Landlords, we know you have a great deal to contend with. Maintaining a property, paying the mortgage, keeping the tenant happy … these are just three items on a very long list. Most landlords have a career and even family responsibilities to handle, too. So, when it comes to landlord insurance, it might be tempting to simply find a well-priced deal and sign on the dotted line.
We are here to tell you that by spending even a brief amount of time researching the particulars of the insurance policy, is an absolute must. Don’t be fooled into thinking that all policies are the same.
Many people don’t realize that landlord insurance is completely different compared to standard homeowner policies, where the policyholder actually lives on the property, but rentals are considered to be a greater risk for insurance companies. It’s simple: Tenants are not invested in a home in the same way the owner is; therefore, they may not treat it with as much respect.
Oftentimes homeowners have been caught when they fail to notify their insurers that they have moved out of home and are now renting it. The problem is, if you fail to distinguish your insured home as a rental property, the policy may not pay out when you may need it to. So, be sure to protect your investment and know that you are covered with adequate insurance.
To save you unnecessary headaches and cost, we have compiled a list of the five critical clauses that your rental insurance absolutely must cover.
“Dwelling coverage, sometimes called "dwelling insurance," is the part of your homeowners insurance policy that helps to pay for the rebuilding or the repair of the physical structure of your home if it's damaged by a covered hazard.”
This is the main purpose of your housing insurance, and protects you in the case of structural issues, major plumbing problems and acts of nature (including hurricanes, earthquakes, riots, fire, break in, vandalism). The specifics will depend on your policy, so take the time to determine exactly what is covered. Various locations may exclude coverage during certain strong weather situations, for example.
The key point to look for here is whether you are receiving a guaranteed replacement cost, or GRC. GRC means that your property would be replaced and rebuilt in the event of structural damage, as opposed to you only receiving the depreciated value of bricks and labor, for example.
You should also be aware of the terms DP1 (basic), DP2 (broad) or DP3 (special), which identify the level of dwelling and fire coverage that a policy offers.
The DP1 is a “named perils only” policy which only insures those limited perils specifically named in the policy. Unfortunately, a covered perils list that only includes fire, lightning and internal explosion is not much of a policy at all. To broaden the list, the DP1 allows an insured to add an Extended Coverage (EC) perils endorsement to increase the number of covered perils to a total of 12. These nine additional EC perils include Riot, Civil Commotion, Explosion (external), Vehicles, Smoke, Aircraft, Hail, Windstorm and Volcanic Eruption.
The Broad DP2 form, like the DP1, is a “named perils only” policy and contains all the perils provided under the Basic form. The additional protection you will find on the DP2 form include coverage for damage from Burglary, Weight of Ice and Snow, Collapse of Building, Falling Objects, Freezing, Artificially Generated Electrical Current, Glass breakage, Accidental Discharge of Water and Steam, and damage from Sudden and Accidental Tearing, Cracking, Burning or Bulging of steam or water systems.
Special form or DP3 has the same “named perils” coverage as on the DP2 form for personal contents but adds open perils coverage on the dwelling and other structures. Open perils means that coverage will be provided, unless it is specifically excluded in the wording of the policy. This significantly expands coverage on the real property compared to the DP2 and, coupled with losses paid on a “replacement cost basis,” makes the DP3 policy the most comprehensive of the three dwelling forms.
Research the level of coverage you are offered for water damage, beyond that of the pipes and heating system. Excess water can cause catastrophic damage to your home, so this is something that should be carefully considered. Flood water, heavy rains and even backed up sewage may not be covered by your base policy … find out how to add this to your insurance depending on your location.
“All it takes is a few inches of water to cause major damage to your home and its contents. This interactive tool shows you what a flood to your home could cost, inch by inch.”
3. Legal Liability
It can be easy to overlook just how vulnerable you are as a landlord when it comes to the law. Your agreement with your tenant means that you have certain legal responsibilities for their safety, as described by NOLO below.
“Under most state and local laws, landlords must offer and maintain housing that satisfies basic habitability requirements, such as adequate weatherproofing, available heat, water, and electricity, and clean, sanitary, and structurally safe premises.
Local building or housing codes typically set specific standards, such as the minimum requirements for light, ventilation, and electrical wiring. Many cities require the installation of smoke detectors in residential units and specify security measures involving locks and keys. Your local building or housing authority and health or fire department, can provide information on local housing codes and penalties for violations.”
If a tenant feels that you have failed to meet any of these responsibilities, they may choose to sue you, which can be a very costly experience. Therefore, it’s wise to check, in advance, that your landlord insurance covers you in these instances, with legal fees, settlements and even medical costs.
4. Fair Rental Income Protection
Fair rental income protection is something that you can choose to add to your basic landlord insurance. This will cover the cost of lost rental, in the event of repairs or an emergency. This does not protect rental income in situations such as eviction or non paying tenants, however.
“If you can’t rent out your property because it’s damaged, you’re losing valuable rental income. With Fair Rental Income protection, if your property becomes uninhabitable because of a covered loss, you’ll receive compensation for the rental income you would have received. This covers the time required to either repair or replace the rental unit — up to a maximum of 12 months." Allstate.com
While this is a very useful safety net, it is important to balance the increase in premium against the potential benefit you will receive from this.
5. Personal Property Protection
Personal property protection is a great addition to your landlord insurance if you are renting a furnished property. The majority of landlords rent empty units, but it is still useful to consider if you are supplying carpets and curtains, as these are covered in addition to any furniture. Again, it is wise to examine how much this clause will add to your monthly premium before you make any firm decision.
“If the tenants are renting the property unfurnished, it is advisable for them to take out tenant insurance to cover their property, as well as any protecting their liability for any damage that they may accidentally cause to your property. The National Fire Protection Association found the average loss from a house fire was $19,500, which could drive your tenant into significant debt, rendering them unable to continue paying rent, even after the property is habitable again." NFPA.org
Tenant insurance is so useful to landlords, that many include it as a condition in their tenancy agreement, as there is no legal requirement for tenants to have this insurance otherwise.
When it comes to insuring your rental property, it’s best to take the time to ensure you are sufficiently covered. The amount of time, energy and, of course, money that you have dedicated to this investment must be protected in the case of accident or emergency. Here we have covered five key areas in your coverage to be aware of, and as policies are not created equal, it is prudent to dig further than the headline when you are choosing a policy. Levels of insurance coverage vary, as explained regarding the differences between DP1, DP2 and DP3, for example.
Determine whether you will receive the cash value or replacement value for any damage. It’s vital you understand the finer details of any policy in which you are enrolling, before disaster strikes. The average cost for landlord insurance on a small unit is only $500 per year, and this may be classed as a business expense. It is a small price to pay to protect your investment, and the right insurance could prevent the kind of loss that damages your financial future.
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