For the same reasons that rental property mortgage is different from primary mortgage, insurance for a rental property is also different from insurance for an owner-occupied home. A rental property presents more risks to both lenders and insurers than a home where the owner of the home lives in it. Due to the unique risks associated with renting out a home to tenants, the type of insurance needed for a rental is different from what is needed for a home you live in.
Furthermore, a rental property is a business, and like all businesses, it is exposed to threats. There is a possibility that the tenants in a rental will fail to pay their rent or pay it late. There is also the chance that some adverse circumstance, such as a natural disaster or a tree falling on the roof, may render the home uninhabitable. Under these circumstances, the landlord’s livelihood will be terminated if they do not have a backup plan.
Another problem of rental properties, from an insurance point of view, is the owner’s distance from the home. Because the landlord is mostly away from the rental, the possibility of damage to its physical structures and the landlord’s belongings inside the home is higher. This is because tenants will not care for the home as well as the owner would and because the occupants of a rental are constantly changing.
Based on these realities, what are the important insurance policies for a rental property?
Landlord’s insurance provides coverage for a home if it is leased to tenants. The perils typically covered by this type of insurance include fire, lightning, windstorm, hail, explosion, theft, riot, aircraft, falling objects, water damage (from appliances, sprinklers and plumbing), smoke, vandalism, volcanic eruption, electric current, and weight of ice snow or sleet.
This is similar to the perils covered by standard homeowner’s insurance. However, although landlord’s insurance is similar to homeowner’s insurance in many respects, it is also different. Landlord’s insurance usually includes dwelling coverage and liability coverage, but these are all adjusted to accommodate the unique needs of a rental property.
- Dwelling Coverage
Landlord’s insurance protects the physical structures of a building from possible damage. It acknowledges the bigger risks of having living in a home, rather than its owner. Depending on the terms of the policy, it can either pay the replacement cost or actual cash value of lost or damaged items. The former pays better.
- Coverage for landlord’s personal property
Landlord’s insurance only covers the landlord’s personal belongings if they are part of the contents of a rented house, apartment, or condo. These include furniture, appliances, and other items that are part of the home. But it does not include any personal stuff that the landlord left behind in the home, if they are not directly used to serve the rental. Coverage is also extended to things like lawnmowers which, though not inside the home, are used to maintain the rental.
- Liability coverage
Another coverage included in landlord’s insurance is liability coverage. This protects the owner from lawsuits by tenants, tenants’ visitors or random strangers, in the event that any of them are injured inside the home. Liability coverage will take care of legal fees, medical costs and awards against the landlord.
Loss of rent coverage
The rental income from a rental property may cease if the home becomes uninhabitable due to accidental damage. During this period, the tenants are not obligated to pay rent and the landlord cannot earn income while the home is undergoing repairs. A loss of rent policy compensates the homeowners for this loss of income. It may also compensate for non-payment or delayed payment of rent by tenants.
Landlord’s insurance typically does not include protection from damage by flood. This does not refer to flood damage which originates inside the house, but flooding from storms or overflowing water bodies. To get protection from flood damage, it is necessary to buy additional coverage.
Protection from water-backup from an outside sewer or drain
This kind of damage will not be covered by standard landlord’s insurance but can be bought as a separate policy or an add-on to landlord’s insurance. Water damage from sewer and drains is not categorized in the same way as damage caused by the internal plumbing of the home.
This covers the physical structures of the home and its content if they are damaged or stolen while the rental home is vacant or undergoing renovations.
Renter’s insurance is not a policy that landlords need to buy. Instead, it is something they should require from tenants. Renter’s insurance protects the tenant from loss of their belongings and personal liability. It reduces the pressure on the property owner’s landlord’s insurance.
And umbrella policy provides additional coverage over and beyond the limits of the landlord’s existing insurance policies. It offers additional layers of benefits that allows the policy holder to extend the protection they enjoy under any particular policy.