A Quick Guide To Landlord Insurance
Novice landlords, renting out a residential property (house, vacation cottage, apartment) for the first time, may assume that their homeowners insurance will cover all the costs in the case of a natural disaster, accident or other damaging event.
That's a rookie mistake.
Chances are, your policy only covers owner-occupied homes. Start renting out to someone else, and the coverage no longer applies. And since renters are generally not held liable when a large appliance malfunctions, a person suffers an injury on the property (through no fault of the tenant) or burglars empty the place, that means you could be left out to dry for these or other misfortunes caused by humans or Mother Nature.
This is where landlord insurance comes in. These policies come in all shapes and sizes; before you begin price-shopping, consider what you need to specifically address and protect against in your rental property.Key Provisions
A good, comprehensive landlord insurance policy will have three core protections:
Property damage: This is coverage in the event that the real estate or furnishings suffer from a natural disaster, fire, electric/gas malfunction, earthquake, vandalism or irresponsible tenants. If possible, try to get a policy that offers replacement cost or replacement value, instead of the actual value (especially if fixtures and furnishings are old) or a predetermined lump sum of cash.
Lost rental income/rental default insurance: Should something cause your property to be totally uninhabitable (severe mold, termites, a rat infestation or a sinkhole), this feature provides temporary rental reimbursement to cover the rent money you'd otherwise receive if tenants could be occupying the property.
Liability protection: This is coverage for the medical or legal costs that might ensue if the tenant or a visitor suffers injury due to a property maintenance issue (such as icy walkways, architectural collapse or an out-of-control hive of bees).
You might also see underwriters refer to different packages as DP-1, DP-2, or DP-3 (DP stands for dwelling property). Each of these refers to varying levels of coverage, with DP-1 being the most basic and bare bones, and DP-3 representing the most comprehensive insurance available. See also The Importance of Property Insurance.Additional Coverage
There are several common riders that can come with landlord insurance policies. They're not as vital as the key provisions mentioned above, but they could come in handy and save you some money in the long run.
Guaranteed income insurance: This covers the landlord if a tenant comes up short on the rent one month (or doesn't pay at all).
Flood insurance: Since many landlord insurance policies don't include flood damage related to natural disasters or municipal plumbing, this coverage is worth adding if the property is in a flood-prone zone.
Emergency coverage: In the event a tenant calls you out to fix something like a leaking dishwasher or was accidentally locked out of the house, this feature can help cover some or all of the costs you incurred to travel to the property and resolve the issue.
Recent studies show that most Americans pay between $800 and $1,100 annually to insure their homes. However, since rental properties are more prone to damage and incident, you can expect to pay about 15 to 20% more for landlord insurance on the same property.
There is also an inverse relationship between the price of your premiums and the length of time the property is in service. Expect to pay even more in annual premiums if you rent out your home for only 12 weeks, instead of an entire year, for example. The reasoning is that short-term tenants are less likely to notice (or even mention) maintenance issues. They might be more careless, or they may not understand the layout of the house, and the location of the plumbing, load-bearing supports or electrical wiring. All this can increase the probability of problems, and the insurer's risk.
When shopping for policies (see How To Compare Home Insurance Companies), be sure to ask your homeowners insurance provider about bundle options. If you sign up for homeowners and landlord insurance through the same company, you may receive a discount.The Bottom Line
Before you decide to rent out a piece of property, take a look at your homeowners insurance policy. Don't assume it will cover damages and liabilities while you're not living there. If you want to protect your home and rent it out as well, landlord insurance is a must.
You might also want to suggest your tenants take out a renter's insurance policy so that their own personal effects will have coverage in the event of an accident (see Insurance 101 for Renters). For more, see The Complete Guide To Becoming A Landlord.