Safe, Not Sorry: 7 Insurance Policies Landlords Should Discuss With Their Providers

by | BiggerPockets.com

If you own rental property, you need make sure you and your investment are properly protected. Certainly, these types of issues have been top-of-mind for many of us lately, with natural disasters where homes have been destroyed in the California wildfires or during the devastating hurricane flooding in 2017. These events bring to light the importance of the right insurance policy, particularly for investors.

When wading your way through the claims process at a time when hundreds of others are doing the same, understanding your coverage is vital to make the process at least a tiny bit easier. But no matter the situation—disaster or otherwise—it’s best to be safe, not sorry when it comes to insurance.

The right protection means finding an insurance policy that will cover property damage, liability, and lost rent if the property becomes uninhabitable. As a landlord, your insurance is a bit different than homeowners insurance and typically includes two types of coverage: property and liability protection. It’s especially important to remember to make the change from a homeowner’s policy to a landlord policy if you previously occupied the property and are transitioning it into a rental property.

According to the Insurance Information Institute, landlord policies generally cost about 25 percent more than a standard homeowners policy to pay for increased protections. Your mortgage lender will typically require proof of a valid landlord insurance policy. Remember that insurance premiums are tax deductible for investors.

Related: What Kind of Insurance Do You Need as a Real Estate Investor?

To better understand the options available to landlords, here is a breakdown of landlord insurance policy options to discuss with your provider.

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7 Insurance Policies Landlords Should Discuss With Their Providers

1. Property Protection

Insurance policies designed for rental dwellings provide property insurance coverage for damage to the home from fire, lightning, wind, hail, ice, snow, and other types of covered incidents. Standard landlord policies typically do not cover flood damage; you will have to take out a separate flood insurance policy (see below).

It’s important to note that property protection is often referred to as “dwelling coverage” by insurance policy providers.

2. Personal Property Protection

Landlord policies cover personal property left on-site for maintenance or tenant use, such as appliances and lawnmowers. Landlord policies do not cover tenant property; your tenants will need to have their own renters insurance policy to cover damaged tenant property.

Landlords can require that their tenants get renter’s insurance as a condition of the lease. One of the major benefits of renter’s insurance is avoiding disputes about who will replace a renter’s personal property if damage occurs.

3. Liability Protection

Landlord policies can include liability coverage. If one of your tenants or a guest gets hurt on the property, liability protection covers legal fees and medical expenses.   

4. Rent Loss Protection

If your property is damaged to the point where it is uninhabitable, your landlord policy will cover the lost rent and pay you the amount of money you would have made in rental income. Rent loss insurance helps you continue to make mortgage payments when a tenant cannot occupy the home.

We are seeing loss of rent insurance becoming extremely valuable to investors in California whose homes were destroyed in the wildfires. Due to the construction labor shortage, rebuilding efforts will be significantly delayed and this type of insurance will help mitigate the financial loss of a vacant property during that time.

5. Flood Protection

Flood insurance policies are run by the federal government through the National Flood Insurance Program (NFIP) and must be purchased in addition to your landlord insurance policy. Your flood insurance policy can include coverage for the building, contents, and replacement costs. Your insurance agent can help you purchase a flood insurance policy from NFIP.

6. Acts of Nature Protection

Your dwelling coverage might be limited to certain types of damage—and exclude other types of peril. Earthquakes, hurricanes, and tornadoes are acts of nature that are not always covered by your standard landlord insurance policy. If you live in an area at risk for earthquakes, hurricanes, or tornadoes, talk to your provider to add additional peril protections.

Acts of nature protection is sometimes referred to as “acts of God” by your policy provider.  

Related: Property Insurance: Why Coverage Gets Dropped & How to Handle It

7. Cash Value vs. Replacement Cost

When you design your landlord insurance policy, you need to consider cash value versus replacement cost when filing a claim.

When repairing or rebuilding damaged property, an actual cost value policy will pay you the actual cost minus the depreciation value of damaged items. For example, if you purchased an appliance for the property that gets damaged in a fire, your insurer will value the actual cost of that appliance now (with depreciation) and pay you that amount. So, if you bought a washing machine for $600 three years ago, the insurer will depreciate the value of the washing machine to reflect its current value at 3 years old and pay you that amount—not the amount it would cost to buy a new washing machine.   

