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Insurance Abstract
A method of administering property insurance coverage for protecting
individuals from liability which may arise as the result of excess
wear and tear and/or damage which may occur to a leased residential
unit during the lease term includes relieving tenants of providing
up-front security deposits and providing property managers with
a service product which will generate fees for the property manager
as well as provide guarantees to lessors making use of the service
product.
Insurance Claims
1. A method of providing insurance coverage as a security deposit
guarantee, comprising the steps of: establishing a contractual agreement
between a property manager on behalf of a lessee to insure a leased
residential unit and said insurer ready to insure against losses
caused by a lessee up to a predetermined limit; and providing a
policy of indemnity insurance sufficient to compensate for said
possible losses.
2. The method of claim 1, wherein said property manager submits
an application form to an insurer regarding said leased residential
unit.
3. The method of claim 1 wherein the property manager assumes the
exposure as part of a self-insured program.
4. The method of claim 3 wherein the property manager determines
the amount to be collected from the lessee.
5. The method of claim 1, wherein said application form is created
by said insurer.
6. The method of claim 1, wherein said submitting step is carried
out by said property manager.
7. The method of claim 1, wherein said insurer evaluates whether
to agree to the transfer of a proposed risk using an insurance underwriter.
8. The method of claim 1, wherein said insurer communicates information
regarding said proposed risk to said insurance underwriter.
9. The method of claim 1, wherein said property manager receives
a binding commitment from said insurer regarding the acceptance
of said proposed risk.
10. The method of claim 1, wherein said insurance underwriter determines
a quote of a particular monetary amount forming the basis of said
gross premium charge to be collected and managed by said property
manager.
11. The method of claim 1, wherein said property manager supplies
a letter of credit (LOC) to said insurance underwriter in an amount
specified by said insurance underwriter.
12. The method of claim 1, wherein said proposed risk relates to
said leased residential unit.
13. The method of claim 1, wherein said insurer assures payment
to said property manager, if said losses occur.
14. A method of providing insurance coverage as a security deposit
guarantee, comprising the steps of: executing an agreement for a
leased residential unit by a lessor and lessee directing payment
of lease payments to a property manager; collecting said lease payments
from said lessee according to said agreement; and removing a gross
premium charge from said lease payments.
15. The method of claim 14 wherein the property manager assumes
the exposure as part of a self-insured program.
16. The method of claim 14 wherein the property manager determines
the amount to be collected from the lessee.
17. The method of claim 14, wherein said agreement incorporates
terms required by an insurance underwriter.
18. The method of claim 14, wherein said insurance underwriter
reviews and approves said agreement.
19. The method of claim 14, wherein said collecting and removing
steps are performed by said property manager.
20. The method of claim 14, wherein said property manager deposits
said lease payments received into an account held by said lessor.
21. The method of claim 14, wherein said property manager deposits
said lease payments into an account held by said insurer.
22. The method of claim 14, wherein the duration of said agreement
is one year.
23. The method of claim 14, wherein the directing step is performed
on a monthly basis.
24. The method of claim 14, wherein proceeds from said gross premium
charge are distributed according to: a guaranteed flat fee of the
total revenue collected is retained by said property manager; a
portion is placed into a fund administered by said property manager;
and a net premium is paid to said insurance underwriter.
25. The method of claim 24, wherein said insurer assures payment
for losses which exceed a certain percentage of said gross premium
charge when said property manager has exhausted both said fund and
said guaranteed flat fee.
Insurance Description
[0001] This application is a continuation-in-part of application
Ser. No. 10/673,798, filed on Sep. 29, 2003.
BACKGROUND OF THE INVENTION
[0002] 1. Field of the Invention
[0003] The present invention relates to a method of administering
property and liability insurance coverage for a leased, (i.e. rented)
residential premise in lieu of requiring a lessee (i.e., a tenant)
to provide a security deposit. This insurance strategy results in
relieving a lessee from having to post a security deposit payment
and from being liable for accidental damage to the leased premises
up to a pre-set limit while still protecting a lessor (i.e., the
landlord) against physical damage loss events.
[0004] 2. Description of the Prior Art
[0005] In creating the lease relationship and lease agreement,
the lessor will typically require a security deposit from the prospective
tenant. The term "security deposit" means the pledge of
property, money, or some additional obligation of a tenant to secure
an obligation. The security deposit functions to offset any outstanding
debt associated with the lessee. Security deposits mitigate risks
associated with non-payment and lease non-compliance, and function
to ensure the safe return of the property at the end of an agreement
term. For example, leased premises must be maintained and delivered
back to the lessor in relatively good condition. In this regard,
security deposits ensure that lessees are held financially responsible
for any wear and tear which is in excess of normal wear and tear,
including post-warranty repairs. Lessors require cash-based security
deposit payments to be made prior to the transfer of property or
other similar rights.
