Your Guide to Landlord Insurance

Posted in Blog  
  on Oct 05, 2015

Are you a small-scale property manager or “accidental landlord,” trying to learn the ropes of renting out property so you can develop a more professional business model? Many people who fit this description are not familiar with landlord insurance, and may be relying on homeowner’s insurance to protect them against property damage or liability. Perhaps you own a vacation home and plan to rent it out for four years to help cover your child’s college expenses. Maybe you have an aging relative who has moved into long term care, and your family is not quite ready to sell the house. Or, you might be a real estate broker with a few vacant properties that could be bringing in income. Whatever circumstances have led you to becoming a landlord, buying landlord insurance should probably go on your short list of tasks. This guide will introduce you to everything you need to know about landlord insurance: whether you need it, what it covers, how to buy it, and a handful of other crucial considerations.

Do you need landlord insurance?
The answer is: Probably. It’s not legally required, but carrying the right insurance is a basic element of protecting your investment. Landlord insurance covers areas of risk that regular homeowners don’t have to worry about, such as legal costs in case your tenant sues you. Landlord insurance also offers special options like rental income replacement and emergency appliance repair cost coverage.
Landlord insurance is most likely not necessary if your rental situation resembles one of the following scenarios:

  • You leave your home and rent it out for one weekend each year when a big local festival happens.
  • You rent out the basement of your home to a local college student.
  • You have a vacation cabin that you let your friends use for three weeks each summer.

In these examples, you’re either renting out property for a very short term (less than 4 weeks) or a tenant is sharing the home you live in. Homeowner’s policies assume you’re living in the dwelling that you’re insuring -- although they do offer additional coverage or a second policy to cover vacation homes.
While your homeowner’s insurance is probably sufficient in the situations listed above, it’s necessary to talk to your insurance agent and make sure. Insurance companies may legally refuse to pay claims if they discover the existence of a landlord-tenant relationship that they didn’t know about.

Differences between homeowner’s insurance and landlord insurance:

  • Different pricing structure: Landlord insurance will probably cost you 12 percent to 25 percent more than homeowner’s insurance, but it provides wider coverage.
  • Different risks: Landlord insurance takes into account the extra risks you face from everything that can happen at a property that’s not your own home. These risks may include your tenants vandalizing or accidentally breaking your property, suing you for some rental policy they disagree with, or not reporting a problem to you until it becomes a crisis. For example, even the nicest tenants can be confused about what’s going on with the washing machine, and they may ignore all the warning signs of a blocked outlet pipe until the machine overflows and floods half the downstairs.
  • Rental income: Landlord insurance may pay you the rental income you were counting on if the dwelling is rendered uninhabitable during repairs (only if those repairs are covered, though).

What landlord insurance covers
The main coverage areas of landlord insurance are property, liability, and rental income replacement, in addition to extra options. Each of these coverage types is discussed below:

Property Coverage
Landlord property coverage is offered in three different tiers: DP-1, DP-2 and DP-3 (DP stands for Dwelling Protection).

  • DP-1: The lowest coverage level, this tier only covers basics like fire and vandalism. If the dwelling is a complete loss, DP-1 policies pay the depreciated cash value of the home at the time it was lost, rather than the actual cost of replacement.
  • DP-2: This tier adds more coverage with a list of specific covered events. These typically include such things as tenant damage, windstorm, hail, and even collision (if a car crashes into your property and damages it). If a damaging event is not named on the DP-2 list, it is not covered.
  • DP-3: Called an “open-peril” policy, this tier covers all instances of damage unless they are specifically excluded. Also, DP-3 policies pay actual replacement cost if a dwelling is lost. This type of policy is usually the best choice, unless you’re already partially covered for losses by a condo association.

Insurance policies generally don’t cover flood damage. Flood insurance is sold by the federal National Flood Insurance Program (NFIP). Your agent should be able to sell you one of these policies, but the amounts and premiums are set by the government. The insurance company may offer its own excess flood insurance if the NFIP amount available to you isn’t sufficient.
Landlord insurance can be written to include any items you own that are kept on the premises, including appliances, tools you keep on site and other structures (e.g. sheds) on the property.

