Rental property insurance: who needs it and what does it cover?
While rental property insurance is not required for a landlord to rent out their property, it brings many benefits - from providing liability coverage for legal fees in the event that a tenant is injured at your rental property, to contributing necessary replacement costs in case the property is destroyed by certain natural disasters.
Almost every landlord will, at some point, consider whether investing in landlord or in other words, rental property insurance, is worth the cost. While every owner needs to decide this dilemma on their own, this article will introduce both the benefits and costs of landlord insurance, explain who it concerns and provide some tips to decide.
Who is Rental Property Insurance For?
The short answer would be – for a landlord renting out their property, whether they are looking to rent out their property in the short-term or long-term. However, it is important to note that while rental property insurance brings many benefits, which will be discussed later, it is not mandatory.
Rental property insurance is also known as landlord insurance. We have an ultimate guide that breaks down everything you need to know.
Nonetheless, it is strongly recommended to at least consider getting it. Unfortunately, life has a way of surprising everyone and there are a series of events in which landlord insurance can help, from natural disasters to possible lawsuits by tenants.
It is also important to note that landlord insurance is not the same as homeowners insurance therefore you would usually not be able to have both at the same time. While the former generally covers property, which is being rented out, the latter refers to insurance which covers a property used as the owner’s primary residence.
Further, even though both cover property damage and provide liability coverage for the holders, homeowners insurance is generally broader than the standard landlord insurance.
The Benefits of Rental Property Insurance: What It Covers
Liability coverage is usually included within most standard packages. In short, this indicates that the landlord will be shielded from both legal and medical fees in case a tenant or their guest gets injured on the landlord’s property.
If this were to happen the tenant or guest may sue the landlord for a pay-out or for coverage of their medical expenses – and this is precisely where the insurance comes in and covers any possible expenses.
However, it is important to keep in mind that the amount the insurance covers is always determined by the amount of coverage the landlord has chosen to get when purchasing their insurance. The amount of coverage would be up to the limits stated in your policy.
Key Insight: Liability coverage may help cover legal fees and any court judgments made against you in a case of a tenant getting injured in your rental property.
Rental Income Protection
Rental income protection refers to cases when the rental property becomes, due to certain circumstances, uninhabitable. In the event this occurs, if the factors making the property inhabitable are covered within the landlord’s insurance, the insurance company will help cover any reparation costs while also helping to cover the loss of income the landlord endures during the period when they are unable to rent out their property.
Think of it like this: a form of rent guarantee insurance. For example, your rental property insurance cover fire damage, and fire damage makes the apartment (you own) uninhabitable, the rental income protection will cover you for the expected future rental payments your tenants would have paid. Generally, the coverage will extend up to a defined period of time, such as 12 months. Rental income protection does not always come with all standard rental property insurance plans, so check the policy before purchasing it if you would like this type of coverage.
Key Insight: Before purchasing your landlord insurance check if it includes rental income protection. If you already have an insurance policy then check your declarations page to see the details of your policy.
Some rental property insurances also include dwelling coverage, which means that the insurance protects the structure of your residence itself from certain losses, which are covered in the insurance policy. Here are some examples, the rental property is destroyed or damaged by windstorms, fires, lightning, and or other covered losses.
However, again as with every coverage, the amount the insurance company will cover depends on the conditions of the insurance policy, and of course on the amount of damage suffered.
Certain Tenant Damage
There are generally two types of tenant damages: accidental and intentional, although the latter tends to be less typical. Accidental damage refers to, as suggested by its name, any damage the renter accidentally causes.
If this damage is covered within the particular policy, the insurance provider will help cover the costs of repair or replacement for the damage caused.
Intentional damage, referring to malicious damage caused intentionally by the tenant, is a little more complex. This is because this coverage is far more dependent upon the terms of the policy, and thus it is especially important to check whether it is covered before purchasing the insurance.
Refer to our article on "Does Landlord Insurance Cover Tenant Damage to Your Rental Property?"
Additional Rental Property Insurance Coverages to Consider
Many insurance providers also offer additional coverages to add to the landlord’s insurance policy, however, the amount of these and what they cover varies from provider to provider.
A common add-on is coverage for vandalism or robberies, in places where the landlord is afraid such event is likely to occur, or even coverage of any possible mishaps which may occur while remodeling your rental property. However, again, these add-ons are not available with all providers, and therefore if a landlord wishes to add certain benefits, they must find a provider who offers them.
Key Insight: Have a unique situation as a landlord? Make sure you talk to your provider in case you need to add additional coverage.
Rental Property Insurance as a Tax Deductible
Rental property insurance will be, for both full-time and part-time landlords, considered tax-deductible. This means that it will lower the landlord’s tax liability by lowering their taxable income, as it is considered a business expense.
What Rental Property Insurance Does Not Cover
Tenant’s Personal Property and Belongings
In case that a tenant’s own personal property or belongings are stolen or somehow damaged, the landlord’s insurance policy will not cover the costs for the replacement or reparation of the tenant’s property (this also applies to any guests the tenant may have).