[0006] In many instances, however, security deposit payments can
present a source of disagreement and/or sizeable barriers to entry
for many consumers. Disagreements over damage or the amount of damage
are the source of numerous problems for lessees, property managers
and lessors. In addition, every year, millions of people are unable
to move into residential units because they are unable to make security
deposit payments to lessors. It is often difficult and inconvenient
for a lessee to advance funds in a lump sum manner for security
deposits upon execution of the lease agreement. For example, a person
may meet every lessor screening test in regard to the rental of
a residential unit, but not be allowed to execute a lease agreement
with the lessor because the person cannot make a substantial security
deposit. Moreover, lessors may also find themselves with substantial
liability upon termination of their lease relationship with the
lessor. Oftentimes, the ultimate responsibility for the care and
well-being of the leased premises is placed upon the property manager.
Therefore, when the damage to the property exceeds the amount provided
as a security deposit, the property manage is often forced to pay
the excess damage costs out of their own income. This can lead to
a financial hardship and an unexpected financial burden to property
managers.
[0007] In addition, the legalities associated with the maintenance
of a security deposit throughout the duration of the lease agreement
can be onerous. Generally, states hold lessors to strict guidelines
as to when and how to return security deposits. Lessors are typically
required to place the deposits in a separate account, paying tenants
any accrued interest on the deposits within 30 days after the termination
of the tenancy. The rules vary from state to state, but lessors
usually have a set amount of time in which to return deposits, usually
14 to 30 days after the lessee vacates the premises, either voluntarily
or by eviction. Lessors may normally make certain deductions from
a tenant's security deposit, provided they do it correctly and for
an allowable reason. Many states require lessors to provide a written
itemized accounting of deductions for unpaid rent and for repairs
for damages that go beyond normal wear and tear, together with payment
for any deposit balance. Lessors who violate these laws can be held
to stiff penalties.
[0008] In the prior art, methods of guaranteeing a security deposit
have been attempted to release lessees from the burden of having
to provide cash-based security deposits while assuring lessors of
protection against financial loss. For example, U.S. Pat. No. 6,208,978
entitled "System and Method for Issuing Security Deposit Guarantees
Based on Credit Card Accounts" issued on Mar. 27, 2001 to Walker
et al. discloses a data processing system coupled to a data storage
system that enables consumers to obtain security deposit guarantees
from their credit card issuers in accordance with private agreements
such as a lease agreement in lieu of providing a cash-based security
deposit to the lessor at the inception of the lease agreement. This
guarantee cover issued by the lessee cardholder's credit card issuing
bank or credit card issuer functions to provide the lessor with
an adequate assurance of security and lease agreement compliance
in the event that the cardholder does not fulfill his tenant obligations
as defined in the agreement. In the event that a lessor makes a
claim to the credit card issuer system within thirty days after
the end of the lease term, the amount of the claim is charged to
the lessee's credit card, thereby causing the credit card issuer
system to make a payment to the lessor. Many of these methods have
not been satisfactory over the long term, due to insufficient credit
limits, high interest rates, a potential for a debt trap, and other
risks.
[0009] While many insurance products and services exist to limit
one's liability and/or to provide monetary protection upon the occurrence
of certain events, no corresponding insurance coverage exists which
functions as a guarantee to lessors instead of providing a security
deposit. In a similar manner, no insurance coverage exists which
can be administered by an entity to the lease transaction, namely
the property manager, thereby providing the property manager with
control over claim adjudication regarding a leased premises directly
under his management, as well as entitling him to an additional
source of revenue through an administrative fee. Furthermore, no
insurance mechanism exists which effectively transfers the risks
associated with covering accidental damage from a tenant to a property
manager or an insurer.
[0010] Accordingly, there exists a need for a method which overcomes
the shortcomings of the prior art and allows lessees to enter into
a lease arrangement without requiring a security deposit. Without
such a method, many potential lessees will continue to be prevented
from acquiring access to properties that require security deposits.
To be effective, such a method must enable consumers to utilize
the insurance premium payments as a substitute for the often sizeable
lump sum security deposit collected at lease signing and at the
same time assure lessors that the lessee has a stake in the maintenance
of the leased apartment, thereby providing lessors with protection
against financial loss.
OBJECTS AND SUMMARY OF THE INVENTION
[0011] It is therefore an object of the present invention to provide
a method for providing insurance policies, products, services, and/or
coverage for leased premises for providing insurance protection
against liability which may arise as the result of excess wear and
tear and/or damage which may occur to a leased residential unit
during the lease term.
