“It’ll never happen to me.” Until it does. Life teaches us that we should pay attention to unnecessary risk and uncertainty, yet with some insurances, we feel strangely untouchable. But if you have investment rental properties – or even rent out a room in your home – the possibility of loss and liability is real enough for you to look into how Landlord insurance works.
It could be a simple kitchen fire. Or a burst pipe. Or your renter’s guest who gets hurt. Even if your renter has Renters insurance – which, by the way, you should require – it will not cover your property or your liability. Your Homeowners insurance may not either. Bottom line, if you have rental properties, you are likely counting on the recurring rental income. Why risk it?
Landlord insurance is often a second thought when it comes to property insurance. As life circumstances change and we rent part out of our home – or move in with the children and rent out our entire house – it’s easy to let things slide and assume our Homeowners insurance will cover us. Besides, our renter’s Renters insurance should be enough.
Any insurance agent will tell you that is not true.
As we examine Landlord insurance, many of the terms will be familiar, from our Homeowners policies, so it does not require a steep learning curve. However, there are a few quirks that make a special review worthwhile.
Many companies that provide Homeowners insurance also provide Landlord insurance and may offer a discount if multiple policies are bundled. A good place to start is with your existing insurer, followed by recommendations from friends and family who live in the same region (so they are familiar with the risks you face, like hurricanes, earthquakes or tornadoes). Your most valuable recommendation will come from someone who has actually filed a claim.
Next come online searches where reading each prospective insurer’s website will give you a better feel for what kind of company it is. After educating yourself on all aspects of Landlord insurance, it will be time to get quotes from your top three options, then to make an informed decision.
Note that if you are considering either renting a room or a short-term rental of your home, some companies may write an endorsement, or rider, to your existing Homeowners insurance to extend the coverage. However, short-term ‘lodging’ activities (like Airbnb) might constitute a business and require a commercial policy. Homeowners insurance would no longer be applicable.
As a landlord, your focus is on your property, personal liability and rental income. In fact, it can represent a good part of your retirement plan. Whether you are renting out a part of your house, a house, an apartment or a condo, Landlord insurance can protect you against any financial loss resulting from fire, severe weather, vandalism and liability. It may even cover you for lost rental income while a property is uninhabitable.
Landlord insurance is not required by law, but going without it is a high-risk proposition. For example, you cannot count on the goodwill of your renter in case of an injury for which you can be held accountable. And losing the income from a property that has become unrentable can be a financial blow.
In fact, having adequate Landlord insurance:
- Protects one of your most valuable assets: an investment property or the actual house where you live, whenever a renter is involved;
- Allows you to repair or replace your rental property after a covered incident;
- Protects a cash flow you may be counting on within your retirement plan;
- Safeguards an asset which you may be thinking of leaving to your children, as part of their own retirement plan;
- Shields your finances against lawsuits by those who are renting, their friends or any others who come onto that property for any reason; and
- Gives you the peace of mind of knowing that one aspect of your life is covered and secure.
Particularly when you are no longer generating active income, having passive income that is protected by Landlord insurance means you will not have to dip into other funds to cover unforeseen losses.
As with other insurances, Landlord insurance decisions lean heavily on cost, coverage and ease. You are interested in the premium you will have to pay, what the policy covers and how easy it is to get set up with a policy.
After those basics, you want to know more about the policy itself: any waiting period until the coverage is active, the quality and availability of customer support, the different levels of deductible offered and available discounts.
With Landlord insurance, you want to understand the different types of coverage available to you so you can interact with different prospective insurers to design your ideal plan. This form of insurance is presented somewhat differently, with three basic Landlord insurance forms acting as the backbone for ‘dwelling protection,’ or DP:
- DP-1 is basic ‘budget’ coverage. It covers more common events like fires and renter vandalism. The insurer usually pays the depreciated value of what was damaged, instead of replacement value.