Landlord insurance takes into account the additional risks you acquire when you put property into a tenant’s hands:

  • Personal injury coverage: Tenants or their visitors may file a liability claim against you for their medical costs if they get hurt due to an unsafe condition they feel is your fault. Additionally, if they suffer property damage as a result of something you did not repair, they may sue you for replacement costs. Finally, you are also legally liable for issues entirely unrelated to the physical state of the dwelling. For example, your tenant may make a legal claim against you for wrongful entry, illegal eviction, invasion of privacy, or disputes over deposits.
  • Legal counsel: As you can see, the numerous kinds of liabilities you encounter as a landlord make access to legal counsel an essential part of your financial security.

Loss of Rental Income
This category of insurance protects you against losing rental income if the unit becomes uninhabitable. It is important to be aware that this insurance does not cover you if you simply lose rent because of eviction or vacancy; you must have actual physical damage that is covered by your insurance and be losing rent while it’s being repaired.
Optional Coverage
Creative insurance underwriters have come up with a whole toolkit of optional extras that they feel will benefit landlords. You don’t have to purchase all of them:

  • Emergency lock replacement
  • Emergency repair service: for furnaces, hot water heaters, air conditioners, and other crucial appliances. This is generally accompanied by a network of preferred contractors whom you can contact for repairs.
  • Personal property (contents) coverage: This expands your property coverage to include all furnishings within the dwelling that belong to you, including carpets, curtains, and contents of outbuildings. Contents coverage is essential if you’re renting a furnished home, but you may also want to consider it if you have high-value appliances or personal tools at the rented dwelling. Your policy will not cover the possessions of your tenants, so it’s advisable to ask that they carry their own renters insurance.
  • Mold coverage: Juries have awarded substantial damages to tenants who have been exposed to toxic mold, because it’s not always visible and it can cause serious health problems. For this reason, some landlord insurance companies specifically exclude mold coverage. To guard against future mold problems, it’s important that you impress upon your tenants their responsibility to report any type of leak to you immediately.
  • Online policy management
  • Coverage for specific acts of nature: you will certainly want some of these, but the needs vary from region to region. It’s helpful to discuss coverage specifics with your insurance agent in order to make appropriate choices. For example, hurricane insurance in Florida can be so expensive that rebuilding your dwelling may cost less than insuring it against hurricanes.

What to look for in a landlord insurance policy

  • Customization: The policy you end up with should be tailored to your specific needs, because each landlord’s situation is very different. For example, if your rental units come with a swimming pool, you will probably want to increase your liability coverage.
  • Flood insurance: The federal government offers flood insurance through a designated set of insurance agencies. If you live in a flood-prone region, you should make sure your insurer participates in this program. The price for flood insurance is set by the government, and its cost depends on the level of risk in your region. (Flood insurance refers only to weather-related flooding. Water damage due to burst pipes or other accidental causes is already covered in your regular policy.)
  • Guaranteed replacement costs: Some low-cost landlord insurance policies pay you the “cash value” of covered items. While this phrase may sound good, it’s actually something to avoid. “Cash value” refers to depreciated cost: If a storm damages your ten-year-old roof, for example, a cash value policy will be based on how much you paid for that roof ten years ago, and will then decrease that value for each year you’ve had the roof. Your insurance company may end up paying you only a fraction of what it costs you to replace the roof in today’s marketplace. Better-quality policies guarantee that payouts will cover your actual replacement costs.
  • Inflation protection: The cost of professional home repair continues to rise, so it’s helpful to have a policy that automatically adjusts its coverage level to keep pace with inflation.

How to keep rates low
Make your coverage decisions carefully, depending on your particular situation. Don’t buy every possible type of coverage automatically, just because it’s available; there’s a certain point at which additional insurance simply becomes an unnecessary expense. For example, if you purchased a condo unit to rent out, the condo association may already cover certain building-related costs.
If you happen to have your own personal homeowner or auto insurance through a company that also sells landlord insurance, you are likely to qualify for a discount through that company.
Like any insurance policy, you’ll pay lower premiums if you are willing to bear the risk of a higher deductible.