[0012] It is therefore a further object of the present invention
to provide a method for providing insurance policies, products,
services and/or coverage for leased premises for providing insurance
protection against liability which may arise as the result of post-warranty
repairs.
[0013] It is therefore a further object of the present invention
to provide a method for providing insurance policies, products,
services and/or coverage for residential units.
[0014] It is therefore a still further object of the present invention
to provide a method for providing insurance policies, products,
services and/or coverage which effectively transfers the risks associated
with covering accidental damage from a tenant to a property manager
or an insurer.
[0015] It is therefore a final object of the present invention
to provide a method that enables property managers to utilize an
insurance policy to obtain a security deposit guarantee from lessees
in accordance with lease agreements that is accepted by lessors
in lieu of cash-based security deposit payments that typically have
been required prior to the transfer of property.
[0016] These and other objects can be attained by creating a novel,
insured, self-administered method in which the property manager
is solely responsible for adjudicating and administering claims.
This method allows a tenant to transfer risk to a property manager,
thereby causing the property manager to assume responsibility for
all incurred accidental damage. In the present method, the property
manager can be responsible for managing the insurance policy. In
this regard, the tenant is required to pay a flat fee up front each
month or up front, depending upon the term of the lease, to be used
by the property manager to establish a loss fund from which the
property manager effects payment for damages sustained to the property.
For his convenience, the tenant pays this predetermined monetary
amount, or gross premium, instead of providing the lessor with a
large sum in advance of taking possession of the premises. The insurer
only plays an active role in the insurance scheme when it is contacted
to assume coverage for benefit payments exceeding a certain percentage
of the gross premium in a particular policy period. Because of the
insurance laws in some states, a fully insured group policy may
be issued in the name of the property manager. In these cases the
insurer provides benefits to the tenant and participates in the
administration of the program. The property manager continues to
participate in the administration of the program. In these situations,
the property manage continues to adjudicate and administer claims
while the claims funds are held by the insurer.
[0017] For the tenant, this method of insurance has the advantage
of increasing available cash because instead of paying a lump sum
at the inception of the lease agreement, an affordable insurance
charge is paid as agreed. Also, with the flat fee program, the tenant
receives protection up to a certain benefit amount for eligible
losses to the unit and the contents of a leased unit. In addition,
data and information related to the tenants, including use habits
and leasing histories do not have to be communicated to the underwriter.
Rather, the underwriter evaluates the property manager. For property
managers, this method of insurance coverage presents the advantage
of protecting them from having to pay for damage to the leased units
out of their own pocket. Moreover, due to the self-administered
nature of the program, property managers are entitled to an extra
source of income through the administrative fees and the retention
of any leftover funds in the loss account. Furthermore, the lessor
is confident that his interest in the premises is fully protected.
The lessor is provided with assurances that the tenant will abide
with the terms of an appropriate lease agreement because a fund
will be created from which the lessor is guaranteed to obtain payment
for damages caused by the tenant during his occupancy of the leased
property.
[0018] Accordingly, the present invention provides a method of
administering property insurance coverage for protecting individuals
from liability which may arise as the result of excess wear and
tear and/or damage which may occur to a leased residence during
the lease term, and further, for protecting individuals from liability
for post warranty repairs. More specifically, it is an object of
the present invention to provide a method that enables a property
manager to utilize an insurance policy to obtain a security deposit
guarantee in accordance with a lease agreement in lieu of a cash-based
security deposit payment that traditionally has been required prior
to the transfer of property.
[0019] In such a case, the property manager registers a particular
leased residential unit for the flat fee program by completing an
application form created by the insurer. The property manager has
the option of offering the program to a tenant on either a voluntary
or a mandatory basis. The voluntary plan permits the tenant to choose
whether to purchase the program for a specified monetary amount.
On the other hand, the mandatory plan is provided to the tenant
as a service at no additional cost to the tenant. In either option,
the flat fee program outlined in the present invention could be
subject to other applicable housing laws. The insurer then negotiates
and structures the insurance coverage with the underwriter. After
reviewing the lease agreement and depending on a set of other parameters
(such as the risks associated with the particular leased premises),
the underwriter will provide a premium quotation for the insurance
coverage to the property manager. The property manager incorporates
the gross premium charge determined by the underwriter into the
lease agreement. The gross premium is divided by the property manager
into three parts. First, a fiduciary account is established as a
loss fund whose proceeds in turn are used to satisfy any current
and future debts of the tenant. Additionally, the property manager
charges the tenant an up front, monthly or periodic administrative
fee to maintain the guarantee. Lastly, a portion of the gross premium
is paid to the underwriter as a net premium charge. In some states,
the fiduciary account may be held by the insurer.
