Landlord insurance – Why your homeowners policy isn’t enough


What is landlord insurance?

Insurance is a must have for any landlord.  It moves risk from the landlord, to the insurance company.  Insurance doesn’t completely remove risk.  However, it does act as a buffer to protect the landlord from unnecessary risk and potential ruin.

Landlord insurance is designed to protect small rental properties including single family homes, duplexes and small apartment complexes.  It can protect a landlord’s financial investment from losses caused by fire, water, lightning or other disasters.

When considering landlord insurance, you’re looking to protect yourself from two types of loss.  First, you need to protect yourself from potential lawsuits.  Second, you need to protect the physical rental property from losses caused by fire or flooding.  To protect yourself, you will need a policy that provides both liability and property protection.  While most policies provide coverage for both of these, the specifics of what they cover vary.

It’s to the landlords advantage to understand the differences between them.

Liability insurance

A landlord liability policy covers liability the landlord has while renting the property.  This could include injury to your tenants or their guests.  If your tenant, or someone visiting them is hurt on your rental property, your liability insurance is there to help protect you from lawsuits.

In California, liability insurance typically is limited to $500,000 or $1,000,000 per incident.  Generally speaking, landlords would be wise to purchase as much liability insurance as they can afford.  This is especially true if they have equity in the property.   All it takes is a tenant who finds an attorney who sees a landlord with $800,000 in equity ripe for the taking.

“Landlords would be wise to purchase as much liability insurance as they can afford” – The Real Estate Solutions Guy

Property insurance

Property insurance, (also called “hazard insurance”), on the other hand, protects the landlord’s property and buildings.

This insurance covers losses from fire, and other potential dangers to the property.  If your rental property is destroyed by fire, then your property insurance may pay for the rebuilding of your property. 

How is landlord insurance different from homeowners insurance?Rental application with renters insurance

Most homeowner insurance policies will not cover losses if the property is being used as a rental.  Additionally, a typical homeowners policy will not cover losses while your property is vacant for periods longer than 30 days.  Other exceptions include if the property is being used for business, or for damages caused by tenants. 

If you’re renting out your home either to long term tenants, or as a vacation rental, you probably need a landlord policy. 

Is landlord insurance more expensive than homeowners insurance?

You can expect to pay slightly more for a landlord policy than a homeowners policy.  Insurance companies know that sometimes landlord’s have bad tenants.  Worse, if you need to evict your tenants, there may be further damage.  As a result, insurance companies charge a higher premium for landlord policies.

A word of caution.  Don’t try to save a few hundred dollars by buying a homeowners policy.  If you ever have to file a claim, an insurance investigator will talk to all of the neighbors as part of their investigation.  They’ll ask your neighbors if the property was rental or if it was occupied.  If the investigation confirms any of these, your insurance claim could be denied.

The risk of not having the right insurance.

Years ago a friend of mine bought a home at a foreclosure auction.  That night, the home caught fire and had minor damage.  However, the following night, the house caught fire again. This time there was much more damage.  Coincidence?  Needless to say, he didn’t need to evict the tenant.

Fortunately, my friend had purchased the proper insurance on this property immediately after it was purchased.  The insurance company paid the entire bill for the house to be rebuilt. Had he simply purchased a homeowners policy, the homeowners policy might have only covered 60% of his costs to rebuild!

If you’re not sure what type of insurance you need, talk to your insurance agent.

How much landlord insurance do I need?

Most insurance agents are paid commissions based on how much insurance they sell.  This may be tempting for them to sell you more insurance than you really need.  You will want to be careful that you are not buying too much property insurance.

Just to emphasize, we’re talking about the costs to rebuild your rental property.  Not liability insurance which would protect you from a lawsuit.

Three types of building replacement coverage

When it comes to your building’s replacement coverage, there are three types.  There’s actual costs, replacement costs and extended replacement costs.

