10 Essential Questions to Demystify Landlord Insurance with Max McClure

Hi, my name is Max McClure. I'm the Chief Insurance Officer at Steadily. I want to extend you a warm welcome today. My goal is to demystify the world of landlord insurance through 10 essential questions.

Landlord insurance is a type of insurance that covers both your property and liability coverage against events that happen on that property. One of the main differences between a homeowner's policy and a landlord insurance policy is that a homeowner's insurance policy will actually deny or not cover claims associated with a tenant.

Why is landlord insurance a must-have as a real estate investor? Anytime I put together a business plan for a rental property, you do some sort of financial model that anticipates what your income on that rental property will be. What you don't anticipate is major events like a large uncovered claim or liability — something that happens on the property where somebody gets injured — where you have to pay out of pocket for those events. That is where insurance comes in to help you better manage your business, understand what your expenses are, and feel good about the coverage that you have.

Your landlord insurance policy is going to cover things like water damage, fire, or if somebody gets injured on your property. Those are things that you as a landlord investor are not going to want to pay directly out of pocket. You want to have confidence that you have an insurance provider who's going to cover those types of events so you can hit your margin and income targets on your rental properties.

What does a typical landlord insurance policy cover? The three principal coverages on a landlord insurance policy are going to be coverage for the building, coverage for liability events, and loss of rental income. Let's say a water pipe breaks in your home and causes the house to flood, or maybe a lightning bolt strikes the home and causes a lot of the electrical stuff inside to fry — that is where your property damage coverage will come in.

Let's stick with the example of a pipe bursting in your rental property that causes the entire building to flood. In that case, you're going to need to hire a mitigation company to come out and dry out the property. They're going to tear out all the parts of your rental property that are wet, like sheetrock, baseboard, and flooring, and once that's done you're going to need a contractor to come in, replace everything, and put it back together. During that period of time your tenants are not going to be able to live there and they're going to have to move out, which means you'll be missing out on rental income. Your loss of rental income coverage will reimburse you for income that you would have earned if the water damage had not happened, which is a very important coverage.

Some additional coverages that landlords should consider: sewer backup coverage, which is when water backs up through a pipe — like the drainage pipe in a bathtub — that can back up and drain into your home. That's an additional coverage you'll need to purchase separately. You can also buy what's called extended replacement cost coverage, which means in the event of a total loss to your rental property — let's say the whole thing burns down — you won't just get paid the stated amount of insurance on your dec page. You'll actually get paid a percentage above that, like maybe an extra 25% or an extra 10%, which will really help with the reconstruction cost if something like that were to happen.

Some of the key factors in determining how much your rental property insurance is going to cost: How big is the dwelling? Where is it located? What kind of deductibles are you comfortable with? What state are you in? If you feel that your landlord insurance is too expensive, there are ways to mitigate the cost. You can elect to have higher deductibles, which will result in a lower premium. You can also install a monitored alarm service in your home, which will lead to a discount.

In order to choose the best policy for your rental property or rental property portfolio, you first have to ask yourself what your risk tolerance is. If you are someone who wants comprehensive, I'm-not-going-to-lose-any-sleep-at-night coverage, then there's an option for you. If you're someone who wants basic insurance and you don't want to spend a lot of money but you understand that there may be things that aren't covered down the road, then there's also a product for you.

A few things to look for when reviewing your policy to make sure you have the right coverage: Do you feel like the property limit amount is adequate to rebuild your property? You probably bought this property or have an idea of what it would cost to rebuild, so look at that amount and make sure you're comfortable with it. Another thing is to look at the liability coverage and make sure the amount makes sense for your business. Some people have a large inventory of rental properties, and for those types of people it generally makes sense to have higher liability limits with perhaps an umbrella policy sitting on top of all of those underlying policies. For others who have one or two rental properties, maybe a $300,000 or $500,000 liability limit is adequate.

Landlord insurance is highly customizable. You can have different coverages that may apply based on whether it's a short-term rental or a long-term rental, and what state you're in. There are a lot of additional coverages that you can add on to a landlord insurance policy that may not be automatically included off the shelf. A common example of that would be the sewer backup coverage we talked about — that's not something that's typically included, but you can add it on, which would cover things like commodes backing up into your house and needing to clean that up and replace anything that was damaged.

Filing a claim with Steadily is very easy. You can text us, you can email us, you can even fax us if you're willing to dust off those old fax machines. Once you file a claim, an adjuster will typically contact you in less than 24 hours and will ask you about what happened to the property. Based on that information, we may decide to do a virtual inspection of the property to assess the damage, or we may actually send somebody physically to your rental property to assess the extent of the damage. We will build an estimate and then issue payment to you minus your deductible based on that estimate.

There are several different ways to reduce the cost of your landlord insurance policy. Do you have a monitored alarm service at that rental property? That'll definitely get you a discount. Do you have a professional property manager? Steadily gives discounts for that as well. In states where there are a lot of tornadoes and hail, the condition and age of the roof is also an important rating factor — the newer the roof and the better the condition, the lower the cost. Another way to save money is if you have more than one rental property and you put them all with Steadily — we give a discount for multi-location accounts.

Common landlord insurance mistakes would be not being an active participant in that insurance purchase. Your agent is your advocate, but nobody's going to know your business and your portfolio better than you. Make sure you're conveying to your agent what your needs are — have you made changes to these rental properties over the last year? Have you acquired new properties? Has something happened at those individual properties where you want to increase coverage or change your liability limits? Being an active participant in that insurance purchase is really critical to having the coverage that you need.

This is Max McClure, the Chief Insurance Officer at Steadily. I hope you enjoyed demystifying landlord insurance. Subscribe to Steadily for more insights, and reach out to Steadily today if you have any questions.