- DP-2 covers ‘named perils,’ that is, a list of specific causes of loss and damage. Any peril not listed will not be covered.
- DP-3 covers what is called ‘open peril,’ meaning it covers all risks except for those that are listed as exclusions. Exclusions might include flood damage, acts of war or terrorism, neglect, mold and others. DP-3 is the more common form of Landlord insurance.
To one of these core policies, you want to add elements to build a Landlord insurance policy that brings you peace of mind regarding your rental property. These may become clauses in the policy or separate endorsements (or riders), depending on the insurer. Among the possibilities are:
- Other structures protection, such as carports, garages and sheds valued at up to 10 percent of the total coverage.
- Personal property coverage, which covers the loss of what belongs to you and not the renter. That could include major appliances or furnishings, if provided.
- Personal liability coverage, which helps pay judgments and settlements related to injury or damage to third-party persons or their property while on your rental property, whether a renter, visitor or worker, if you are found to be responsible.
- Medical payments coverage, which helps pay to treat injuries to third parties at your rental property if you are found to be responsible.
- Loss of income, which compensates you for the rental income you lose in the event your rental property becomes uninhabitable following a covered loss; usually for up to 12 months.
- Loss of use, which helps your renters rent temporary housing during repairs to your property if it is uninhabitable.
- Non-occupied dwelling, which guarantees coverage if your property is empty for more than 30 days, whereas many standard policies do not.
- Air-conditioning or heating loss, to cover any payments you have to make to renters if one of the mechanical systems fails.
- Building code upgrade, which covers the cost of upgrading to new building codes if they have changed since your property was built and if making covered repairs requires that you meet the new codes.
- Guaranteed replacement cost, which pays you the replacement cost of getting destroyed or damaged property back into service. Without it, you will be paid the depreciated ‘fair market’ value, which may not be enough to cover repair or replacement.
Few Landlord insurance policies cover flooding, earthquakes, hurricanes and nuclear hazards. (The first three are is readily available as a separate purchase.) You might ask your potential insurance provider for an exhaustive list of riders so you can see what makes sense for you to purchase.
Once you know what you want your Landlord insurance policy to cover, identify 4-5 insurers that are financially solid based on their Financial Strength Rating by A.M. Best. Another resource is J.D. Power, who publishes a “U.S. Property Claims Satisfaction Study” and a “U.S. Home Insurance Study.” Those studies rank customer satisfaction by company, and the latest reports can be found through a simple internet search.
Contact each company on your list as soon as you have an idea of the coverage limits and deductibles you would like. Be sure to ask about available discounts, since the company representatives will rarely volunteer their availability. Request a quote online, by phone or through an insurance broker. Select the best option for you once you have several quotes.
If your rental property is a condominium, your Landlord insurance might play somewhat of a different role since the structures (walls and floors) are usually insured by the condominium itself, and not by you. However, many of the other elements will be the same.
As seniors, two areas should be explored with each potential insurance provider: age-friendliness and health-related value.
Age friendliness: This relates to how convenient and easy a service is in adapting to your changing needs as you get older. With insurances, this includes having multiple ways you can communicate with the company, as well as friendly, supportive assistance from the company’s customer service representatives. They should be aware of how your needs might be affected by aging and how changes to your policy might help keep your premiums low. The company’s bill-paying and claims-processing procedures should be clear, and its website should be intuitive and easy to navigate.
Health-related value: This reflects the changes in value to a service as the landlord’s health declines. The value of such protection increases as a landlord is less able to stay on top of maintenance and safety issues, whether dealing with a renter within the landlord’s house or a standalone rental property. The insurance company might also share home safety information as its residents become weaker as a result of health concerns. It might even have a mechanism that involves a second person in communications, whether a relative or legal advisor.
