Multifamily and commercial property owners often face significant tenant-related risks, whether it’s damage caused by an angry tenant, loss of rental income from a tenant unable to pay, or challenges with tenants refusing to vacate. While third-party tenant protection plans may seem like a solution, they often fail to cover claims adequately, leaving property owners frustrated and exposed.

Rising insurance premiums and the risks associated with coinsurance clauses further compound these challenges, especially in today’s hardening property and casualty (P&C) insurance markets. With premiums increasing by 20% or more annually for some property owners and coinsurance clauses requiring strict compliance to avoid penalties, the need for a better solution is clear to protect investment properties. 

An 831(b) Plan, also known as micro captive insurance, offers property owners a unique opportunity to manage tenant risks in-house while turning what was once a cost into a new revenue stream.

Traditional Insurance Is Limiting and Expensive

Traditional insurance policies may provide coverage for certain landlord risks, but they often fall short when it comes to tenant-related events. The increasing cost of insurance, combined with rising deductibles, means these policies are becoming less effective and more difficult to justify.

Moreover, relying on third-party tenant protection plans can be equally frustrating. These plans often come with limitations that prevent claims from being covered, leaving property owners without adequate recourse.

Tax Benefits of Using This Plan

These accounts operate differently than just straight self-insuring, where premiums would be taxed, thus minimizing the ability to pay claims. Using an 831(b), premiums are tax-deferred, and dividends on surplus are taxed at the long-term capital gains rate. In the event of a claim, the company writes off any settlement payouts as expenses.

Another added benefit to using this plan is that money held in the account doesn’t just languish. Money should make money. Funds can be invested within investment guidelines as an additional method of increasing the property owner’s net worth. Furthermore, dividends on surplus are taxed at the long-term capital gains rate, and unused funds can be loaned back to the shareholders after policies expire. 

Why to Self-Insure with an 831(b) Tenant Assurance Program

An 831(b) plan has been used for nearly four decades, but its application for multifamily and commercial landlords has gained traction only recently. Through an 831(b) Plan, property owners can:

  • Take Control of Risk Management: As the insured and the insurer, you can customize coverage to address specific tenant-related risks.
  • Keep Premiums In-House: Instead of paying a third party, premiums are collected into a designated account controlled by the landlord to pay future claims.
  • Offset Rising Costs: What was once a cost center can now generate additional revenue, helping offset rising insurance premiums and operating costs.

Protect Tenants and Reduce Landlord Risk

Traditional property insurance focuses on protecting the property, often leaving tenants vulnerable to catastrophic events. Many landlords require tenants to carry renter’s insurance, but enforcing this requirement can be difficult. Additionally, renter’s insurance policies may have high deductibles or limited coverage, leaving tenants unprotected.

With an 831(b)-backed tenant assurance program, landlords can offer in-house tenant protection as an added service or include it in monthly rent. This not only provides tenants with peace of mind but also ensures landlords have a reliable mechanism to handle tenant claims, minimizing disruptions to cash flow.

Also Address the Risks of Coinsurance

Property owners must also contend with coinsurance clauses, which require the property to be insured for a certain percentage of its replacement value — often 80% or more. Inflation and rising property values can lead to underinsurance, triggering penalties during a claim.

An 831(b) plan helps property owners set aside reserves to address potential gaps in coverage or coinsurance penalties, providing a financial cushion for unexpected risks. 

SRA 831(b) Admin’s Rigorous Vetting Process

Just as a 401k has a plan administrator, so must an 831(b) Plan. SRA 831(b) Admin was founded in 2008 and has become the largest plan administrator thanks to its rigorous four-part test to ensure compliance with IRS regulations.

Tenant risk can become a profit center with greater control over claims. You can offset rising insurance premiums and mitigate the risk of coinsurance due to inflation. But this unique plan can help those with larger rental spaces maximize their tax savings, increase their income, and help protect the tenants who have trusted them. Setting up an 831(b) plan starts with discovering how this can benefit your business.