[0020] Thereafter, the property manager is responsible for managing
a claim for damage and payment for the losses associated therewith.
The tenant reports an incident directly to the property manager
who is in charge of the claim process. The property manager assesses
the property damage and determines whether it warrants insurance
coverage. If the damage is covered under the insurance policy, the
property manager remits benefit payment from the loss fund. Additionally,
pursuant to the insurance policy, the insurer provides the property
manager with a guarantee that it will indemnify the property manager
if the total covered claims that occur in a specified policy period
exceed a certain percentage of the gross premium generated in that
policy period. This coverage guarantee, referred to as stop loss
coverage, will remain in effect during the term defined in the lease
agreement. Stop loss coverage is only triggered if the property
manager has exhausted both the loss fund and his earned administrative
fees. Lastly, the property manager provides the underwriter with
monthly management reports detailing the premium and damages paid
out of the loss fund. In those states requiring the group policy
and insurer participation, the property manager submits a monthly
report of claims paid by the property manager for reimbursement
by the insurer. In these states, the property manager can participate
in any profits. They can not be responsible for more than the premiums
paid to the insurer.
BRIEF DESCRIPTION OF THE DRAWINGS
[0021] The following detailed description, given by way of example
and not intended to limit the present invention solely thereto,
will be best understood in conjunction with the accompanying drawing
figures, in which:
[0022] FIG. 1 is a detailed schematic flowchart illustrating a
method for generating and issuing an insurance policy in accordance
with the present invention;
[0023] FIG. 2 is a detailed schematic flowchart illustrating a
method for creating and managing a lease agreement in accordance
with the present invention; and
[0024] FIG. 3 is a detailed schematic flowchart illustrating a
method for administering property and liability insurance coverage
in accordance with the present invention.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENT
[0025] Referring now to the drawings in greater detail in which
like numerals indicate like elements throughout the several views,
FIG. 1 depicts therein a flowchart illustrating a method for generating
and issuing an insurance policy in accordance with the present invention.
Referring to FIG. 1, the present invention begins with a property
manager 10 preparing and submitting a completed application form
12 to an insurer 14. The step of completing and forwarding the application
form 12 to the insurer enables the property manager to register
a particular leased apartment for the flat fee program, thereby
putting the program into motion. An underwriter 16 is then engaged
to facilitate the provision of insurance between the property manager
and the insurer. The insurer submits to the underwriter data and/or
information 18 which is relevant to determining insurance policies
and premiums for residential units.
[0026] Data and/or information 18 related to the lease of residential
units includes type and age of premises, parts and/or components
and/or systems of the premises along with their repair costs, replacement
costs, probability of damage, probability of post-warranty repairs
necessitated by wear and tear, damage, malfunctioning components
and/or systems and defects in materials, parts, components, systems
and/or workmanship, average costs for repairs, historical leasing
data, including typical repair costs and average total excess wear
and tear costs for the entire premises. Premises leasing data and/or
information also includes locality, regional and geographical data
which is correlated with excess wear and tear along with data and/or
information which is related to use habits and/or patterns in a
given area or areas.
[0027] At step 20, the underwriter will formulate an insurance
policy 22 and corresponding appropriate gross premium charge 24.
This insurance policy protects a tenant from damage to the unit
which results from theft or an accident within the unit. The policy
does not cover gross negligence or willful and wanton conduct. At
step 26, the policy can then be presented to the property manager
for acceptance. The property manager may then, at step 28, accept
or reject the insurance policy. Although the property manager obtains
the insurance policy on behalf of the lessee, the lessee typically
does not execute the policy. Rather, the tenant typically only receives
a certificate of coverage in paper form confirming coverage and
informing him of the nature and extent of the insurance protection.
The property manager is the actual policyholder. Upon acceptance
of the insurance policy, the property manager incorporates the terms
required by the underwriter into a lease agreement 30 drafted by
a lessor. The lease agreement is then reviewed 32 by the underwriter
for compliance with his terms. If the underwriter approves of the
lease agreement, the lessor and lessee execute the agreement. When
the lessee executes the agreement, risk has been effectively transferred
from the tenant to the property manager or insurer. The lessee will
have no liability for accidental damage to the property up to a
set limit. In addition, the property manager may be required to
supply a Letter of Credit (LOC) 34, promising to provide the underwriter
with a predetermined amount that is calculated to be sufficient
to cover the identification of damage to the premises and costs
associated with repair and replacement in the event that the damage
to the premises in a particular policy period exceeds a certain
percentage of the gross premium charge, thereby invoking the underwriter's
guarantee to indemnify the property manager. A letter of credit
is not required where the insurer holds the claims fund.
