Off-Campus Student Housing

This year, The Boston Globe published “Shadow Campus,” which exposed off-campus housing conditions that lead to the 2013 death of Boston University senior Binland Lee. Ms. Lee died of smoke inhalation, trapped in her attic bedroom. In Boston, 25 colleges and universities are within city limits. The off-campus population increased to more than 45,000 from 2006 to 2013. There are approximately 154,000 rental units; about one in 67 units is inspected in a timely fashion. Since 2000, the median cost of room and board for college students has climbed nearly 60% ' almost double the inflation rate.

The phenomenon is not unique to Boston. Between 2009 and 2011, there were 23.2 million college students in the U.S. In 2013, the Census Bureau recorded that 25% resided off-campus. Among the 50 states and the District of Columbia, students living off campus ranged from 13.3% (New Jersey) to 40.3% (North Dakota).

Fire Hazards and Other Perils

The U.S. Fire Administration reports that 86% of campus-related fire fatalities since 2000 occurred in off-campus housing. Common factors in a number of these fires are: lack of automatic fire sprinklers; missing or disabled smoke alarms; careless disposal of smoking materials; impaired judgment from alcohol consumption; and fires originating on upholstered furniture.

Fires are perhaps the most deadly perils affecting off-campus housing, but they are not the only ones. Filthy units; pest infestations; electrical problems; illegal bedrooms in basement or attic spaces; inadequate ingress/egress; broken locks; blocked exits; and heating and plumbing issues are all common complaints. Another is rampant overcrowding. Despite Boston's zoning ordinance limiting students per-dwelling, overcrowded apartments are commonplace in the city's college neighborhoods.

The Globe implies that none of this is news to many landlords and property managers, who know that the apartments are in serious disrepair, condone overcrowding, and turn a blind eye to ongoing building code violations. An over-taxed building inspection system provides an imperfect means to monitor the situation. Boston Mayor Martin Walsh laid the off-campus housing controversy at the feet of “irresponsible property owners.”

The risk and liability exposures of scofflaw landlords are nothing new. But in places with a surfeit of students desperately looking for off-campus housing, plus the increased rents that landlords can command, the exposures are magnified even for generally law-abiding landlords. Underwriters know typical residential landlord practices, but are they equally prepared to deal with situations where building inspections are infrequent (if at all), students seem to put up with almost anything in their living conditions, and students, landlords and property managers don't hesitate to jerry rig dwellings to accommodate large numbers of residents or by doing ad-hoc electrical work?

Fire Insurance

Underwriters of fire insurance policies have long used the concept of an “increase in hazard” to limit coverage. Generally, the concept means that where there is an increase in hazard to the insured property that is in the knowledge or control of the insured, coverage will be suspended. If a loss occurs while coverage is suspended, the coverage may be denied. If the hazard is cured, a loss after the reinstatement is covered.

An increase in hazard will generally not be found if there has been merely a casual or temporary change in the character of the premises. Likewise, an insured's negligence is not an increase in the hazard unless it results in a change to the property, use, or occupancy.

All of the following circumstances could, according to courts, constitute an increase in hazard sufficient to suspend or to deny coverage: intentionally disabling fire-sprinklers, smoke or fire alarms; a change in number of bedrooms; a failure to remove debris; the storage of explosive materials, including alcohol; and converting a single-family dwelling to a boarding or rooming house.

Moreover, in at least one case, the increase in hazard did not need to give rise to the loss for the insurer to deny coverage. In Boyd v. Aetna Ins. Co., 192 F.Supp. 435 (S.D. Fla. 1960), a fire broke out on property insured by Aetna. When the local volunteer fire fighters arrived, they saw several signs warning, “Beware of trap gun in this house.” The firemen did not enter the house, and it burned to the ground. The court held:

[I]f increase of hazard is established, the fire need not result from that which operated to increase the hazard, that is to say, that the insurer is not required to prove causal connection between the alteration of the risk and the fire, since under the policy terms the coverage is suspended during the continuation of the increased hazard.

All that was required for the increase in hazard clause to apply was that there was an “increased hazard by a means within the knowledge and under the control of the insured.”

