What Makes a Good Landlord Insurance Policy?
Before renting out your property, you should purchase a landlord insurance policy. Unlike a homeowner's insurance policy, a landlord insurance policy will protect you from common problems that occur when you rent property.
Types of Landlord Insurance Policies
While the terms used to describe insurance policies vary by company, most agencies offer three types of landlord policies. The DP-1 policy is the least expensive policy and offers coverage for only named risks. These risks can include:
- Fire and smoke.
- Hail, windstorms, and lightning.
- Damage caused by aircraft or other vehicles.
However, there is no guarantee that a DP-1 policy will cover damage from any of these problems. Landlords must check their policy before signing to see what risks their policy lists.
A DP-2 policy offers coverage for more types of risks. Like DP-1 policies, covered risks will be explicitly named in the policy. In addition to the risks covered in the typical DP-1 policy, a DP-2 policy may cover risks like:
- Electrical damage and frozen pipes.
- Building collapse.
- Damage caused by the weight of snow and ice.
- Falling objects.
- Flooding caused by a stream or river overflow.
DP-3 policies are often called “open peril policies.” This type of policy covers most risks and is the most expensive. A DP-3 policy will list any specific perils that are excluded from coverage. If you are concerned that a DP-3 policy does not offer coverage for a specific peril, you can ask that a rider be added to your policy to provide additional coverage.
Actual Cash Value Versus Replacement Cost
When purchasing insurance, landlords should look for policies that offer replacement cost coverage versus actual cash value coverage. For most DP-1 and some DP-2 policies, the insurance agency will only pay you what they believe your property was worth when the damage occurred. For example, if hail damages your rental's seven-year-old roof, the insurance company will pay for the worth of the existing roof. Then you would be responsible for paying the additional cost to replace the roof with a brand new one, which will certainly be more expensive than the "value" of the 7-year-old roof.
Most DP-3 policies and some DP-2 policies offer replacement cost coverage. If you have replacement cost coverage on your seven-year-old roof, the insurance company would issue a check that would cover all of the costs associated with replacing your roof with a new one. Replacement cost coverage is somewhat more expensive, but the coverage it offers is extensive by comparison with most DP-1 or DP-2 policies.
Some policies have an all-risk provision that will protect the property from theft, vandalism, or malicious mischief. Common examples of these risks include graffiti and intentionally broken windows. Some DP-3 policies already have this coverage, while other insurance agencies will add an all-risk provision as a rider to your existing policy by request.
If your property is vacant for longer than 30 days, your landlord's insurance policy may be invalid. An unoccupied property creates a larger risk for the insurance company, so some agencies will cancel coverage if you make a claim and your property has been vacant. Talk to your insurance agent the moment your property becomes vacant to discuss any changing landlord insurance requirements. Also, look for policies that offer a 60-day window before the property is considered vacant.
Landlord Umbrella Policies
A personal umbrella liability policy will extend the liability coverage on all of your property. These policies are usually a few hundred dollars per year for $500,000 to $1,000,000 of coverage. However, if you own more than a couple of rentals, the personal umbrella policy may become invalid.
If you own four or more properties, you can purchase a commercial umbrella liability policy. When you purchase this type of coverage, you provide a list of properties that you would like covered under the policy. As you purchase or sell properties, contact your insurance agent so your coverage can be adjusted accordingly.
Purchasing landlord insurance is the best way to protect your real estate investment. To make sure you get the coverage you need, stay in communication with your insurance company to notify them of any changes.
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