Take all your tax deductions
Being a landlord means running your own business, and landlord insurance premiums can be deducted as a business expense. Also, if you experience financial loss due to property damage that’s not fully covered by your insurance, you can often count that “casualty loss” as a tax deduction as well. (While you’re thinking about taxes, don’t forget all the other deductions you can take as a landlord. These include depreciation on the cost of your rental property as well as repair costs, accountant fees, mortgage interest and more.)

Lower your risk
Insurance agents will offer you better rates on your landlord policy if you have certain safety measures in place. All of the following can potentially lower the cost of your policy by decreasing your risk:

  • Sprinkler system
  • Burglar alarms
  • Gated or locked access
  • Absence of known risks in the area
  • Current electrical inspection
  • Mold inspection
  • Requirement that tenants be non-smokers
  • Requirement that tenants purchase renters insurance
  • A clean bill of health on the dwelling’s CLUE report. CLUE stands for Comprehensive Loss Underwriting Exchange, and it is a report on any insurance claims made on a property for the past seven years. This report is generated by LexisNexis, a consumer reporting agency. If the dwelling’s CLUE report shows previous claims, the insurer will charge more to cover it. Only owners and insurance companies can request these reports, but the Fair Credit Act made these reports free to the owner.

The importance of maintenance
A well-maintained property will result in fewer headaches overall, and will also contribute to lowering your landlord insurance premiums. Over time, the CLUE report on a well-maintained property will reflect fewer insurance claims, because you’re less likely to experience damage related to faulty household systems.
When you maintain your property well, it’s much easier to track how well your tenants are performing the upkeep that you require of them. You will also be in a position to effectively defend yourself against any claims by your tenant that they suffered damage due to your neglect.

Renters insurance
Renters insurance is not required by law, but you can write your lease to require tenants to carry their own insurance. This reduces your liability in cases where a tenant’s possessions are stolen or someone is injured due to the tenants not maintaining the property in a safe condition.
While renters insurance certainly offers you some protections, it doesn’t substitute for your own landlord insurance. Specifically, renters insurance won’t cover damage to tenant’s possessions that results from your lack of maintenance. For example, if tenants lose expensive musical instruments to a fire that started from faulty house wiring, renters insurance won’t cover their loss.
Likewise, if a tenant’s visitor slips and falls on icy steps because the tenant neglected to clear the snow away, renters insurance will cover the claim. However, if the visitor falls because one of the steps isn’t nailed down properly, then you’ll be liable for the cost of the claim.

Umbrella policies: sometimes a good option
If you’re renting multiple units, your potential liability may be high enough that your insurance agent will recommend an umbrella policy. This protects your personal assets in case your liability exceeds the levels of your landlord insurance policy. It also ensures that you’ll be able to recover your investment in the case of catastrophic damage, and may be required by your mortgage lender.

What to do if your insurer drops you

  • Check your CLUE report: You’re entitled to a new copy every time you are turned down for insurance coverage.
  • Contact other insurance companies: If they turn you down, find out why. See if it’s something you have control over.
  • Get in touch with your state’s insurance commissioner: Their office may have a pool of insurers who cover higher-risk insurance needs.
  • File a complaint: If you feel you were unfairly denied insurance, you can complain to your state’s insurance commissioner, the FTC, or the insurance company itself.

How to Buy Landlord Insurance
The first step is always to speak with an agent in person and see if you feel comfortable talking with them. In addition to your sense of personal trust, consider the following points before agreeing to buy:

  • Check the quality rating the company has been given by the rating agencies (Moody’s, Standard & Poor's, A.M. Best, and Fitch). The Insurance Information Institute provides some background on how these agencies work, as well as extensive unbiased information on all insurance-related topics.
  • Check for any unpaid claims or complaints against the company with your state’s insurance commissioner.
  • Does the company (or your agent) specialize in landlord insurance?
  • Do they offer adequate coverage?
  • Are their premium and deductible amounts competitive?
  • Do they offer discounts for bundling several insurance products together?
  • Is their office nearby and/or easy to access by phone?
  • What is their claims paying process?

When you become a landlord, there’s suddenly a lot you have to learn. You’re responsible for the welfare of people whom you can't directly supervise, and this makes you subject to a whole new set of legal liabilities. Purchasing a good landlord insurance policy will protect your real estate investment, give you peace of mind, and help you conduct your rental business in a professional and profitable manner.


Photo source may be found here.


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