This article covers homeowners insurance for rental property cost. A common mistake made by landlords is not having the proper insurance to cover the rental property.
The two types of insurance commonly used to insure a rental property are homeowner's insurance and landlord insurance. Although both policies provide coverage for the home, a landlord policy provides additional benefits not available from a homeowner's policy.
Dwelling Coverage - Homeowner's insurance policies and landlord insurance policies both provide coverage if a home sustains damage. However, a landlord's insurance policy covers some losses that a homeowner's insurance policy does not. For instance, many homeowner's insurance policies exclude damage from vandalism if the home was vacant for more than 30 days. Most landlord insurance polices do not contain this coverage exclusion. In addition, homeowner's insurance polices do not cover damages intentionally caused by a resident of the home, even if the resident is a tenant. Landlord policies provide coverage for damages intentionally caused by tenants.
Personal Property Coverage - The personal property coverage of a homeowner's or landlord insurance policy provides coverage for items that are not permanently attached to your home. When you rent a home to a tenant, you may leave items such as appliances, yard equipment and even furniture for the tenant to use. Many standard homeowner's insurance policies only cover the theft or damage to your personal property if you reside in the home when the loss occurs. However, a landlord insurance policy usually covers the owner's personal property left in the home as long as the property was for the use of the tenant or maintenance of the property.
Loss of Use - If your home becomes uninhabitable due to a covered loss, the loss of use coverage of a homeowner's insurance policy provides compensation for you to rent another home during the repairs of your home. However, most homeowner's insurance policies do not provide this coverage if the home is not your primary residence. If you have a landlord's insurance policy, you may have coverage for the loss of rental income you incur if your tenant has to move due to the home becoming uninhabitable.
Other Coverages - Landlord's insurance polices provide other benefits not available under most homeowner's insurance policies. If you have to evict a tenant from your home, many landlord policies provide compensation for some of the legal expenses you incur. A homeowner's insurance policy usually only provides liability coverage if you cause damage to someone's property or cause bodily injury. Landlord policies typically include coverage for accusations such as wrongful eviction.
If you rent out a home for more than a few weeks each year, you need insurance that protects you in ways your standard homeowners policy does not. Although standard homeowners insurance and landlords insurance both cover damage to, or loss of, your structure, landlords insurance offers greater protection, and it keeps you from taking a hit from income lost while your property is being repaired.
The three categories of landlords insurance are DP-1, DP-2 and DP-3. DP-1 is the most basic, providing cash-value coverage for damage due to fire, vandalism, wind, hail and other common perils. DP-2 is more comprehensive but still covers only the perils specifically named in the policy. DP-3 policies offer replacement-cost coverage for all perils not specifically excluded. Coverage applies both to the property's structure and your own personal property you keep there for tenant use. Landlords insurance doesn't cover flood damage. The “Insurance Journal” notes that you'll need to purchase separate flood insurance from the National Flood Insurance Program. It recommends that your tenants protect their personal property with their own flood insurance policies.
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Liability Coverage - Although you usually can add liability coverage to your homeowners insurance for an extra fee, landlord insurance includes it, and it's designed for the higher coverage limits landlords need in the event someone is injured on the property. Allstate, for example, expands the typical homeowner add-on for liability to include coverage for legal defense if you're sued. Experts recommend that landlords have at least $1 million in liability insurance.
Lost Income - Homeowners insurance doesn't cover you for lost income in the event a peril renders your property uninhabitable. Landlord's insurance does. And, according to Bankrate.com, certain insurers offer "landlord protective policies" that cover the breakdown of boilers, furnaces and other equipment. Note, however, that landlords insurance only covers income lost because of a covered peril; it won’t compensate you for vacancies.
You'll pay extra for the additional coverage that landlords insurance provides; the cost is 10 to 20 percent higher than homeowners insurance premiums. You could save money by purchasing your landlords insurance through the same company you use for auto and other insurance because insurance companies often discount bundled services. Another way to reduce your premiums is to require that your tenants have renters insurance that protects their personal property and provides liability coverage in case their guests are injured on your property.
If you are in the process of purchasing or considering purchasing an investment property the question of insurance may have come up.
The most frequently asked insurance question we get from investors is “What is the different between insurance for my investment property and insurance that I have on my primary residence?”
Homeowner’s insurance policies are specifically designed for the owner-occupied resident. This sort of policy protects the home, the owner’s personal contents, and most importantly his/her liability.
The landlord policy (commonly referred to as a dwelling policy) is very different. This policy is specifically designed to protect your investment as a landlord. Let’s look at the different categories of insurance to see what type of coverage is available for a landlord vs. a homeowner policy.
Dwelling - Both policies have coverage for the main structure in the event of a loss. Depending on the type of insurance policy you purchase will determine what perils (wind and hail, water damage, vandalism, etc.) the home is covered against. Be sure and ask your agent about replacement cost vs. actual cash value. This can make the difference between a small inconvenience and a big financial mess.
This portion also covers major appliances in the case of a natural disaster (i.e. tornado, fire, etc.). However, it does not cover these appliances in the case of normal wear. If this is something you are concerned with, you may want to consider purchasing an additional warranty for your appliances.
Separate Structures - This type of coverage refers to sheds, fences, and other detached structures. Coverage for separate structure is typically automatic with a Homeowner’s policy (owner-occupied policies). Often times the separate structures coverage must be added on as an endorsement to the landlord policy if desired. Be sure and speak to your agent about whether or not you need this coverage.
Personal Property - This is generally not included on a landlord policy unless specially requested. Most investors do not furnish their rentals so there is usually no need for this type of coverage.
Loss of Use Vs. Fair Rental Value - With a homeowner’s insurance policy, the insurance company will pay for you to rent a home while yours is being rebuilt. But, what if you are a landlord? What about your tenants? If your investment property is uninhabitable, how will you generate an income from your renters? The solution is simple; make sure your insurance policy comes with Fair Rental Value. The insurance company will cover the lost rents resulting from a claim. It is important to give your agent the correct amount you are collecting for rent monthly so that you will be properly reimbursed.
Liability Insurance - This is by far the most important piece of coverage to a landlord policy. Landlords often require greater liability protection against claims brought against them. This type of coverage will protect you if someone files a lawsuit against you for negligence causing bodily injury or property damage. A landlord has a lot less control over their investment property than they do their primary residence. We always recommend selecting as much liability insurance as possible. Depending on your personal situation, you may want to consider an umbrella policy.
An umbrella policy homeowners insurance rental property is a blanket insurance policy that only covers the liability portion of the claim. Most landlord policies come with liability limits between $25,000 and $1 million. Let’s say that you are landlord and somebody dies on your property as a result of your negligence. In this scenario, they file a lawsuit against you and win in court. If you have a $1.5 million judgment against you and your liability limits are $1 million then you would be responsible for $500,000 in damages that will come out of your own pocket. You can get an umbrella policy for up to $5 million to cover all legal expenses in the event you are sued.
Medical Payments to Others - This coverage will protect you if someone is injured in your rental property. Let’s say there is a nail sticking out of the wall in your property and someone runs their arm across it cutting their arm and requiring 22 stitches. Your insurance can cover this sort of expense.
There are many different types of landlord policies, and each has a different level of comprehensiveness. The idea is to choose what is right for your particular situation. Keep in mind that policies may also differ if you have more than one investment property. HomeUnion’s real estate investment portfolio properties often come with insurance included, however, depending on the market in which the property is located, your needs may exceed the insurance that is already in place.
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