Actual Costs Coverage

In the event of a loss, an actual cost policy covers what you paid for your property, less depreciation.  This is a very poor choice for insurance coverage and should be avoided.  With actual costs coverage, you could sustain substantial equity losses that are not covered by the policy. 

For instance, let’s assume you paid $100,000 for a house 20 years ago.  Today, the costs to rebuild your house are probably much higher than $100,000.  However, if your home was destroyed by fire, an actual costs coverage policy would only pay you $100,000 less 20 years of depreciation!

You really need an insurance policy that will pay for the replacement of your building, including building code changes.

Replacement Costs Coverage

Unlike actual cost, a replacement cost policy pays to rebuild the premises.  However, it usually does not include upgrades.  Replacement cost will only cover reasonable expenses to rebuild your destroyed property, minus any depreciation.

You want to be sure your policy covers 100% replacement costs as many policies that are labeled replacement costs are capped at a lower amount than 100%.  You may think that replacement means, they will replace everything you had in your home.  For example, whet if your home had an expensive, custom fireplace?  Your insurance policy might only install a standard fireplace, instead of replacing with the same model or better.

Additionally, most insurance policies will not cover the costs of any required building code upgrades.  For instance, if you home was built in the 1960’s, there will likely be new building code requirements if you choose to rebuild.  For example in California, this would include solar panels, fire sprinklers and other energy conserving features.  The costs for these building upgrades will usually not be included in a typical policy. 

What does this mean?  You’ll need to pay for these upgrades out of your own pocket, unless you have building code  upgrade costs included in your policy.

Guaranteed or Extended Replacement Costs Coverage

A few insurers offer extended replacement costs coverage.  For instance. what if the cost to rebuild your rental property is greater than the amount you are insured for?  Extended replacement coverage will increase the replacement amount by a percentage of the insured amount.  Extended replacement costs may provide as much as 100% more coverage than the insurer’s minimum required coverage.

For instance, if your policy was only for $200,000, but it actually costs $250,000 to rebuild your home, an extended replacement policy would cover the full replacement costs.

However, not all insurers offer 100% or greater extended coverage, so you’ll have to shop around. 

Additionally, you may want to ask about your insurance agent about an inflation guard. If your region is subject to wildfires, earthquakes and flooding, rebuilding costs could substantially increase if there is a large disaster.  For instance, after the 2017 earthquake in Napa several years ago, construction labor costs almost doubled due to demand.

What is Rent Default Insurance?

Rent default insurance is another form of insurance that has become available in the United States is rent default insurance.  While new in the United States, it’s common practice for landlords in other countries.  Brian Davis, of SparkRental says, “While landlord property insurance covers damage to the property, rent default insurance covers the risk of nonpayment of rent. If the tenant defaults on the rent, the insurance policy kicks in and pays it until the landlord has replaced the nonpaying tenant with a new tenant. In most cases that includes up to six months of rent payments”. 

Things to watch out for in rent default insurance

Our research was unable to find any rent default insurance carrier who was admitted.  This could create a potential problem if the insurance company experiences a large number of of claims.  Also be sure to check your deductible.  Some have no deductible, others have a one month deductible.  One insurance company actually requires an eviction, before triggering your coverage.  But what if your tenant just skips without an eviction?  If you have damages or costs in excess of the deposit, you are out of luck.

How much does rent default insurance cost?

Davis says that rent default insurance “typically costs between $350-500 per year, depending on the rent, and provides one more layer of protection for your rental revenue”.  He continues and says, that “one insurer has suspended new policies (during the Covid-19 outbreak), another we work with has continued issuing them”.

Short term rental insurance for Air BnB’s

Not all landlord policies are created equal.  While some policies may allow for short term rentals, such as Air BnB’s, others require annual leases.

When looking at insurance for short term rentals, insurance agent Josh Bagby in Canton, Georgia says “In today’s world of AirBnb and Vrbo, you need to make sure your policy would cover the property being rented for only 1 or 2 nights. Some carriers say they will allow short term rentals, but their minimum rental agreement may only allow for 7 night rental and exclude stays shorter than that”.

