Basement Apartment Insurance in Ontario: What Landlords Must Disclose

Introduction to Basement Apartment Insurance

Hi everybody and welcome to another episode of CRESI’s Ontario Landlord Series podcast. This episode here, we’re going to be continuing on with our basement apartment theme, and we’re going to be coming at it from the insurance angle today. So lots to think about when we’re thinking about now having two families in a home, whether you’re living above or you’re renting out both units. So we’re going to talk again about coming to landlord from a basement apartment, from insurance, today.

And to talk with us today about the insurance for our basement apartment is Azita Fathi from Prime Service Insurance. How are you doing today? Welcome.

Meet Our Expert: Azita Fathi

Thank you so much for having me, Kevin. I really appreciate the opportunity to be part of this conversation and connect with your audience. My name is Azita, as you mentioned. I’m a licensed insurance broker in Ontario.

I’ve been practicing since — and have had the privilege of working with many homeowners and landlords in Ontario.

Why Basement Apartments Are Exploding in Ontario

So one of the most common things that I see today is the increasing popularity of basement apartments. With mortgage rates the way they are and the rising cost of home ownership, it only makes sense for more people to turn their home into a revenue-generating property. And that is — whether it’s right or wrong, who am I to judge — but we just want to make sure that it gets done properly and rightly, and you get yourself protected.

What I mostly see happening is people have their basement turned into a separate unit and give it to their relatives, and they don’t think anything about it because the relative is living in the basement. But right there and then, the purpose for that property has changed and has turned into a separate unit for another family. So in the beginning, we may not be charging our relative any rent — they’ll be participating in paying utilities, for instance. And that on its own has again changed the purpose for that property.

So you have to let your insurance company know that you now have another person living in your basement. Whether it’s legal or illegal is not relevant at this point in time, right? Because I know you’ve talked about legal and illegal basement apartments — at the moment when somebody is living in a basement, the purpose has changed, and legal or illegal is not relevant at that point in time. Any question about this? Does that make sense?

Family vs. Tenants: The Insurance Trap

Yeah, I know for sure — because someone’s living in the basement, whether the basement is legal or illegal, that is regardless and irrelevant to the fact that somebody is living there, which would change the purpose. I think that’s interesting though, that you were saying about the family member.

Because even though there’s no lease in place — I guess that’s how you prove it, right, what’s going on — if they’re staying with you as a permanent guest or… So you’re absolutely correct. The landlord and tenant agreement is not coming into play here. However, if you have someone living in your basement, whether it’s your relative or not, and they have content, they have value that is stored in the basement — God forbid something were to happen to that property and we have a total loss, and the adjuster comes in and realizes that someone else was living in the basement, and you did not disclose that — because when you get your home insurance, there are specific questions you’re answering on that application.

And one of the questions is: is there someone, even related or not related, living with you, or do you need additional insurance for that person? If you did not disclose that on your application, the oversight is that that claim may be denied, or their content may not be covered — the property is covered, their content is not. So those are the little things that we have to look at.

Think about when we are having someone living in our basement apartment. I would say get all insurance disclosed so that the proper information is shared. We’ll get into the generalities of insurance on another episode — we’re going to talk about that for sure.

But the basement apartment thing — let’s say family’s living upstairs and they’re going to now rent out their basement. They’ve converted it all, they’ve had their contractor come in, it’s all legalized and done. And now they’re going to call you and say, hey, my insurance is going to change. What is going to happen? How does that all break down for them?

Essential Insurance Changes for Rental Conversions

Great question. Again, as soon as a client calls an insurance broker and says now the purpose of the property has changed and now it’s a rental property or a separate unit that has been rented, we don’t ask whether it’s legal or illegal — that’s the very first thing that we should know about the insurance. Of course, the assumption is that the property is safe, right?

So you do have the smoke detector, you have the fire exit — we assume that’s in place, otherwise you would not be renting this place, because it’s not safe for anyone to live in. The only two things that change: A, your liability increases because you have more foot traffic coming and going. So you definitely should increase your liability portion of your home insurance.

You have to add rental income protection to your home insurance. And you have to ask that tenant, or whoever is living in the basement, to have their own separate insurance to protect their content. So from a liability perspective, maybe the cost to you would be around $600 or $700 a year, if not less.

