[.blog-disclaimer-text]Disclaimer: This article is not legal advice. Legal information is not the same as legal advice, where an attorney applies the law to your specific circumstances. Consult an attorney for advice on your interpretation of this information or its accuracy. You may not rely on this article as legal advice, nor as an endorsement of any particular legal understanding.[.blog-disclaimer-text]
In many cases, rental property owners may believe that their homeowners insurance policy is sufficient to protect their property. However, rental property insurance, or landlord insurance, offers a more comprehensive option -- one that is specially designed to protect property owners and their financial interests.
How does rental property insurance differ from homeowner’s insurance? How is it different from renters insurance? Is rental property insurance required and what are the pros and cons involved? We’ve answered your most pressing questions so that you can better inform and educate the owner of the property you manage and find the right coverage if needed.
What is rental property insurance or landlord insurance?
Rental property insurance is a type of insurance coverage that applies to non-owner-occupied properties and addresses some of the specific challenges associated with rental property ownership. Rental property insurance may include some or all of the following elements:
Just like homeowners insurance, rental property insurance covers damage or destruction of the dwelling itself. Depending on the type of coverage, dwelling coverage may be limited to specific types of perils and may differentiate between actual cash value and replacement value coverage. Be sure to check the policy type in order to determine what is covered and what is not.
Personal property coverage
Rental property insurance does not cover the personal property of the tenant; that’s what renters insurance is for. However, it does cover the personal property of the property owner. For instance, appliances, lawn implements, and other items which may be provided with the property rental are considered the personal property of the owner. If that personal property is subsequently destroyed, personal property coverage would pay for replacement or damages.
If a tenant or his or her guest falls or is injured while on the premises, they may sue the property owner for medical costs or damages. Liability coverage offers protection over and above that provided by the tenant’s renters insurance.
Loss of rent coverage
In the event that damage makes the rental property uninhabitable, loss of rental income coverage can help cover financial losses while it is being repaired.
Specialty insurance coverage
Many insurance policies do not cover damage caused by floods or earthquakes. If the rental property is in a floodplain or earthquake zone, it will usually be necessary to purchase specialty insurance policies to cover these specific types of natural events.
Umbrella policy coverage
For property owners with a large amount of personal wealth, an umbrella policy adds additional coverage to shelter their liability for amounts over and above the policy limits. If they have not already done so, the property owner should explore ownership through an LLC to further protect them from personal liability.
How does rental property insurance differ from renters insurance?
Rental property insurance is distinctly different from renters insurance. Renters insurance is designed to protect the tenant and his or her property, rental property insurance is designed to offer an extra level of protection for property owners -- one that is significantly more comprehensive than traditional homeowners insurance.
What are the various types of rental property insurance?
There are three primary types of rental property insurance, also known as dwelling policies (DP) -- DP-1, DP-2, and DP-3. These offer considerable differences in the circumstances and types of coverage they offer.
DP-1 policies are very limited in their coverage and are based only on specific risks or perils named in the policy. These may include damage from the following:
- Fire and Lightning
- Internal and External Explosion
- Windstorm and Hail
- Riot and Civil Commotion
- Volcanic Explosion
- Vandalism and Malicious Mischief (may not be included in all policies)
DP-1 policies are usually based on the actual cash value (ACV) of the various components of the dwelling. While the dwelling itself may appreciate in value over time, the components may depreciate. For example, a roof that was replaced 10 years ago is worth less than a roof that was replaced one year ago, even if the rest of the dwelling is worth far more than it was worth 10 years ago. A DP-1 policy will only reimburse the property owner for the ACV or depreciated value of the element being claimed.
DP-2 policies offer an average amount of protection along with coverage for many more risks than those covered by a DP-1 policy. These may include the following:
- Fire and Lightning
- Internal and External Explosion
- Windstorm and Hail
- Riot and Civil Commotion
- Volcanic Explosion
- Vandalism and Malicious Mischief
- Burglary Damage
- Weight of Ice and Snow
- Glass Breakage
- Accidental Discharge or Overflow of Water or Steam
- Falling Objects
- Freezing of Pipes
- Electrical Damage
- Tearing Apart, Cracking, Burning, Bulging
Generally, DP-2 coverage is replacement cost insurance, which can offer a significant advantage over DP-1 actual cash value coverage. That means that in the event of a claim, the policy would pay to replace the damaged element without regard for its depreciation.
In addition, DP-2 policies generally offer loss of rental income coverage. Overall, DP-2 coverage provides a significant advantage over DP-1 coverage and should be considered by the property owner if at all financially possible.