Replacement value will pay you the value equal to replacing a damaged item. Compared to actual cash value, replacement value will get a new item at no out-of-pocket cost to you. If you are willing to pay the difference out of pocket, actual cost coverage will be fine. But if you would rather insurance take care of everything, replacement cost coverage is the way to go. Understandably, replacement cost coverage will cost more than actual cost coverage.

Landlord Insurance Options

As you can see, there are many things that must be considered when choosing your landlord insurance policy. It is important to read the policy carefully, discuss options with your agent and ensure that you are fully protected. As we’ve all seen recently, just about anything can happen, so it’s a good idea to be prepared with the proper insurance policy to cover your investment and meet your needs.

Which of these policies do you have?

Let’s chat below!

About Author

Nathan Miller

Aside from being a landlord and real estate investor himself, Nathan founded Rentec Direct, a software company that serves the rental industry. Today he works with over 13,000 landlords and property managers by providing them automation software and education to effectively manage their rentals.

20 Comments

    • Nathan Miller

      Hi Stu, It’s great to have an insurance agent that’s familiar with landlord policies and rental behavior. My current agent is excellent and has pointed me towards excellent policies. I did however have a previous agent who didn’t understand the landlord biz and as a result wasn’t always suggesting the proper policies. I could have been in hot water if something came up back then.

    • Craig England

      Chad,

      I have found that replacement cost is often times not much more than an acv policy would be. It definitely depends on the company, property, and market you are purchasing in. In some cases it can be pretty significant, however there is a reason it costs less. Replacement cost tends to be more popular especially because of partial losses. If you need a roof replaced it will pay for labor and the cost of actually getting it put on rather than just paying for a pile of materials. Some experienced investors are willing to take the risk of having acv but as an insurance professional I would not recommend it for new investors or if you have a fairly small portfolio. Hope that helps and definitely feel free to reach out to me if you have more questions about it.

    • Nathan Miller

      Hi Chad,

      Replacement cost is a far more popular option because it’s really the more obvious choice for most investors. From an investors perspective, if your investment is damaged and not bringing in income it’s not much of an investment. Therefore replacement insurance is typically a more attractive option.

      As for cost, I tend to see the difference as little as $50-$80/year for an average property value of $200-300k.

  1. Kurt Stresau

    What kind of policies are people using for multi-property scenarios? Surely some of the big owner/management companies with hundreds of properties are not maintaining independent policies on each of them…? Is anybody using multi-property policies? If so, what kind and where to find such a unicorn?

  2. Eileen Mark

    I am an Farmers Insurance Agent and I work with many landlords. Lately, the replacement cost policies are coming in very close to the ACV policies in the company I represent, Foremost. Today I actually quoted one in which the premium for the RC was slightly less. That is a first for me, but Foremost offers a discount for their Platinum Package on their Landlord Protector Policy that gives a significant discount, and I believe that is why my RC quotes are coming in so competitively priced as of late. The Foremost package will not cover tenant vandalism, however. The Farmers Landlord Protector does cover tenant vandalism, but you must have your primary home insured with Farmers in order to satisfy the underwriting guidelines.

    If you are in Illinois, give me a call. I’d love to help you save money on your Landlord policy, and help you choose the right coverage for you!

    • Nathan Miller

      Hi Daniel,

      Short term rentals are often a different policy and depending on how short it might be covered under standard policy. But it would be best to contact your agent and be very clear with them what you are doing with the short term rentals so they can recommend the appropriate coverage.

  3. Matt Franklin

    Thanks for this article, Nathan — I really appreciate the information. I just received an insurance quote for my first single-family investment property and my big concern is the liability component. On my quote, there’s Premises Liability of $100,000 and Medical Payments at $500 per person/25,000 per occurrence. I’m wondering if these are standard levels of coverage, because it seems low to me. Are there rules of thumb you use for coverage levels relating to liability?

    • Alex Saleeby

      Recommend you consider a general liability policy to cover this and other properties. The benefits should pick-up where the individual property policy ends. Getting a $1M commercial policy is not that expensive and well worth the investment if you ever need it.

  4. Alex Saleeby

    Nathan, thanks for the article. Informative and spot it.

    Totally concur on the replacement cost coverage vs “cash value” which is BS. I believe the latter is more profitable for insurance companies as the potential benefit/payout decreases over time (due to depreciation). I bet the premium does not though. If anything, it will likely increase, improving the spread even more. Replacement values is the way to go for my properties.

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