What Type of Insurance Coverage Do Landlords Need for a Rental Property? - dummies

What Type of Insurance Coverage Do Landlords Need for a Rental Property?

By Robert S. Griswold, Laurence Harmon

The first step in getting the right insurance is to understand the different types of insurance available for your rental property. Of course, building insurance is essential to protect against losses from fire, storms, burglary, vandalism, and so on, but you also want general liability insurance and other coverage to protect against losses from personal injury lawsuits and other misfortunes.

Knowing the different full-building coverage available

Three types of full-building insurance coverage exist:

  • Basic: Most insurance companies offer basic building coverage packages that insure your property against loss from fire, lightning, explosion, windstorm or hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, and even volcanic activity. This coverage often doesn’t include protection against claims alleging property damage or personal injury from mold or protection for certain contents, such as boilers, equipment, and machinery, unless specifically added.

  • Broad form: With broad form coverage, you get the entire basic package plus protection against losses due to glass breakage, falling objects, weight of snow or ice, water damage associated with plumbing, and collapse from certain specific causes.

  • Special form: The broadest coverage available is special form, which covers your property against all losses, except those specifically excluded from the policy. This coverage offers the highest level of protection and is typically more expensive. However, many insurance companies offer competitive packages specially designed to meet the needs of rental owners, so shop around.

If you own multiple rental units, you may receive discounts if you have a single insurance policy that covers all properties. For example, if you currently own three properties, each with a $1 million policy, you can get a single policy with a $3 million limit at a more competitive rate. Doing so provides up to $3 million in coverage for each property.

You can also benefit if you have an aggregate deductible, which is the portion of your loss that you essentially self-insure. The losses at any property can be used toward meeting the aggregate deductible. Extremely competitive rates on group package policies are also sometimes available for the clients of professional property management firms.

Eyeing supplemental coverage

Flood, hurricane, and earthquake insurance are examples of supplemental coverage available for a separate cost. This coverage can be critical in the event of a natural disaster. However, these policies are often expensive and have extremely high deductibles, making them uneconomical for the average small rental property owner. Get quotes nonetheless and see whether supplemental coverage is something you think you can afford or can’t afford to do without.

Seriously consider replacement cost coverage. An insurance company pays owners for losses in two ways:

  • Actual cash value pays the cost of replacing property after subtracting for physical depreciation.

  • Replacement cost pays the cost of replacing the property without subtracting for physical depreciation.

The standard policies most insurance companies offer provide for actual cash value coverage only; you must specifically have an endorsement and pay extra for replacement cost coverage. The extra cost is often well worth it.

If you decide to rent out your personal residence, immediately contact your insurance agent and have your homeowner’s policy converted to a landlord’s policy. A landlord’s policy contains special coverage riders that aren’t in the typical homeowner’s policy. Because of the increased liability risk for rental properties, your insurance company may not even offer this coverage, whereas certain companies specialize in this business.

Grasping general liability insurance

Besides building coverage, a comprehensive general liability policy covers injuries or losses suffered by others as a result of defective conditions on the property. General liability insurance also covers the legal costs of defending personal injury lawsuits. Because legal defense costs are commonly much greater than the ultimate award of damages, if any, liability insurance is a valuable feature.

Considering umbrella coverage

Umbrella coverage, which is designed to supplement other policies, can be a very cost-effective way to increase your coverage, which is another way to decrease your exposure to a financially devastating lawsuit. Your primary policy may have liability limits of $1 million, but an umbrella policy can provide an additional $1 or $2 million in vital coverage at a reasonable cost.

Depending on the value of your property and assets, buying an umbrella liability policy with higher limits makes sense. The proper policy limits are always your decision as the owner, but seek and listen carefully to the advice of an experienced insurance agent.

We suggest you purchase your umbrella policy from the same company that handles your underlying liability insurance. Otherwise, you may find yourself dealing with conflicting strategies on how best to defend yourself in litigation.

Looking at other insurance coverage

A variety of other insurance options make sense for certain rental property owners. You may want to consider the following nonstandard options:

  • Non-owned auto liability coverage: If you plan to have any maintenance or management employees assisting you with your rental activities, consider buying this type of coverage. It protects you from liability for accidents and injuries caused by your employees while working and using their own vehicles.

  • Fidelity bond: This type provides reimbursement if a dishonest employee steals your rents. An endorsement for money and securities can protect you from losses occasioned by the dishonest acts of nonemployees.

  • Building ordinance: This type protects you in the event your rental property is partially or fully destroyed. It covers the costs of demolition and cleanup, plus the increased costs to rebuild if the property needs to meet new or stricter building code requirements, or the loss of value if the property can’t be rebuilt to its prior condition.

  • Loss of rents or income insurance: Loss of rents or income insurance can come in handy to keep up with the mortgage payments and other costs of ownership in the event of a loss that interrupts your income stream, such as a fire or natural disaster.