Less than $50 a month, right? Yeah, and that’s to make sure you’re going to be covered in case anything ever happens or goes wrong. Insurance is one of those things we all hate to pay, I think, but it comes in handy when you need it.

$20,000 MISTAKE: Real Denied Claim Case Study

Absolutely. So we just had a client that had a relative living in the basement, and this happened in Scarborough over the past two weeks, with all the cooling and the snow melting — we had a flood in the basement, and the landlord was away.

So the tenant is the one that called the insurance adjuster to come in for his own property. And that insurance then got subrogated to another insurance company, and that’s how the homeowner’s insurance found out that there was someone living in the basement. So the landlord’s claim was denied because the landlord had not disclosed to the insurance company that they had someone living in the basement, but the tenant, who had proper tenant insurance in place, got his content covered.

So we all know that our home insurance will cover accidental or sudden bursts of water, but it doesn’t cover seepage. In this case, it would have been covered under the home insurance if they would have disclosed it at the beginning. Just to go back to that — always disclose, let everybody know what’s going on.

Have your proper insurance in place to make sure that’s — $20,000 out of pocket. It’s a big hit.

The Smoke Alarm Case That Went to Court

It was. The other scenario I wanted to speak about — we kind of touched on it — the insurance company would not ask whether the basement is legal or illegal, but we assume that it’s safe. And one of the safety measures is having a smoke alarm in the basement. There was a total loss in Brampton just recently — actually, when I say recently, it was two months ago.

It made it to the news. It was one of our colleagues that had insured that property, and the content — the fire had destroyed the entire property. The basement was rented. The fire marshal determined that the basement did not have its own smoke alarm.

So the content for the tenant was not covered. And the building, of course, is covered under the fire insurance and safety. So the content insurance obviously is there to protect the tenant, right, in that case. But the smoke alarm would be the responsibility of the landlord.

Correct, correct. So this is where other insurance companies now get involved, because the original claim that went through was declined because of the fact that the home was not safe. Of course, as a homeowner, you have the right to take the insurance company to court, and that case is right now currently in the court, where they said they’re going to fix the upper level and they’re not going to touch the basement. So that’s where that’s at right now. Wow.

Landlord Insurance Checklist (Screenshot This!)

Because your episode is talking about homeowners and landlords and how to protect themselves, I just have a few checkpoints for landlords to make sure that when they are placing a tenant or renting a unit, these are the checkpoints they should have in place. Number one is, of course, make sure you increase your liability insurance. Number two — the other thing that’s often overlooked is you have a unit, whether it’s basement or a separate unit, and you have a 30-to-60-day overlap period from one tenant to the next. Please, please, please make sure that even for any days longer than 30 days that your property is vacant, again the purpose for that property changes, and you have to let your insurance company know.

Some people say it’s only 60 days, it’s only 30 days, I’m not going to worry about it. But in this case, if something were to happen and the property is damaged — whether it’s vandalism, whether it’s water — the claim would be denied. So liability: make sure to let the insurance provider know when the purpose changes. And number three — have the tenant get insurance, and definitely make sure that you are named as additional insured on that tenant policy.

So should that insurance get cancelled, you’ll be informed.

Tenant Insurance Secrets Every Landlord Needs

So from what I understand, and from what I’m aware of from the legal side of things, a landlord can’t evict a tenant because they don’t have content insurance. But at least this way you’d be notified, is what you’re saying, right? Yeah.

So whenever we’re setting up a lease, we get people to have tenant’s insurance — we can ensure they have it as part of the things we need to collect before we turn over keys. But once we’ve turned over keys to them, they can turn around and cancel their tenant content insurance as quickly as they want, which makes no sense to me. It protects their stuff, right, whether they’re in a condo or a basement apartment or whatever.

Content insurance is somewhere around $20 to $25 a month, I think, and it takes care of everything that they own. But they’re renting something else from somebody else, you know — it’s actually very inexpensive. You’re absolutely right, Kevin. It’s very inexpensive, and it protects the tenant. Beside the content, it has an additional living expense component to it.

