Many inexperienced landlords assume a homeowner’s insurance policy will protect them while renting out a home, but the fact is a homeowner’s insurance policy almost never covers you unless the home is owner-occupied. Landlords need dedicated insurance policies for protection against damage, theft, and liability issues to avoid costly risks.
While insurance is frequently overlooked by real estate investors and first-time landlords, it’s an important part of the success of any real estate venture.
Unit Rented to Others Coverage
For landlords who will live in the same home as the tenant, a standard homeowner’s insurance policy can usually be endorsed with additional “unit rented to others” coverage. This specific type of coverage protects you from liability issues and covers the tenant’s property, but it will only protect you if you also occupy the property.
Dwelling Policies for Rental Units
There are several names for policies for rental units but they are usually called dwelling policies. Dwelling policies fall into 3 categories:
- DP-1 policies offer basic coverage for things like vandalism and fire.
- DP-2 policies offer broader coverage for named perils like wind damage in addition to vandalism and fire. Most DP-2 policies offer a provision for collision coverage if a car hits the property.
- DP-3 policies are open peril policies that cover all perils that aren’t specifically excluded.
A DP-3 policy offers the greatest amount of protection. Where a DP-1 policy may only offer the actual cash value of the property, a DP-3 policy will give the replacement cost if the property is destroyed. With a cash value, that means a 10-year-old roof will be written down substantially due to its advanced age. With a replacement policy, you will be covered for the cost of a replacement roof.
Landlord Insurance Policies
Most major insurance companies offer what is referred to as a landlord or landlord protective policy that offers many forms of protection specific to landlords such as:
- Equipment breakdown coverage for issues like furnaces
- Loss of rental income coverage if the building must be vacated for repairs
- Liability coverage that protects the landlord if they are sued for damages, such as those resulting from someone falling and getting hurt on the property
- Property damage coverage that protects you against damage to the property caused by vandalism, theft, fire, and storm damage.
Be sure you explore additional forms of coverage you may need. For example, landlord policies do not always cover vandalism to the property caused by a tenant unless you buy additional Vandalism coverage. You may also want optional coverage like employer liability coverage, rent guarantee insurance, and landlord contents insurance that covers any personal property you have in the building like furniture or carpet.
Homeowners and landlords both typically need to purchase flood insurance as a separate policy that’s added to a base policy. Flood insurance can protect you against water damage to the property from a sewer backup, heavy rains, flooding, natural disaster, and more whereas a base landlord or dwelling policy will offer protection against water issues like broken water heaters or pipes inside the home.
Failing to get flood insurance can wipe out your income and investment in a disaster. While FEMA offers disaster aid to homeowners and tenants who suffer losses in a flood, rental property owners do not receive help from FEMA because they are considered business owners.
While landlord insurance can increase the cost of ownership of a rental property, it’s always important to have to protect you against everything from lawsuits and tenant vandalism to natural disaster, fire, and floods.