In contrast to DP-1 and DP-2 policies, DP-3 policies cover all perils except those that are specifically excluded by the policy. These may include:
- Ordinance or Law
- Earth Movement
- Water Damage (may be included in some policies)
- Mold (may be included in some policies)
- Power Failure
- Nuclear Hazard
- Intentional Loss
- Governmental Action
DP-3 insurance policies may cover personal property but will cover far less than homeowner’s insurance would since most of the personal property will be that of the tenants. In most cases, personal property coverage will be limited to the appliances and not much else. Check with the insurance carrier to determine whether policy limits on personal property are sufficient to replace personal property that is damaged or destroyed during a covered event.
One additional advantage of DP-3 coverage over the other categories is that it may offer some coverage during times when the property is unoccupied. Check with your insurance carrier to find out if you need to adjust coverage in the event that the property is unoccupied for 30 days or more due to a lack of tenants or to facilitate repairs and improvements.
How much does rental property insurance cost?
There is no good average for rental property insurance since premiums can vary widely depending on a number of factors, including the following:
- The market where the rental property is located
- The type of property (single family or multi-family)
- The value of the property
- The type of rental plan (short-term, long-term, seasonal)
- Additional structures and features including pool, storage building, retaining walls or fences
- The type of policy chosen (DP-1, DP-2, or DP-3)
- Add-on coverage for floods, earthquakes, or other specialty coverage
How can you make rental property insurance more affordable?
Shopping around for coverage is an important way of determining which rental property insurance policy is most affordable. In addition, do the following:
Look for bundled discounts
If the property owner has a number of properties or already has homeowners and auto insurance policies with a particular insurer, find out if bundling the rental property insurance policy with other existing coverage will result in a discounted rate on the premiums.
Ask about safety and security upgrades
Upgraded fire, flood, or security features may result in a discounted rate on rental property insurance. Be sure to compare the cost of the upgrade with the potential savings and find out what documentation is required by the insurance company to qualify for the discount.
Don’t over-insure your property
Make sure that you carefully review the policy limits and compare to the current property valuation in order to ensure that the amount of coverage is appropriate for the property in question.
Look for carriers who offer flexible options
Many rental property insurance carriers offer a variety of flexible options, allowing you to customize coverage so that you don’t overpay. It may make more sense to purchase a basic policy with add-ons rather than an expensive comprehensive policy that offers coverage you don’t require.
Require tenants to carry renters insurance
While there are many aspects of rental property insurance that are unique to that type of policy, others may be duplicated by renters insurance policies. By making sure that all of your tenants are purchasing and maintaining renters insurance, and checking that their coverage is being renewed on a regular basis, you can pass some of your coverage needs on to the tenant.
What can you do to prevent property damage, accidents, and injury before they occur?
The best defense is a good offense, and this is just as true when it comes to protecting the property you manage. While it is important to carry appropriate insurance coverage, there are many steps you can take to protect and preserve the value of a property so that, ideally, you never have to make a claim.
- Consistent property maintenance is one of the most important ways to protect the value and condition of the rental property. While the tenant will no doubt be in charge of many of the maintenance and upkeep requirements associated with the property, the property owner may wish to pay for regular system maintenance in order to keep everything working at peak efficiency and head off problems before they occur.
- Use the time between tenants as an opportunity to thoroughly inspect the property and check for deferred maintenance and other potential problems. Make repairs and upgrades on a consistent basis to prevent damage from outdated systems or fixtures.
- Consider paying for regularly scheduled maintenance like lawn care or pool maintenance. Unraked leaves can cause mold, mildew and water damage or present a slip and fall hazard. Improper pool maintenance can result in significant structural damage. When in doubt, you may save money in the long run by taking more responsibility for property upkeep.
- Consult with an attorney to determine how to structure your lease in order to limit the personal liability of the property owner. This would also be a good time to discuss what type of ownership structure will provide the best protection for the owner’s assets.
- Consider requiring renters insurance from your tenants in order to provide an additional layer of protection against liability from accident or damage. It is important to implement a system for checking in regularly with tenants for verification of ongoing renters insurance coverage.
You can help tenants to understand the advantages of renters insurance and obtain adequate coverage -- and Rent Spree can help. That’s why we’ve partnered with Sure to provide a fast and efficient renters insurance process for you to share with your renters. They can take advantage of on-demand quotes and easy sign-up for renters insurance policies. You’ll then be able to check for ongoing coverage right from the RentSpree dashboard, providing you with maximum convenience and reliability.
As a rental agent or property manager, you have an important role to play in advising the property owner regarding coverage options. By researching insurance carriers and available policies, you can inform the owner of your rental property about ways to better protect the value of the property you manage.