companies, choose the fire insurance best suited to your rental property, and aim for safe and secure management.
Frequently Asked Questions About Fire Insurance for Rental Property Management
Q1. Are rental property managers required to enroll in fire insurance?
There is no legal obligation to enroll, but in most cases financial institutions will require enrollment when taking out a loan. Enrollment is also strongly recommended from a risk management perspective.
Q2. Does fire insurance cover earthquake damage?
Fire insurance alone does not cover earthquake damage. To prepare for earthquake damage, it is necessary to enroll in earthquake insurance as a rider to your fire insurance.
Q3. What is the typical fire insurance premium?
It varies depending on the building's structure, location, and coverage content, but a rough guide for a single apartment building is approximately 30,000 to 100,000 yen per year.