'Moral Hazard'

A “moral hazard” can also effect an increase in hazard clause. This refers to the effect of insurance in causing the insured to relax the care to safeguard property because loss will be borne by insurance. In one court, moral hazard was held to be heightened where: 1) an insured learned it could not operate the insured premises for its intended purpose; 2) the original tenant discontinued operation; 3) no replacement tenant could be found; and 4) the insured corporation lost money operating the premises. In general, however, the worsening of the insured's financial condition alone is not enough to constitute an increase in hazard: Evidence of physical change in the condition, occupancy, or use of the property was also required by the above-mentioned court.

Based on that interpretation, a moral hazard may be a possibility when an unscrupulous and/or desperate insured landlord is confronted with a chance to benefit financially from an insurance policy's coverage terms. The costs of even modest homes in the Boston neighborhoods surveyed are sky-high due to the ability to charge high rents to groups of students. A landlord who purchases expensive property in a college town with a high demand for off-campus housing may be tempted to use the property for any purpose to recoup the investment. But without a physical change to the property or its use, it is not likely that this alone would constitute an increase in hazard.

More likely, we think, is the landlord who rents to a limited number of students, then knowingly accepts rent from several more, and looks away while the house becomes a regular crash-pad to scores more. This looks more like a change in the use or occupancy of the property, converting it into a boarding house.

With that change in use comes additional stresses to the property that change its condition ' like the amount of debris or clutter that accumulates, over-taxed electrical systems and appliances such as ovens. These factors are fire hazards that need not even lead to a loss to jeopardize coverage. If these factors existed before coverage bound, the carrier may rely on rescission if the conditions were not disclosed or were inadequately disclosed in the application. But where the change arises later, the increase in hazard clause may be implicated.

Conclusion

For underwriters, the lessons are clear. You cannot rely on building inspections of the properties you insure. You cannot rely on landlords in these circumstances to do the “right thing.” The off-campus housing situation in the U.S. creates a unique mix of factors that challenge property underwriters like never before. They may make inevitable an increase in hazard.

Mary-Pat Cormier is a partner in the Boston office of Bowditch & Dewey. She can be reached at [email protected]. Jennifer Garner, an associate in the same office, can be reached at [email protected].

This year, The Boston Globe published “Shadow Campus,” which exposed off-campus housing conditions that lead to the 2013 death of Boston University senior Binland Lee. Ms. Lee died of smoke inhalation, trapped in her attic bedroom. In Boston, 25 colleges and universities are within city limits. The off-campus population increased to more than 45,000 from 2006 to 2013. There are approximately 154,000 rental units; about one in 67 units is inspected in a timely fashion. Since 2000, the median cost of room and board for college students has climbed nearly 60% ' almost double the inflation rate.

The phenomenon is not unique to Boston. Between 2009 and 2011, there were 23.2 million college students in the U.S. In 2013, the Census Bureau recorded that 25% resided off-campus. Among the 50 states and the District of Columbia, students living off campus ranged from 13.3% (New Jersey) to 40.3% (North Dakota).

Fire Hazards and Other Perils

The U.S. Fire Administration reports that 86% of campus-related fire fatalities since 2000 occurred in off-campus housing. Common factors in a number of these fires are: lack of automatic fire sprinklers; missing or disabled smoke alarms; careless disposal of smoking materials; impaired judgment from alcohol consumption; and fires originating on upholstered furniture.

Fires are perhaps the most deadly perils affecting off-campus housing, but they are not the only ones. Filthy units; pest infestations; electrical problems; illegal bedrooms in basement or attic spaces; inadequate ingress/egress; broken locks; blocked exits; and heating and plumbing issues are all common complaints. Another is rampant overcrowding. Despite Boston's zoning ordinance limiting students per-dwelling, overcrowded apartments are commonplace in the city's college neighborhoods.

The Globe implies that none of this is news to many landlords and property managers, who know that the apartments are in serious disrepair, condone overcrowding, and turn a blind eye to ongoing building code violations. An over-taxed building inspection system provides an imperfect means to monitor the situation. Boston Mayor Martin Walsh laid the off-campus housing controversy at the feet of “irresponsible property owners.”