[0028] FIG. 2 is a flow diagram that illustrates the process for
creating and managing a lease agreement in accordance with the method
of the present invention. Referring to FIG. 2, a lease payment 36
is received by the property manager. The property manager then extracts
the gross premium 38 from the lease payment and preferably deposits
the remainder directly into a bank account of the lessor 40. The
property manager is entitled to a guaranteed flat fee of the total
gross premium as an administrative fee 42. A predetermined net premium
44 is paid to the underwriter for fronting costs 46, insurance and
reinsurance charges 48, third-party administrative costs 50, and
broker fees 52. The remaining funds are placed into a fiduciary
account as a loss fund 54 administered by the property manager.
The fiduciary account constituting the loss fund financed by the
gross premium is established to satisfy debts for damages 56 incurred
on a continuing basis. In some states, the loss fund is held by
the insurer.
[0029] At the end of the year, the property manager preferably
retains the remainder 58 in the loss fund. Three months after the
policy period has ended, thirty percent of the amount remaining
in the loss fund for that particular policy term is available for
use by the property manager. The balance will be divided into two
equal installments at six months and nine months after the specified
policy term has ended. During this time, additional funds should
typically already be available to pay claims for the new policy
period due to additional sales that have taken place within the
initial ninety day waiting period. If the property manager decides
not to renew the insurance policy or the policy is canceled, seventy
percent of the available loss fund money must remain untouched for
twelve months after the termination date of the program. This is
to ensure that adequate monies exist in the loss fund to cover any
damage sustained by the premises for at least the remainder of the
lease term, which is typically one year. Because the end of a policy
period may not always coincide with the end of a lease agreement,
the property manager is not permitted to deplete all of the remaining
funds in the loss account until the lessor's right to indemnity
from the lessee for damage to the premises has expired.
[0030] FIG. 3 is a flow diagram that illustrates the process for
self-administering property and liability insurance coverage in
accordance with the method of the present invention. When a claim
for damage 60 is reported, the property manager is responsible for
inspecting, measuring, and testing the property 62 in order to determine
whether the property meets the management criteria for coverage.
If the policy coverage is triggered 64, the property manager will
assume responsibility for the damage, and effect payment 66 for
the excess wear and tear and/or damage out of the loss fund, in
accordance with the terms of the insurance policy. If, however,
coverage is not triggered at step 68, the property manager will
have no liability at step 70. If the total covered claims that occur
in a specified policy period exceed a certain percentage of the
gross premium generated in that policy period 72, stop loss coverage
is activated 74. Stop loss coverage is provided so that the property
manager has protection against large or catastrophic losses. If
this occurs, the insurer will reimburse 76 the property manager
for covered claims in excess of 75%, not exceeding $1,000,000, in
a policy period. Stop loss coverage is only triggered if the property
manager has exhausted both the loss fund and his earned administrative
fees. In those states where the group policy is used, the property
manager is not responsible for more than the premium paid to the
insurer. The property manager receives the balance of the loss or
claims fund held by the insurer after all claims are paid.
[0031] In addition, the property manager is responsible for compiling
monthly detailed management reports 78 for the benefit of the insurance
underwriter 80. These reports include complete informational indicia
on the insured portfolio such as the physical address of the property,
amount of covered damages paid out of the loss fund, and premium
amount. Upon expiration of the term of the lease agreement, the
tenant may request a new lease agreement. If the new lease agreement
is requested, a new insurance application is received. If a new
lease agreement is not requested, the program terminates.
[0032] Those of ordinary skill in the art will recognize that the
present invention makes advances in the area of lease management.
The present invention provides a method of administering property
insurance coverage for protecting individuals from liability which
may arise as the result of excess wear and tear and/or damage which
may occur to a residential unit during the lease term, and further,
for protecting individuals from liability for post warranty repairs.
The method dispenses with the traditional security deposit mechanism,
which frequently creates an extreme financial burden on a lessee,
and replaces it with an insured mechanism in which the lessor is
still assured of coverage for any incurred property damage. Throughout
the lease, maintenance of the leased apartment through the administration
of insurance coverage is the responsibility of the property manager.
The insurer functions to provide an insurance guarantee to cover
benefits for claims which exceed a certain percentage of the gross
premium in a particular policy period.
[0033] Thus, having fully described the present invention by way
of example with reference to the attached drawing figures, it will
be readily appreciated that many changes and modifications may be
made to the invention without departing from the spirit or scope
of the invention which is defined in the appended claims.
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