So in the water case where you are repairing the basement, the insurance will pay for accommodation while they’re staying at a hotel. So there’s a lot of things that go into tenant insurance that’s there, exactly as you said, to protect the tenant and add that extra peace of mind for landlords too. So yes, being named as additional insured would prevent the tenant from cancelling their insurance without the landlord’s knowledge. That’s actually a good thing that I’ve learned there too.

I say this a lot of times — I learn something through every episode myself as well. So if we’re going to tell landlords that when tenant Susan is coming in, would that be for any property, I guess, simply, right? Yeah, they should — so how can they be added?

They have to tell the tenant to add them, I guess, at the time of it. So when you rent a property, one of the conditions is, besides checking the references and the credit and all of that, you should say you need tenant insurance, and you have to name the landlord’s company as additional insured when purchasing that insurance. And that is a standard practice among all insurance brokers — they know this and they will easily add the landlord’s name to the insurance, just the same way that banks want their name added to the home insurance, right?

As a mortgagee. How would the lenders know when you’re cancelling your insurance? They would be immediately notified by the insurance company. And that’s the exact same way for the landlord. That’s great.

I’m going to change that moving forward for sure. Thank you. My pleasure.

So is there a difference whether the family’s living upstairs with their insurance, or if there are two families living completely off-site staying in the home? Are we talking about the same home, the basement, or a separate unit altogether?

Owner-Occupied vs. Full Rental: Premium Differences

So I’m a landlord and now I have a duplex, up and down, with the basement, and the rest of the home is out that way — versus me being the homeowner and living upstairs and renting out my basement. Is there a difference in the insurance at all? No. So if you are not living in the property, it will increase the risk for the insurance company.

So if you have a duplex and you rent out both upstairs and the lower level, now you have two units that are rented, and the chances or risk of those tenants not caring for and maintaining the property the same way you would have increased your insurance liability. So to answer your question — short version, yes — the premium would be different if you’re not living at the home, because you’re not maintaining the property the same way you would have been if you had stayed there.

How Property Management Slashes Your Premium

Makes sense, right? Yeah, no, it’s now a full income property instead of just a supplementary additional dwelling down below you, where you’re there with your eyes and ears on the property at all times, versus having somebody else. Now, here’s one for you.

Does having a property management company take care of your investment property reduce your premium as well? That’s another question that we ask as a broker. Are you managing it, or do you have a property management company that is managing the property? The next question after that is: does the property management have liability insurance? And the minute you say yes, then we know that beside the insurance company, there is someone else that has skin in the game — and that’s why it lowers your premium.

Basement apartments — get insurance, disclose that that’s happening, whether it’s a family member just living down there as an extra person and not paying rent — let your insurance company know that as well. If it is a rental property and you are renting it out, obviously make sure they know that this is going on, that someone is down there, that it has to be safe, that it should be legal. Obviously not all situations can be done that way, and we do need housing, and it’s what it is — but make sure that it is completely safe for somebody to live in. Azita, do you have any final things that you wanted to share with anybody today?

Complete Basement Apartment Insurance Breakdown

Prepare the checklist for basement apartment coverages, if I may. So A, as you said, inform your insurer about the rental unit. Number two, add a rented premises endorsement — so that means you’ve rented the basement.

Number three, include rental income protection — so you’ve rented a basement to generate that income; should something happen, you want the insurance company to continue paying you that rent while you’re getting your property fixed. Four is increase your liability, as we discussed, because extra foot traffic increases the liability.

And definitely, definitely add yourself as additional insured on the tenant policy. Notify your provider if your property is going to be vacant for more than 30 days. And the most important piece is make sure that you have a smoke and CO2 detector installed in the basement level or the lower level. That’s it for me.

Excellent. Thank you so much. I appreciate your time today. Yeah, we’ll talk to you again soon.

Absolutely, I appreciate the opportunity. Bye. Please remember, while we are professionals, this podcast is for informational and entertainment purposes only. The advice shared may not apply to your unique situation.

Always seek personalized advice from a qualified professional before making any investment decisions. Hey everybody, thanks so much for joining us this week. I hope you enjoyed the episode. If you’re finding it informative and useful, make sure to like, subscribe, share with a friend so that we can keep getting the information out there to Ontario landlords.

Keep on joining us, we’ll see you next time.