Are you over insured?

The value of your home, may be far more than the actual costs to rebuild your home.  If you live in the California Bay Area, your home may be worth more than a million dollars.  However, most of your home’s value is in the dirt. The the cost to rebuild your home will only be fraction of that. 

Don’t overpay by insuring your home for more than the cost to rebuild.  If you insure your rental property for a million dollars, your insurance company won’t pay you a dime more than the cost to rebuild.   If they can rebuild it for $400,000 that’s all they’ll pay, and not a dime more.

Just to emphasize our point, the Insurance Information Institute says “Your homeowners policy is based on the cost to rebuild your home, not its real estate value. While your house may be at risk from theft, windstorm, fire and the other perils, the land it sits on is not”

“Your homeowners policy is based on the cost to rebuild your home, not its real estate value” – III.org

Note:  When we say, “Don’t over insure”, we’re referring to loss of the building, not liability.  As noted earlier, we still recommend you purchase as much liability insurance as you can afford.

How much is landlord insurance?

The cost of landlord insurance is dependent upon the property being insured and the carrier.  Factors like age of the home, construction, design, quality, condition, and location all impact the price.  Additionally, landlord insurance is typically more expensive than your homeowners insurance, due to the additional risks of tenants and possible vacancy.  In California, a typical landlord policy ranges from $700-$1000 a year.  It obviously pays to shop around for landlord insurance.

You may also want to consider adding an umbrella policy to your insurance.  An umbrella policy provides coverage when your underlying liability reaches it’s limit.  If your liability coverage is for $400,000, an umbrella policy steps in after your liability policy exceeds $400,000.  Umbrella policies typically run around $100 for each $1,000,000 of coverage  Be aware, you can usually only buy an umbrella policy with a carrier that already has your liability policy.

What is renter’s insurance?

Renter’s insurance protects the renter’s personal property.  It also provides some level of protection for the tenant from lawsuits from tenant’s guests. A landlord’s insurance will not cover any of the tenant’s personal belongings or lawsuits against the tenant by the renter’s friends who may be injured while visiting the renter.  If your tenants have pets, you as a landlord may want to require your tenants to obtain renter’s insurance with a policy that covers injuries caused by pets.

Here’s a great video that cover’s why renters should have renter insurance.

 

Can a landlord require renters insurance?

The short answer to this question is, “Yes”.

Brian Evans of Eastern Public, an insurance adjuster in New York, says “Most residential and commercial leases will require the tenant to obtain and maintain renters or homeowners insurance”.

“Most residential and commercial leases will require the tenant to obtain and maintain renters or homeowners insurance”. – Brian Evans

Evans says where most landlords go wrong, is failing to check their tenant’s compliance with the lease. When a loss occurs, this can create major problems.  When tenants lose their belongings due to fire or flood, they often think that their landlord’s insurance will cover them.  This simply isn’t the case.  The landlord’s policy can only protect the landlord’s property.

How much does renter insurance cost?

Like landlord insurance rates vary from carrier to carrier, but they are not as dependent upon location as a landlord policy.  However, factors like the amount of coverage, deductible and prior claims can affect your tenant’s cost for renter’s insurance.  Most carriers will look for any claims made during the past 3 years when determining how much to charge.  On average, cost of renter’s insurance in California, runs around $300 a year.

Tenants with dogs

If your tenants have dogs, you may want to require your tenants to obtain a renter policy that covers covers injuries covered by pets.  Unfortunately, there are breeds of dogs that may be impossible to insure around.  According to Denia Shields, with Lou Aggetta Insurance in Pleasant Hill, California, “There are certain breeds that are absolutely an issue :  Doberman Pincher, Rottweiler,Pit Bull, Akita, Chow,  Presa Canario, and Staffordshire Terrier” are the primary culprits.  Shields goes on to say, “Unfortunately, if you own a breed of dog that is on the list there are very limited options available and the carrier will likely exclude coverage for any claim arising out of  ownership or care, custody or control of that animal if they are willing to write the policy at all.”

