Landlord insurance provides coverage for property owners renting out one or more residential homes, apartments, or condos. As a landlord, you need protection from loss that may result from damages to a rental property due to fire, break-in, severe weather and more.
Homeowner Insurance vs. Landlord Insurance
Different pricing structure: Landlord insurance will probably cost you 12 percent to 25 percent more than homeowner’s insurance, but it provides wider coverage.
Different risks: Landlord insurance limits the extra risks you face from things that can happen at a property that’s not your own home. These risks may include your tenants vandalizing or accidentally breaking your property, suing you for some rental policy they disagree with, or not reporting a problem to you until it becomes a crisis.
Landlord property coverage is offered in three different tiers: DP-1, DP-2 and DP-3 (DP stands for Dwelling Protection).
- DP-1: The lowest coverage level, this tier only covers basics like fire and vandalism. If the dwelling is a complete loss, DP-1 policies pay the depreciated cash value of the home at the time it was lost, rather than the actual cost of replacement.
- DP-2: This tier adds more coverage with a list of specific covered events. These typically include such things as tenant damage, windstorm, hail, and even collision (if a car crashes into your property and damages it). If a damaging event is not named on the DP-2 list, it is not covered.
- DP-3: Called an “open-peril” policy, this tier covers all instances of damage unless they are specifically excluded. Also, DP-3 policies pay actual replacement cost if a dwelling is lost. This type of policy is usually the best choice, unless you’re already partially covered for losses by a condo association.
Flood InsuranceNational Flood Insurance Program (NFIP).Your agent should be able to sell you one of these policies, but the amounts and premiums are set by the government.The insurance company may offer its own excess flood insurance if the NFIP amount available to you isn’t sufficient.Landlord insurance can be written to include any items you own that are kept on the premises, including appliances, tools you keep on site and other structures (e.g. sheds) on the property.
Landlord insurance reduces the additional risks you acquire when you put property into a tenant’s hands:
- Personal injury coverage: Tenants or their visitors may file a liability claim against you for their medical costs if they get hurt due to an unsafe condition they feel is your fault. Additionally, if they suffer property damage of something you did not repair, they may sue you for replacement costs. Finally, you can be legally liable for issues entirely unrelated to the physical state of the dwelling.
- Legal counsel: As you can see, the numerous kinds of liabilities you encounter as a landlord make access to legal counsel an essential part of your financial security.
Loss of Rental Income
This category of insurance protects you against losing rental income if the unit becomes uninhabitable.
It is important to be aware that this insurance does not cover you if you simply lose rent because of eviction or vacancy; you must have actual physical damage that is covered by your insurance and be losing rent while it’s being repaired.
What to look for in a landlord insurance policy
Customization: The policy you end up with should be tailored to your specific needs, because each landlord’s situation is very different.
Flood insurance: The federal government offers flood insurance through a designated set of insurance agencies. If you live in a flood-prone region, you should make sure your insurer participates in this program. The price for flood insurance is set by the government, and its cost depends on the level of risk in your region.
Guaranteed replacement costs: Some low-cost landlord insurance policies pay you the “cash value” of covered items. While this phrase may sound good, it’s something to avoid. “Cash value” refers to depreciated cost. Better-quality policies guarantee that payouts will cover your actual replacement costs.
Inflation protection: The cost of professional home repair continues to rise, so it’s helpful to have a policy that automatically adjusts its coverage level to keep pace with inflation.
How to keep rates low
Review the options with your insurance agent to learn about what is really needed for your property. There’s a certain point at which additional insurance simply becomes an unnecessary expense. For example, if you purchased a condo unit to rent out, the condo association may already cover certain building-related costs. If you happen to have your own personal homeowner or auto insurance through a company that also sells landlord insurance, you are likely to qualify for a discount through that company. Like any insurance policy, you’ll pay lower premiums if you are willing to bear the risk of a higher deductible.
Being a landlord means running your own business, and landlord insurance premiums can be deducted as a business expense.
Also, if you experience a loss due to property damage that’s not fully covered by your insurance, you can often count that “casualty loss” as a tax deduction as well. (While you’re thinking about taxes, don’t forget all the other tax deductionsyou can take as a landlord. These include depreciation on the cost of your rental property as well as repair costs, accountant fees, mortgage interest and more.)