Purchasing the right landlord insurance policy is one of the most important things you can do to protect your business. Even though it’s not a fun topic, a little time spent learning about it and your policy will be well worth it.
When sourcing insurance, many owners are just trying to save money. Getting the bare minimum to save money is understandable, but this mentality can cost you huge sums of money out of pocket in the long run. In today’s litigious society, tenants can sue you for many things, many of which may not even seem (and may not be) your fault. It is a classic case of lessons “learned the hard way.” Here are some basics to getting the protection you need for your rental property.
Insurance is an individual thing.
There is no shortage of insurance agents around the US who are more than willing to tell you what type of coverage you need. But each landlord requires different insurance. Be sure to survey several other agents before making a choice. If there is any “hard sell” or pressure, that’s a good indicator that it’s time to hang up the phone and find a new agent. You can often get rate quotes without leaving your home or office. Searching the internet is an excellent place to start. Compare “umbrella policies” and find a deductible that fits your needs.
Feel free to second-guess your agent when buying property coverage. You will need less than the agent first suggests if they recommend that you insure the property for its current selling price. The cost of replacing damaged or even “totaled” property is never as high as the selling price. For example, you cannot lose the land the home sits on when a fire burns the house.
Standard dwelling insurance policies
These cover things like the building itself, property in the building, separate structures on the property, loss of use, and liability. Sometimes, there are riders you can add that will provide additional protections, but let’s look at these in particular.
Liability
Some property owners must realize that if they have a renter and an accident happens, they might get sued, too. Insurance companies send in lawyers to help with this, but it will only be as much as your policy allows. A personal umbrella policy is often the best way to protect yourself.
Another type of liability insurance is Tenant Liability Insurance. That protects you in the event of a tenant who doesn’t have the right kind of insurance. Not only that, but it also protects you from frivolous lawsuits and other issues that you can encounter. It’s relatively inexpensive, considering the protections it provides.
Renter’s Insurance
Renter’s insurance is required or strongly suggested for most rental leases. There are plenty of examples of how you can add this to your lease, but here is one way you might do it.
LIABILITY: We will not be liable for any damages, loss, or injury to persons or property within your apartment or on the premises. Although there are entrance and exit gates for the apartment community, they do not significantly limit access to the property by anyone. Sometimes, they do not work due to malfunction or damage. In addition, access is not restricted by a wall or fence. You are responsible for obtaining your own casualty and liability insurance. Concerning your family or invitees, you agree to hold us harmless and indemnify us from liability. WE STRONGLY RECOMMEND THAT YOU SECURE INSURANCE TO PROTECT YOURSELF AND YOUR PROPERTY. The provisions of this lease bind your successors, heirs, beneficiaries, and personal representatives.
In this example, the renter’s insurance is not required; however, it bluntly states that the renter is responsible. Most state laws will uphold a landlord requiring renters’ insurance as a lease provision. As a condition of the lease, it is considered a reasonable request.
As an owner, do your due diligence and verify within thirty days of possession that the tenants have, in fact, gotten an insurance policy. If you require renter’s insurance as a part of your lease, by no means turn over the keys until proof of insurance is shown.
Physical assets protection
If you look at your policy declarations, you’ll know how much that covers; or how little. If you do not have enough coverage in this area-though, your buildings might be covered-anything else is not and will come out of your pocket to repair or replace.
What Does Landlord Insurance Cover?
Every policy is different, but there are a few main areas that insurance for landlords covers:
Property Damage
This coverage refers to damage to your buildings and personal property. Theft, vandalism, tenant damage, fires, and storms are covered here. Typically the insurance will cover replacement costs for the entire property, assuming the insurance adjuster decides it was a total loss.
Loss of Income
This helps bridge the income gap if a rental property becomes uninhabitable due to a covered loss. For example, let’s say a fire damaged part of the kitchen and will take a month or two to repair. This coverage will provide a rental reimbursement.
Liability Insurance
If a liability claim or lawsuit is brought against you, this portion of landlord insurance protects you. It doesn’t matter if it was a tenant or a visitor; you could be held liable for something that happens on your property. Even if the person was a thief or trespasser, you might still be liable!
Liability insurance covers several things: medical costs, funeral costs, legal fees, and settlement fees. Remember that lawsuits against you may come from damage to the tenant’s property, not just injuries.
Optional Coverage
You can invest in additional coverage depending on your risk profile. Examples are natural disaster insurance, landlord contents insurance, and rent guarantee insurance. Your insurance agent will be able to explain each of these in-depth and help you decide whether or not they’re a good fit for your properties.
Is Landlord Insurance Required by Law?
“The man who became of his understanding of the laws of wealth, acquireth a growing surplus, should give thought to those future days. He should plan certain investments or provisions that may endure safely for many years, yet will be available when the time arrives which he has so wisely anticipated.”