The risk and liability exposures of scofflaw landlords are nothing new. But in places with a surfeit of students desperately looking for off-campus housing, plus the increased rents that landlords can command, the exposures are magnified even for generally law-abiding landlords. Underwriters know typical residential landlord practices, but are they equally prepared to deal with situations where building inspections are infrequent (if at all), students seem to put up with almost anything in their living conditions, and students, landlords and property managers don't hesitate to jerry rig dwellings to accommodate large numbers of residents or by doing ad-hoc electrical work?

Fire Insurance

Underwriters of fire insurance policies have long used the concept of an “increase in hazard” to limit coverage. Generally, the concept means that where there is an increase in hazard to the insured property that is in the knowledge or control of the insured, coverage will be suspended. If a loss occurs while coverage is suspended, the coverage may be denied. If the hazard is cured, a loss after the reinstatement is covered.

An increase in hazard will generally not be found if there has been merely a casual or temporary change in the character of the premises. Likewise, an insured's negligence is not an increase in the hazard unless it results in a change to the property, use, or occupancy.

All of the following circumstances could, according to courts, constitute an increase in hazard sufficient to suspend or to deny coverage: intentionally disabling fire-sprinklers, smoke or fire alarms; a change in number of bedrooms; a failure to remove debris; the storage of explosive materials, including alcohol; and converting a single-family dwelling to a boarding or rooming house.

Moreover, in at least one case, the increase in hazard did not need to give rise to the loss for the insurer to deny coverage. In Boyd v. Aetna Ins. Co. , 192 F.Supp. 435 (S.D. Fla. 1960), a fire broke out on property insured by Aetna. When the local volunteer fire fighters arrived, they saw several signs warning, “Beware of trap gun in this house.” The firemen did not enter the house, and it burned to the ground. The court held:

[I]f increase of hazard is established, the fire need not result from that which operated to increase the hazard, that is to say, that the insurer is not required to prove causal connection between the alteration of the risk and the fire, since under the policy terms the coverage is suspended during the continuation of the increased hazard.

All that was required for the increase in hazard clause to apply was that there was an “increased hazard by a means within the knowledge and under the control of the insured.”

'Moral Hazard'

A “moral hazard” can also effect an increase in hazard clause. This refers to the effect of insurance in causing the insured to relax the care to safeguard property because loss will be borne by insurance. In one court, moral hazard was held to be heightened where: 1) an insured learned it could not operate the insured premises for its intended purpose; 2) the original tenant discontinued operation; 3) no replacement tenant could be found; and 4) the insured corporation lost money operating the premises. In general, however, the worsening of the insured's financial condition alone is not enough to constitute an increase in hazard: Evidence of physical change in the condition, occupancy, or use of the property was also required by the above-mentioned court.

Based on that interpretation, a moral hazard may be a possibility when an unscrupulous and/or desperate insured landlord is confronted with a chance to benefit financially from an insurance policy's coverage terms. The costs of even modest homes in the Boston neighborhoods surveyed are sky-high due to the ability to charge high rents to groups of students. A landlord who purchases expensive property in a college town with a high demand for off-campus housing may be tempted to use the property for any purpose to recoup the investment. But without a physical change to the property or its use, it is not likely that this alone would constitute an increase in hazard.

More likely, we think, is the landlord who rents to a limited number of students, then knowingly accepts rent from several more, and looks away while the house becomes a regular crash-pad to scores more. This looks more like a change in the use or occupancy of the property, converting it into a boarding house.

With that change in use comes additional stresses to the property that change its condition ' like the amount of debris or clutter that accumulates, over-taxed electrical systems and appliances such as ovens. These factors are fire hazards that need not even lead to a loss to jeopardize coverage. If these factors existed before coverage bound, the carrier may rely on rescission if the conditions were not disclosed or were inadequately disclosed in the application. But where the change arises later, the increase in hazard clause may be implicated.

Conclusion

For underwriters, the lessons are clear. You cannot rely on building inspections of the properties you insure. You cannot rely on landlords in these circumstances to do the “right thing.” The off-campus housing situation in the U.S. creates a unique mix of factors that challenge property underwriters like never before. They may make inevitable an increase in hazard.

Mary-Pat Cormier is a partner in the Boston office of Bowditch & Dewey. She can be reached at [email protected]. Jennifer Garner, an associate in the same office, can be reached at [email protected].