Not all insurance policies are created equal. In this article, I will discuss the key attributes of a quality Landlord Home Insurance Policy.
Standard property insurance policies assume that the homeowner lives in the property.
Landlords, on the other hand, rarely ever live in their rentals and therefore need a different type of policy – a Landlord Insurance Policy.
In fact, most landlords don’t realize that if they file an insurance claim on a rental, but the policy is NOT listed as a Landlord Policy, the insurer can deny the claim – no ifs, ands, or buts about it.
If your home insurance is not recorded as a Landlord Policy, the insurer can deny the claim.
Did you catch that? They don’t have to pay!
Why the Difference?
It’s simple really… because there are different risks involved with rentals vs. homeowner occupied properties.
Landlord policies account for typical issues that a landlord might have – such as “loss of rent”.
It also fits under a different pricing structure with the insurance company – and thus the main reason they want to know about your rental.
It’s Easy to Forget…
When people are forced to move, but don’t want to sell their house, the logical solution is to rent it out and become a landlord.
It’s easy to forget to tell your home insurance carrier that you’ve moved, after all, the property is still the same. It’s natural to ask yourself “Why does it matter who is living there if I still own it?”
The fact is, that in order for your existing home insurance policy to fully cover the property, you need to inform your insurance carrier that the property is being converted to a rental, and you are not occupying it as your primary residence.
Your insurance company will then label it as a “Landlord Policy”, and ask you a few questions about the amount of coverage that you might need.
Always Be Prepared
Being a landlord can be a great way to make a living, but it is so very important that you make sure you’re completely covered if something goes wrong – even if the chances are remote.
It’s essential to have the proper insurance policy in order to keep you from unnecessarily losing money or assets that may be impossible to recoup.
Listed below are the most important clauses that you need to consider when creating/converting your Landlord policy.
6 Critical Clauses in a Landlord Policy
1. Dwelling Coverage w/ “Guaranteed Replacement Cost”
Dwelling coverage is most basic type of home insurance, and if you don’t own your property outright, your lender will probably force you to have this type of coverage.
Dwelling coverage insures just that, the dwelling. It will protect you against financial costs related to structural damage of your property.
This typically covers structural issues, plumbing and gas systems, fixed appliances, cables and piping, internal fixtures and fittings, and outdoor items like exterior blinds and awnings.
However, you should also consider getting “Guaranteed Replacement Cost” coverage – which will pay to replace/rebuild the property, even if the cost of building materials exceed the amount you were originally insured for.
Dave Ramsey says:
“Several years ago, a lot of the major insurance companies quit offering guaranteed replacement cost insurance—a policy in which your home is replaced no matter what it costs.”
You just have to shop around. Without guaranteed replacement insurance, you will only be covered for the value of your home at the time you took out the policy – which doesn’t always cover the cost to replace it.
2. Water/Flood Coverage
Water and/or Flood Insurance is typically an extra policy which is added to your base policy.
It covers water damage to the building or anything inside is the property. Most basic dwelling policies will cover broken pipes or water heaters, but the extra flood policy is needed in order to cover floods, rains, sewer backups, water issues from natural disasters, etc.
Prices and rates are regulated by the U.S. Government’s National Flood Insurance Program, therefore the cost will be the same no matter who the insurer is.
It’s also a great policy to have if your tenant decides to put a hot tub in the living room.
3. Personal Property Protection (Contents)
Personal property coverage is essential if you’re renting a furnished apartment, but many landlords prefer to have it even if they rent empty units. Contents coverage typically protects you against damage to carpets, curtains, furniture, domestic appliances, household goods, and light fixtures.
While some landlords choose to have contents coverage, not all do. You’ll need to weigh the potential benefit of having the insurance against the monthly cost of the added coverage to know if it’s right for you.
4. Acts of Nature
Acts of nature include tornadoes, hurricanes, earthquakes, and even riots.
Although some types of insurance may not include all types of coverage – tornado insurance is not something you need in California, but it is absolutely necessary in Kansas.
In some cases, this clause is not included by default and you have to ask for it.
Again, you really have to weigh the pros and cons of each add-on, for example, hurricane insurance is so expensive in Florida, sometimes it’s cheaper to rebuild your house out of pocket than carry an hurricane insurance policy.
5. Fair Rental Income Protection
Rental default insurance, sometimes known as loss of income, is a type of insurance that allows you to collect the rental amount of the property for a certain length of time if you are unable to do so because of repairs or a catastrophe.
However, most standard Landlord policies won’t cover the lost rent due to an eviction or dead-beat tenants. The coverage works in conjunction with a damage claim that makes the property uninhabitable.
Allstate’s policy says:
If your rental property becomes uninhabitable due to a covered loss, Allstate Fair Rental Income Coverage can help pay you the rental income you would otherwise lose. In other words, if your tenants have to move out, Fair Rental Income could keep the rental income flowing in for up to 12 months, while the unit is being repaired or rebuilt.
Loss of income insurance might seem like a great deal at first, but it’s important to determine how much your premium will go up for this coverage, and that you weigh the benefits.
If you can self-insure, and can live without rental income for a month or two, paying for years of loss of income coverage may not be a wise financial decision.
6. Legal / Liability / Medical Coverage
If a tenant or employee – even a contractor working on a part-time basis – sues you for damages, legal and liability coverage can keep you from having to go out-of-pocket. This is generally coverage that every landlord should have, as it’s easy to build up huge legal fees or be forced to pay large settlements for things that are largely out of your control.
As with any policy, this coverage has its limits. If you have multiple rental properties, then you might want to consider getting an Umbrella Policy to cover you and your personal assets if a liability claim goes beyond the limits of your landlord policy.
Most of the time, lenders will require that you have liability coverage, in order to protect their investment/loan.