You’re here, so its crossed your mind that you may need some level of landlord insurance since you’re now a landlord. Perhaps you’ve been a landlord for a while and you’re reevaluating whether you’ve got the right coverage. Well, it’s good thing, because we’ve built this guide to specifically help you figure out if you need insurance, what your options are and what you can expect to pay.

Before we get started, let’s talk quickly about what landlord’s insurance is.

What is Landlord’s Insurance?

Hopefully you’ve realized that having rental properties is a business, even if you have just the one unit. You have rental income and you have expenses. And the fallout from that is your profit (and hopefully not a loss). You can raise rents to increase your income and you can manage expenses to keep costs down. You have a lot of control. Landlord’s insurance, however, is to protect you from certain things you DON’T have control over.

You can have above market rents, the best tenants and be the world’s best operator (keeping your expenses down), but if there’s a fire, flood, explosion or vandalism, your business could be wiped out. And these things are almost entirely out of your control. An insurance policy will normally cover these kinds of unexpected events and gives you the means to control the uncontrollable.

A landlord policy will typically cover the following:

Property Damage – covers damage due to events like fire, vandalism, theft and storms that could occur to the physical structure of the property (the building).

Liability Insurance – covers lawsuits, bodily injury claims, medical fees, funeral costs, legal fees, settlement costs, and other liability claims against you as the landlord for events that occur on your property. If you didn’t shovel and de-ice the sidewalks this winter and a tenant slips, you could be liable for all the medical fees, or worse a settlement against you for negligence. Liability insurance may also cover another person’s property damage in the event you could be liable. If you never got around to fixing a leak that you were aware of and the leak damaged a tenant’s expensive art collection, you could be on the hook.

Loss of Income – when there’s a loss event (such as a fire, flood, etc.) that causes a tenant to move-out and you to subsequently lose rental income, this insurance will help compensate you for lost income. Its important to note that the lost rental income must be due to a loss event, and not something like an eviction, which is not covered.

Optional Coverage – there are several additional options you can add to a standard policy, such as rent guarantee insurance, natural disaster insurance, and coverage on property items such as furnishings or carpet in the rental property.

Do I need landlord’s insurance?

Although a landlord policy is not required by law, it is prudent to have some level of coverage, specifically for the reasons given above. However, many first-time landlords ask if they truly need separate coverage or if their existing homeowner’s policy (or another policy) would cover damages and/or liabilities.

What does an existing homeowner’s policy do for landlords? Well, not much. In most circumstances, your insurance company will deny your claim if it wasn’t clear that you’d be renting to other people. It’s unlikely that you’d be covered for property damage and almost certainly won’t be covered for any type of liability claims, especially those arising from your tenants or his/her guests.

This question comes mostly from landlord’s with short term rentals or those who also live in the property or building. If you’re only renting your property for a couple weeks per year, your current homeowner’s policy may be OK, but if you have more than just an occasional tenant, your existing policy won’t do much. And if you don’t live in the building and/or have a lease agreement in place for 12 months, which is normal, you’ll certainly need something different than a homeowner’s policy.

It’s best to talk with your insurance agent, who can direct you to the right type of coverage. It’s far worse to be paying for something that you thought covers you and actually doesn’t cover you at all. You’d literally be paying for nothing.

Property Damage: What are the options?

Property coverage typically refers to the coverage of physical loss due to sudden, accidental, and direct events. Policies may be under many names (Landlord Insurance, Landlord Protection, Dwelling Protection, etc.), but are generally referred to as dwelling policies.  Then there are typically three levels of coverage, abbreviated as: DP1, DP2, DP3. These define how broad your coverage is.

  • DP1 (aka “basic property coverage”): basic coverage which includes relatively common events like fire
  • DP2 (aka “named peril coverage”): broad coverage, which includes events/perils that are specifically named, like windstorm, hail, fire or vandalism
  • DP3 (aka “comprehensive property coverage”): broadest coverage, which is an open policy, or special policy, where unless a peril is specifically excluded, it’s covered

Because of the more encompassing level of protection, most landlords choose a type of coverage similar to DP3, or comprehensive property coverage. However, this does depend on your situation as a landlord. If you’re renting out a single unit condo that you bought, initially to live in yourself, you may not need that broad of protection since the condo association should have a policy to cover most of the building related events. In that situation, you’re better with a basic coverage, and one that includes some liability protection (see below).

Payout Terms: Cash Value vs Replacement Value

Each of these different coverage levels may also have different kinds of physical payouts. For example, with a DP1 coverage, it may be common to see claims paid in terms of cash value. That means you’d receive the current value (post depreciation value – taking into account age and remaining life of the property that was damaged).