The policy premiums for Landlord insurance will vary from insurer to insurer, and from insured to insured. Each company has its own algorithm, or calculation formula, as well as factors it uses. Some include:
- The replacement cost of your property;
- The age, size and condition of your property;
- The number of rental units;
- The distance from the nearest fire hydrant;
- The fire protection rating of your city;
- The crime rate in the neighborhood;
- Security elements such as gated entry, fire alarms, burglar alarms, sprinklers, etc.;
- The likelihood of damage from natural disasters;
- Your and your neighbors’ claims history; and
- The coverages, limits and deductibles you select.
Whereas Homeowners insurance premiums are said to average around $1,100 per year, per the Insurance Information Institute, Landlord insurance will run 20-30 percent higher for the same property. This is because insurers recognize that renters do not treat a home with the same care an owner-occupant would, so their risk is higher.
Most of the factors listed are beyond your ability to alter or adjust. Only on the last line – “coverages, limits and deductibles” – do you have much discretion. You can decide what riders, if any, you want to add to your plan. You can select an upper limit on what the policy will pay. And you can opt for a high or low deductible, depending on how much ready cash you would have available to spend upfront in case of an incident.
As you start looking at possible insurance providers, you want to examine annual premiums, how easy it is to enroll and what can be covered.
Cost: If you are renting out your property, the activity must be profitable for you. The cost of premiums for Landlord insurance needs to fit within your budget. You may have to balance the coverages and deductibles with the risk you are willing to take regarding physical and financial loss.
Ease of enrollment: Buying insurance is not high on anyone’s ‘fun’ list, and smart companies will make the process as trouble-free and painless as possible. They will provide several means of enrolling, whether on a website, by email or by phone to reflect the various ways seniors are comfortable transacting business.
Coverage: Starting with each company’s basic or ‘standard’ policy, you will want to examine what endorsements (or riders) it offers to be sure you can design a policy that does what you need, and nothing more. It is essential to see what is excluded, too, to avoid surprises.
Confirm if the policy is ‘named peril’ or ‘open peril.’ Remember, a named-peril policy covers only what is listed in the policy, and the insured is tasked to prove that one of the named perils caused the loss. An open-peril policy covers everything except what the policy specifically excludes, and the burden is on the insurer to prove the peril causing the damage is not excluded. Open-peril (also called ‘all-risk’) is more expensive but leaves less room for surprises.
Next, you will consider if there is a waiting period before a claim can be filed, the quality of the company’s customer support, available levels of deductible and any discounts for which you might qualify.
Waiting period: A Landlord policy can be set up to go into effect immediately, or on a specific date, such as when the property is rented and the tenant takes possession. Check to see if there is an automatic waiting period, from 30 to 90 days, before you are allowed to file a claim.
Customer service: You want to assess a new insurer by the hours customer service reps are available, how user-friendly the website is, how transparent the company’s decision-making is, and how easy bill-paying and claims-processing are reputed to be. The quality of customer service ranks especially high with seniors when dealing with an income-generating property, particularly as they are affected by age and declining health.
Deductibles: A deductible is an amount the insured must cover before the insurance company starts to pay for damages. People typically select deductibles in the $500-$1,000 range. Premiums go down as deductibles go up. However, you must be able to cover that amount for each claim.
Discounts: You want to explore all possible discounts the insurer offers to see what might pertain in your case. As in the case of Homeowners insurance, these might include:
- multiple policies with the insurance company (or bundling);
- protective devices such as smoke detector, security system or sprinklers;
- a claims-free history;
- disaster-resistant roofing;
- new or newly renovated house;
- loyalty as a long-time client;
- continuous coverage (active policy still in place); and
- a non-smoker tenant.
When deciding on a Landlord insurance policy, keep in mind that the premiums you pay are tax deductible, as a business expense, since they are a cost of doing business.
Also, while no Federal or State law requires renters to have Renters insurance, you can make it a condition in your rental agreement as long as it pertains to all your renters for that property. You can legally require a specific minimum amount of insurance coverage, proof of insurance and coverage that extends for the entire period of occupancy.