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How much landlord insurance do I really need?

November 3, 2020

The simple answer is: your landlord insurance policy needs high enough coverage to pay for your rental property to be rebuilt if it were destroyed. The more complicated answer is: you need to pick coverages and deductibles for your property damage and liability coverage that fit your financial situation and risk tolerance; we’ll discuss how to choose below.

The first thing to wrap your head around is that landlord insurance, like homeowners insurance, is not just one number -- there are actually six insurance coverages, and two of them are really important.

Here are the seven covered losses your landlord insurance company will offer:

  1. Rebuild the main structure itself: “Building Coverage”
  2. Pay legal costs if a tenant sues you for medical injury: “Liability Coverage”
  3. Compensate you for lost rental income while a property is being repaired: “Loss of Use Coverage”
  4. Replace damaged maintenance equipment you keep on the property: “Personal Property Coverage”
  5. Pay for a tenant’s medical costs if they are injured on the property: “Medical Payments Coverage”
  6. Rebuild unattached structures like sheds: “Other Structures Coverage”
  7. Miscellaneous types of coverages like vandalism.

The biggest ticket items are building and liability coverage, so let's figure out how much you need of each.

How much Building Insurance?

Let's start with an easy number: how much is the real estate worth today, ballpark?  Let's assume you bought a rental property five years ago for $250,000 and you think it's appreciated to about $300,000 now.

Does that mean you need $300,000 in property insurance? No! 

Your real estate might be worth $300,000 but a big part of the value is the land, not the building.  The real question is: if there were a natural disaster that completely destroyed your investment property, what would be the replacement cost?

If you could rebuild your rental property for $200,000 then that's the number you need for building coverage.  

One way to estimate this replacement cost number is to look at your last tax assessment; the assessor usually breaks out the tax into the value of the land + improvements (buildings). Be careful, though, because the current depreciated value of your property might be less than the cheapest price you could pay to rebuild it.    

For example, your 30-year-old building might have a current value of $200,000, but if it burned down it might cost you $350,000 to rebuild it.  

Bottom line: select a property damage coverage that is just enough to cover the replacement cost of rebuilding your rental property, but no more.

How much Liability Insurance?

For liability coverage, it's harder to come up with an exact number of what you need, because it depends on your financial situation and what kind of tenants you have.  

The reason your insurance carrier offers liability coverage is to protect you when a tenant or their guest is injured (or suffers property damage) and decides to sue you.  For example, if your tenant slips on ice while walking out to their car, they may file a lawsuit against you.  Just like a homeowners insurance policy, your landlord insurance policy could kick in to settle with the tenant or defend the lawsuit.

But the question remains: how much liability insurance do you really need?  Most landlords choose $1,000,000 in liability coverage for small 1-4 unit properties.  As the number of tenants in a property increases, the chance of having multiple large claims in a year also increases.

Bottom line: select a liability coverage limit that is high enough to cover a serious injury lawsuit from your tenants.

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