The only way for the tenant to protect their own property is to purchase a renters insurance policy. This policy is made to protect the renter’s personal belongings in the case that property damage, vandalism, or theft occurs.
In insurance terminology vandalism and theft can be an example of what a human peril is.
Maintenance and Equipment Malfunctions
If any equipment at the landlord’s property breaks down only as a result of a malfunction, the landlord will be required to pay for the repairs or replacements themselves. This means that if, for example, the dishwasher at the landlord’s property breaks down, the landlord will have to pay to repair it with their own money.
Despite its coverage of natural disasters, landlord insurance does not apply to any damage caused by floods. In order to protect the property from floods, in particular, the landlord would have to purchase separate flood insurance, which might be a good investment, especially in areas with higher risks of floods.
We wrote an article on water damage. If you are wondering what is included and what is excluded in water damage cover refer to "Does Landlord Insurance Cover Flooding and Water Damage?"
Residences the Landlord Themselves Occupies (Shared Property)
This one is perhaps more obvious, as the difference between homeowners insurance and landlord insurance has already been explained, however, it is an important reminder.
In most cases, rental property insurance does not cover the property the landlord themselves lives in, even if, at that property, they rent out a room or a unit to a tenant. This is because rental property insurance has been designed specifically for “non-owner-occupied” properties.
Wear and Tear Damage Caused by the Tenant
This is the one type of renter’s damage landlord insurance does not cover, and it refers to damage that occurs as a natural result of the property being used and inhabited.
The Cost of Rental Property Insurance
While there are numerous benefits to purchasing landlord insurance, one must also consider the costs.
According to the Insurance Information Institute, the average cost of landlord insurance is $1,478 in annual premium, however, the insurance premiums vary from provider to provider.
Additionally, the same statistics also concluded that homeowners insurance was actually cheaper than landlords insurance by approximately 25%. Generally, insurance providers receive fewer claims and have to cover lower average loss amounts for owner-occupied homes rather than rented-out property.
The higher costs also occur as landlords usually have higher coverage levels to protect themselves from lawsuits and legal fees (it is common for a landlord to have a $1m liability limit).
Here is a more in depth article, "How Much Does Landlord Insurance Cost?".
How to Reduce the Cost of Your Rental Property Insurance
There are several ways that can reduce the cost of landlord insurance. However, none of the tips listed are guaranteed forms of lowering the insurance premiums, as the decision ultimately depends upon the insurance provider.
Maintaining the Property
Keeping the building and the surrounding area in good condition may make it more attractive to insurance companies, therefore gaining more insurance offers and possibly better and cheaper deals.
A few ways to do this may include repairing the façade, eliminating any mold or keeping the sidewalks free of major cracks, and keeping up with other common maintenance procedures.
Tip: Finding and hiring a property maintenance company is a time saver if you manage multiple rental properties
Including Safety-Related Improvements in the Building
Another factor making a rental property more attractive to insurance providers is its safety. Safety measures help prevent major accidents and show insurance agencies that your property is less risky to insure.
Improving safety measures may include maintaining proper fire escapes and installing smoke detectors, adding alarm systems, and security cameras. If the tenants have families with small children, it may also be considerate and beneficial to install child-safe window hardware.
Raising the Deductible
One of the easiest ways to minimize or lower insurance premiums is raising the deductible, which refers to the amount the owner would have to pay themselves in case an accident was to occur, before the insurance company covers any expenses.
Therefore, the more the landlord is willing to pay out of their own pocket before the insurance company has to step in and cover the expenses, the smaller the insurance premium is likely to be.
However, this strategy should be implemented wisely – it would be unfortunate if the owner was not able to cover the costs not covered by their insurance policy.
Hiring an Insurance Broker Who Specializes in Real Estate
This last tip is more concerned with the purchase of insurance itself, rather than ways to lower the insurance premium prior to the purchase.
Hiring an independent broker who specializes in real estate means that he or she will not have any obligations with any particular insurance company, and will therefore find the deal best for the landlord.
Additionally, if the broker is experienced and skilled enough, they will know various markets and can therefore present the property to many insurance providers, who can subsequently compete for it.
Cheaper is Not Always Better
While we provided a few tips to help minimize the landlord’s insurance premium, it is necessary to keep in mind that as far as landlord insurance is concerned, quality is more important than price.
Insurance is to provide peace of mind for the landlord, as we know accidents happen. If the landlord tries to keep the insurance costs as low as possible, not only might their insurance policy lack coverage (and the landlord might end up in serious financial trouble), but they may also end up with a low-quality or unprofessional insurance provider.
Tip: Shop around and compare the available renter's insurance policies.
Should You Get Rental Property Insurance?
Ultimately, that decision depends on you. If you believe that certain accidents out of your control may occur and you would rather go to bed at night knowing that in case this happened, both your property and your income are protected, then landlord insurance is the way to go.
While the costs may seem initially high and unnecessary, in the long run, rental property insurance has the ability to save you from significant financial loss and struggles.
Here is an article to help determine if you should get renters insurance, "Is Landlord Insurance Worth the Investment?"
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