“There are certain breeds that are absolutely an issue :  Doberman Pincher, Rottweiler,Pit Bull, Akita, Chow,  Presa Canario, and Staffordshire Terrier” – Denia Shields

How much renter insurance should a landlord require?

Evans encourages renters to have a policy that covers the “full value of the tenants personal property and any betterments or improvements the tenants have made to the property.” Additionally, the policy should provide for living expenses “to address any expenses for up to 12 consecutive months following a covered loss.”

If a tenant causes a kitchen fire, the landlord’s insurance policy would initially cover the loss.  However, the landlord’s insurance company would likely pursue the tenant’s insurer for reimbursement.  Because of this, Bagby recommends that landlords have “tenants carry enough liability insurance on their renter’s policy to completely cover the rebuild of the home”.

What to look for in an insurance company

Don’t assume your insurance company will always pay if you have a claim.  While insurance is necessary, insurance companies are notorious for finding reasons to limit how much they pay.  Here’s some things you should look for.

Is your insurance company admitted?

An admitted insurer is recognized by your state’s insurance agency and admitted to operate in your state.  It also means that if your insurance company files for bankruptcy, your state may cover your losses.  Why should you do this?

Within a week of the Paradise fire in California, I had friends in other parts of the state, who received phone calls from their insurance companies saying, “We’re filing for bankruptcy.  You no longer have home insurance and need to find another carrier.”  That’s not the news you want to hear.

If there’s a major catastrophe, your insurer may not be able to cover all of the losses they have insured.  Having an admitted insurance company provides an additional layer of insurance.  It’s a backup should your insurer go out of business or become unable to pay your claim.

Check the Exceptions in your policy

About six months ago I purchased tickets to a concert.  I also purchased insurance in case I was able to go to the concert.  Little did I know that the COVID-19 coronavirus would impact my plans. 

“No worries I thought.  I bought insurance.”

I pulled up my ticket insurance and read through the policy.  There it was.   Buried in list of 20 exceptions, epidemics and natural disasters were excluded.  That meant the insurance I had purchased to protect my ticket purchase was worthless due to the coronavirus.

The lesson – always read the exceptions to your coverage. 

5 ways to save money on landlord and renters insurance

Shop around

Ask friends or other investors who they use for insurance.  While many carriers offer landlord or renter insurance, different carriers will have substantially different rates. 

Increase your deductible

Your insurance policy will have a set dollar amount that you must pay first for any claims, before your insurance will kick in.   This is called your “deductible”.  If you increase the deductible that you are responsible to pay, it can have a significant impact on your monthly premium. 

Insure with the same carrier as your auto

Buying multiple insurance policies through the same insurance carrier can help you save too.  Many carriers will give a 10% discount if you combine your auto and home with them.  Also, remember that if you’re looking for an umbrella policy, you’ll need to combine that with your other policies too.

Don’t over insure the building

We covered this above, but just a reminder, don’t insure your house for what you paid.  Insure your home or rental property for the cost to rebuild.  A house on the beach in Malibu may be worth several million dollars.  But the cost to rebuild won’t be much different than the cost to rebuild it further inland.

Look into discounts for upgrades, home security systems and seniors

If your home has a monitored security system for water, fire and burglary, your carrier may offer an additional discount.  Additionally, some carriers may offer discounts for people 55 and older.

Wrapping it all up

Having the right type of insurance is really important.  Most homeowner policies do not offer the correct type of insurance for either long term or short term rentals.  You’ll want to check with agent to make sure you have the right type of insurance.  Don’t try to save a couple hundred dollars a year by choosing the wrong insurance.  If you have to file a claim, the insurance company will discover your duplicity and deny your claim. 

Whether you’re a tenant or a landlord, you’ve now got the tools to get the proper insurance coverage.

 

Have a rental property you’re tired of insuring?  Get a cash offer for your rental property today.

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