Landlord Insurance 101
Property insurance is a protection against financial property loss. It offers protection against “named perils”—types of situations that are covered against damage.
What is landlord insurance?
Landlord insurance is, as the name suggests, insurance protection for landlords. It can often go by other names, including “dwelling property,” “rental dwelling,” “rental property.” The policy document can fall into one of three categories: DP1, DP2, DP3, each offering increasingly more comprehensive coverage.
There are three main types of coverage that landlords should expect in their policies:
Building and property coverage: This coverage typically includes protection against named perils like fire, windstorm, smoke, snow, and water damage.
Liability: This coverage protects landlords against a lawsuit from anyone claiming to have gotten injured on the landlord’s property. As Lynne McChristian, from iii.org, told us, “It’s important to remember that we live in a litigious society. Landlords need to seek protection for that; it’s the cost of doing business.”
Janet Portman from Nolo.com also highlighted the importance of liability coverage by painting us the following picture: “Let’s say that you’re a fairly reasonable, secure landlord. You make sure everything is up to code and you screen your tenants. And then a renter, one of their guests, a delivery person, or even the UPS guy, slips on the front stairs. And then they call you saying “I was hurt at your property because this wasn’t properly maintained. Who is your insurance company? I want to file a claim.”
Liability coverage protects landlords from having to pay for lawsuits out of pocket.
Loss of Rental Income: If the property becomes uninhabitable due to damage from one of the named perils, the landlord will not be able to rent it out, and they will, therefore, lose the income expected from the rental property. This coverage is often an extra add-on, but it’s highly recommended that landlords include it in their policy package. Note, however, that it does not cover loss of rental income if the tenant defaults on their rent. There are separate “rent rescue” or “rent guarantee” insurance policies that can be purchased with external insurers.
How is it different from homeowners insurance?
This is a common question asked by homeowners who are renting a room or section of their home out to a tenant, or who have inherited a property that previously had homeowners insurance. The question is usually followed up by “why is landlord insurance more expensive than homeowners?”
Lynne McChristian, of the Insurance Information Institute, explained that: “Homeowners insurance is for the resident. If you rent out a room in your home and you live in your home as your primary residence, then that might make a difference and homeowners insurance might cover that. But it might not be the correct level of protection.” She then added that insurers see renters as a higher risk. “When you own property that you don’t live in, it becomes a commercial business, and it requires different coverage. It’s more expensive than homeowners because you don’t have someone who has the same level of vested interest in the property that a homeowner would have.”
When we interviewed Janet Portman, residential and commercial landlord/tenant law and former public defender, she echoed McChristian’s explanation and further warned that: “Trying to cover your renter with a homeowners insurance policy is risky because, if there’s a loss and you file a claim, the company will investigate it. When they find out you had a tenant, you will not be covered, and all the money you paid in premiums will be for nothing.”
The bottom line is: landlords are only covered by homeowners insurance if they’re living in the same property as the tenant, and even then, it’s important to confirm that the insurer will not void the policy for such an arrangement.
Understanding Risk and Its Effect on Premiums
The higher the risk, the higher the premiums. Because insurance is about managing risk, the more risks that have to be accounted for, the riskier it is for the insurer, therefore the higher the premiums become for the customer.
Janet Portman gave us the following example of why rental properties are considered riskier:
“Homeowners insurance is less risky than landlord insurance because, from the company’s perspective, they have more assurances that risks will be minimized. Homeowners are more likely to notice a problem and be invested in fixing it. This can be proven through the homeowner’s claims history. However, risk is multiplied when you have tenants. The insurance company doesn’t know anything about the renter’s history, so they are taking on a higher risk.”
Thus, the premiums must also be higher.
Why you can’t afford not to have landlord insurance
“Are you willing to gamble on losing everything? It’s foolish not to have insurance.” – Janet Portman, executive editor at Nolo.com
