As a landlord, you face all kinds of risks that can result in financial losses for your rental property. From fire damage and theft, to lawsuits and non-payment of rent, safeguarding your property and rental income against such incidents is a top priority. That’s where landlord insurance comes into play.
In this article, we’ll explain how landlord insurance helps you manage the risks of owning a rental property, how it differs from home insurance, and what coverage you can expect from a typical policy.
What is landlord insurance and why do you need it?
Landlord insurance (also known as rental property insurance) is a type of insurance that protects you against financial losses that affect your rental property. It covers your building, personal possessions, third-party liability, and lost rental income. You can also tailor your policy by adding extra coverage based on your needs, preferences, and risk tolerance.
Many landlords make the rookie mistake of thinking their home insurance will step in to cover damage and liability issues connected to their rental property. At first glance, a home insurance policy appears quite similar to a landlord insurance policy, so this assumption is understandable. In reality though, these two insurance products serve different purposes.
Home insurance compensates you for financial losses relating to your property, belongings, personal liability, and other risks included in your policy. However, it’s designed with the assumption that you’ll be living in your home, not merely renting it out. Home insurance coverage doesn’t extend to investment properties.
Therefore, you must obtain landlord insurance if you own a home you use purely to earn rental income. Also, if you have a mortgage on a rental property, your lender will likely require you to purchase landlord insurance anyway.
In some cases, a home insurance policy may provide you with sufficient protection. For example, let’s say you rent out a spare bedroom or basement in your primary residence. In this scenario, your home insurance provider will likely still cover you since you live on the property alongside your tenant. However, it’s still wise to review your existing policy to ensure that’s the case and to understand any restrictions.
Even if your insurance provider or mortgage lender doesn’t require you to obtain landlord insurance, it’s still worth getting. It offers protection against risks you may encounter as a landlord that you ordinarily wouldn’t as a homeowner. Relying only on home insurance alone will leave you with significant gaps in your coverage that could leave you financially vulnerable.
What does landlord insurance cover?
Landlord insurance resembles a traditional home insurance policy for the most part. But it also addresses specific risks associated with rental properties. Let’s take a look at what kind of coverage you can expect.
Standard landlord insurance coverage
A standard landlord insurance package offers four types of coverage: property, personal contents, liability, and lost rent. These are the bare minimum you should look for when shopping for your ideal policy.
Property coverage. This section of your insurance shields you against financial losses from damage to the building, plus attached structures like a patio and deck. If you have a detached structure like a fence, shed, or garage, you can bolster your coverage to include the replacement value of these.. Should your building suffer damage, your insurance provider will reimburse you for the rebuild cost. The extent of your coverage will depend on the type of policy you choose. You can opt for coverage for specific risks (known as perils in the insurance industry) or all types of risks. Some examples include fire, hail, wind, lightning, and falling objects.
Personal contents. This part of your policy reimburses you for damage to personal belongings on your property, such as furniture, electronics, and appliances. However, losses due to theft and vandalism are excluded.
Liability coverage. If a third party (including your tenant) sustains injuries while on your rental property, they may file a lawsuit against you. Should the court deem you responsible, you could face substantial settlement costs. In such a scenario, your liability coverage will kick in and cover your legal and medical expenses. Liability coverage also protects you in cases where you’re at fault for damaging another individual’s property. For example, should a large branch from your tree fall onto your neighbour’s home, your insurance company will cover the repair costs.
Lost rental income. Suppose you must temporarily evict your tenant because a fire has rendered your rental unfit for occupancy. This section of your insurance will compensate you for the rental income you forego while doing repair work to restore your property. It’s worth noting that your insurance provider will pay you for lost rent at “fair market value,” which means you may receive less than the amount you were collecting from your tenant.
Additional landlord insurance coverage
In addition to the standard coverages, you can customize your landlord insurance policy with add-ons specific to your needs.
Remember that extra coverage means a higher monthly premium, so you’ll need to weigh the costs and benefits of enhancing your policy. However, most insurance providers will grant you a discounted rate if you bundle certain coverages.
Sometimes, your existing insurance company may not offer the coverage you need, so you may need to seek a stand-alone policy through another provider.
Extended contents. A standard landlord insurance policy will cover personal belongings only up to a certain dollar amount. Consider enhancing your coverage level with this add-on to protect pricey items on your premises or equipment, such as artwork or a riding lawn mower that you use for seasonal maintenance.
Earthquake. If your rental property is in an area prone to earthquakes, this insurance add-on can save you plenty of grief and money should a seismic event occur. It may also cover landslides and liquefaction.
Flooding. This insurance add-on covers you should your home suffer damage due to flooding that originates from your home (such as a burst pipe) or heavy rainfall.
Sewer backup. Water that leaks into your property through your sink, toilet, or drains due to a backed-up sewer can cause damage that is quite extensive and costly to repair. This add-on will spare you the out-of-pocket costs.
Overland water. Tacking overland water coverage to your insurance policy will protect you against freshwater spilling into your property through basement floors, windows, walls, or the foundation at ground level.
Tenant damage and vandalism. Consider adding this coverage if your rental is in a high-crime location. A good home insurance policy specifically for landlords will usually contain a clause to cover tenant vandalism and damage. A typical homeowner insurance policy will not cover this.
Short-term rental. This unique insurance protects you from the risks that come with running a short-term rental operation on platforms like Airbnb and Vrbo. Similar to standard landlord insurance, you can obtain coverage for your building, contents, personal liability, and lost income. However, relatively few insurance providers offer this specialized coverage given the extra risk such rental agreements pose. As a result, you may have to acquire a policy from the rental platform itself. In the case of rental arbitrage, you can ask your tenant to have their own policy.
Rent guarantee. No matter how well you’ve screened your tenant for financial stability, there’s always a chance they suddenly stop paying rent. Rent guarantee programs, such as the one offered by SingleKey, addresses this risk by reimbursing you for financial losses resulting from non-payment of rent.
What landlord insurance doesn’t cover
While landlord insurance will compensate you in many instances, there are exceptions. You won’t be able to file a claim in the following circumstances:
Damage due to neglect. You and your tenants share responsibility for keeping the property in good condition.
General wear and tear. All properties naturally degrade over time no matter how well-maintained, so your insurance provider will disallow any claims related to wear and tear.
Damage caused by infestations. This includes pests like rodents, termites, and insects.
General maintenance. Housekeeping is a recurring and expected cost of running a rental property.
Equipment breakdowns. Landlord insurance doesn’t cover repairs or replacement costs for household items and equipment like appliances.
Tenant’s personal belongings. Your tenants must obtain renters insurance to cover their personal items.
Our final thoughts
Managing a rental property comes with many risks that can erode your bottom line, much like any other business. It’s impossible to predict if and when one will occur, so purchasing landlord insurance is a financially savvy move.
While your current home insurance policy may provide the protection you need if you’re renting out your primary dwelling, it doesn’t extend to an investment property in which you don’t live. In addition, home insurance won’t protect you against the unique risks inherent in running a rental property. Only landlord insurance offers the specialized coverage you need.
With the right landlord insurance policy, you can eliminate much of the risk of owning a rental. Plus, you can rest easy knowing an unexpected disaster won’t wipe out your bank account overnight.