― George S. Clason, The Richest Man in Babylon
The short answer is no. You don’t need to have landlord insurance. But it would be unwise to go without it just to save a few dollars. Here’s why.
As a landlord, you’re also a business owner. Protecting your business only makes sense, as it supports your livelihood. If something happens to that property and you don’t have it insured, your livelihood is at stake. Fires, storms, vandalism, and liability are things landlords have to face.
Remember that you should still get landlord insurance even if you are just renting out your home or maybe your basement temporarily. Regular home insurance doesn’t cut it because you wouldn’t live in the same residence as the tenant.
Homeowners vs. Landlord Insurance
Homeowners insurance pertains to a property that the owner is living in. This distinction leads to three types of situations to consider if you’re renting out at least part of your home:
Scenario 1
You live in the same general area as the tenant. So it could be a three-bedroom house, with all bedrooms upstairs next to each other. In this case, regular homeowners insurance is acceptable.
Scenario 2
You and your tenant live in the same house but in separate areas. For example, the tenant lives in the basement that has been converted into a small apartment and never has to come upstairs to use the kitchen, bathroom, etc. Since you live upstairs, it’s basically a separate part of the house. In this case, you should look into landlord insurance since you don’t live in the same area as your tenant. Your homeowner’s insurance may cover you, but you should double-check.
Scenario 3
You have completely moved out of your old house, and now a tenant lives there. In this case, landlord insurance is definitely what you need.
How Much Does Landlord Insurance Cost?
As you might expect, your rate will depend on a number of things. A small unit may be low, about $500 a year. On the other hand, a large property with a swimming pool, or a building with multiple units, may cost thousands of dollars a year.
Here are just a few factors that come into play when the insurance company gives you a quote:
- The number of units
- Geographic location
- Whether the complex is gated
- The amount of coverage you’re signing up for, as well as the type
- If smokers are allowed
- Condition and age of the building
- If burglar/smoke alarms are in place
- Plumbing and electrical are up to code
Is Landlord Insurance Tax Deductible?
“The hardest thing to understand in the world is the income tax.” -Albert Einstein
Most costs you incur as a landlord will be considered business expenses. That means landlord insurance premiums can be deducted from your taxes.
What are the Best Landlord Insurance Companies?
This is a loaded question, as some landlords prefer to work with a smaller insurance company while others prefer larger ones. So before you shop around, think about what you’re looking for.
Here is a list of the larger, more respected companies out there. It’s by no means exhaustive, but it gives you a head start:
- Liberty Mutual Insurance
- Allstate
- StateFarm
- MetLife
- TrustedChoice
- Farmers Insurance
- USAA
- Safeco Insurance
Things to Watch Out For
It’s important to carefully read through your policy before signing up. You don’t want a claim to get denied just because you didn’t do your homework and realize something important wasn’t covered.
Here are a few things to take a close look at before signing the paperwork:
Dwelling Coverage with Guaranteed Replacement Cost
If you don’t get the “Guaranteed Replacement Cost,” the insurance company probably won’t pay to completely replace/rebuild a property if it is a total loss. Instead, it would cover the dwelling, like the structure, plumbing and gas systems, and internal fixtures.
Legal, Medical, and Liability Coverage
The thing to watch out for here is the coverage limits. Most policies can protect against these claims only to a certain point. Consider looking into an umbrella insurance policy to help protect your personal assets if your landlord insurance can’t cover all the costs.
That said, if your property is held under an LLC:
Personal Property Protection
Whether you have furnished the property or not, this may be a good idea. This aspect of landlord insurance protects against damage to carpets, appliances, light fixtures, furniture, and curtains.
Acts of Nature or Water/Flood Coverage
Most new landlords need to realize a fundamental landlord policy doesn’t cover these events. But, unfortunately, these can get pricey depending on where you live, so many landlords avoid getting the extra coverage.
That is a HUGE risk, though, depending on where the unit is located. It’s relatively typical to hear stories of buildings destroyed by a hurricane or flood that wasn’t covered by insurance, leaving the owner with the entire bill.
Fair Rental Income Protection
This one is a coin flip. If your business can survive without a few months of rent in case something happens, it might make sense to forego this extra coverage. But if you need that regular cash flow, it might make sense to pay the additional premium for the peace of mind this coverage provides.
Conclusion
“You have to make sure that your assets and your back are protected before you make any big decisions.”
-Adam Rich
The fact that you found this article on landlord insurance means you’ve decided to purchase it. That’s a fantastic decision because it’s one of the best things you can do to protect your investment. Just make sure you shop around and compare several different companies/policies. This process will help you learn more about the coverage policy options and get better rates.