However, you should consider a policy that provides payouts in terms of replacement value. That means you’d receive the amount that it would take to replace or repair damages in today’s actual dollars. This is favorable because you’re typically not able to buy used materials or depreciated labor (obviously this doesn’t exist) when repairing damages. And unless you otherwise plan to supplement your claim personally, replacement value is preferable.

It’s understandable that if you were only doing a cursory review of your coverage and payout options, you may see something about being paid for the”cash value” and instinctively think, “yes, I want to be paid in cash” vs paid the “replacement value” and think “no, I want the cash, not a replacement”. However, your initial thoughts would be wrong. You’d be paid in cash in both situations, just different amounts. But now you know.

Liability Insurance: What are the Options?

Liability insurance, as mentioned previously, covers situations when a tenant or visitor is injured due to the landlord’s negligence, a maintenance issue, or failure on the part of the landlord to keep the property safe and in working order. Typically, a tenant or visitor injures themselves on the property and believes the landlord is responsible for this.

The coverage is to protect you from financial loss in the situations where a tenant or visitor brings up a lawsuit seeking reimbursement for medical bills, legal fees and possible even distress. Typical events that may trigger this are slips, falls, animal bites, and even when a tenant is victim of a crime (usually because of failure to maintain proper lighting, security, etc.).

The options typically include listing what liability you may want covered. For instance, if there’s a swimming pool onsite, you may want coverage specifically for accidents that could occur around that. Most experts recommend having $1 million in liability coverage per rental as a sufficient coverage. However, this does depend on the specifics of your rental.

Other Options?

There are several other options that you can add on to your coverage. We’ve included the two most commons ones below:

Landlord Protective Coverage. May include equipment breakdowns (such as boilers and furnaces). These aren’t typically covered by the protection policies mentioned above as they’re not considered sudden, accidental or direct events.

Lost Rental Income. When you have a covered loss (a loss of property that is previously covered by your policy), you may also suffer from lost rental income, particularly when a tenant has to vacate the property while its under repair. If you elect to add this option, you’d be compensated for lost rental income as well.  Vacancies due to evictions or turnover are not considered a covered loss and therefore lost rental income in those cases would not be covered.

What does it cost?

When people are thinking about the cost of the policy, they’re typically thinking about the “premiums”. This is the monthly or annual cost of the policy. It’s common to see an average landlord protection policy premium be in the annual $800 – $1200 range. As a comparison, an average homeowner’s policy may be in the range of $700 – $1000 annually, depending on size.

There are a bunch of factors that affect the pricing, but the majority of those factors are related to the rental itself and aren’t really a lever for you to adjust the cost with (assuming you want to properly cover the property).

There are three factors, which ARE in your control that affect the pricing: the type of coverage, the deductible and coverage limits.

The Type of Coverage

This refers to the types of physical coverage mentioned above as well as what options you add on. Typically, the more broad your coverage (comprehensive coverage), the more expensive the policy will be. If you include options like the “lost rental income” coverage, then the premium will also be up. If you’re choosing a “named perils policy” (DP2), then the more named perils you add, the higher the annual premium will be. The other factor included here is whether you are being reimbursed for “cash value” or for “replacement value”.

The Deductible

The deductible is the amount that you, as the landlord, must pay before the insurance carrier then picks up and starts paying towards the claims. The higher the deductible you set, the lower the monthly/annual premiums will be. Simple as that.

The COVERAGE Limits

There are going to be upper bounds to the coverage, where amounts greater than the upper bounds are no longer covered. For instance, if you have $1 million in liability coverage, but get sued (and a judgement against you) for $1.5 million, you’re covered for only the $1 million (minus the deductible). The rest would have to come out of pocket.

The other factors that affect pricing (again mostly related to the property itself):

  • The geographic location of the property, and if there are known risks in the area
  • The size of the structure and its age/condition
  • Whether your electrical wiring is up to current code
  • How many rental units you have
  • Whether you allow smokers to rent from you
  • Whether your complex has a swimming pool
  • Whether you have fire sprinklers installed in your rental units
  • Whether the complex has gated access
  • Whether you have burglar alarms

What About Renter’s Insurance?

Tenants should get their own renter’s insurance policies. The policies we’ve described here do not cover the renter’s personal belongings. Renter’s insurance, just like landlord’s insurance is not required by law. And surprisingly studies have shown that nearly half of renters don’t get their own insurance. Unfortunately for landlords, tenants have the mindset that all landlords are rich and have the wrongful impression that they can make claims against the landlord if their personal property is damaged. That’s why its in your best interest to require your tenants to purchase their own renter’s insurance policy.

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