Which Types of Insurance Coverage Should I Have on My First Rental Property?

by | BiggerPockets.com

It’s time for a hot, steamy discussion of everyone’s favorite subject: insurance. Kidding. The only ones who get hot and bothered about insurance are the folks with the special kind of personality to make a living off of it. And I’m one of those dorks. In fact, I’m such a dork that I wasn’t content to simply sell insurance for a big-box firm. Instead, I’ve made it the goal of my career to help real estate investors better understand their insurance options.

While the sexiness of the topic is debatable, there’s no denying that insurance is important. It’s your first line of defense against nuisance lawsuits. Given that 90% of investors are sued at some point in a 20-year career—and 75% of Americans in general are sued in their lifetimes—investors can’t afford to ignore insurance. It’s our first defense against many of the common lawsuits that can hurt our bottom lines. So I’m here to help you, the new investor, understand the most critical types of coverage for your first rental property.

Why Do I Need More Than One Type of Coverage?

Insuring a rental property is different from insuring your personal homestead. If your only experience with insurance is a typical Home and Auto policy, you’re not alone. But you will need to approach your rental properties differently. As you go about this, there are ways to make sure you’re on the right track. It is also normal to have questions about finding the right agent, the types of policies that are out there, and ways to keep your costs low. These are all questions that I hope to address in time—but let’s start with the basics first.



One of the first things you will need to know is what types of coverage you need for any rental property. The information below isn’t just true of your first property, but really, any investment property that will have a tenant. At a minimum, rental properties should have these three types of coverage:

  • General Liability Coverage
  • Building Coverage
  • Loss of Rents/Business Income Coverage

This is by no means an exhaustive list, but the bare minimum of what you need to get started. Let’s dive into exactly what each of these types of coverage does for you and why you can’t afford to go without them.

General Liability Coverage

General liability coverage protects you from lawsuits claiming you are responsible for bodily injury and/or property damage. Let’s look at some examples.

Bodily injury lawsuits may result from anyone (tenant, visitor, contractor, truly anyone) who is hurt on your property.  The most common types of nuisance lawsuits that we see don’t involve anyone actually being negligent or fraudulent. Many of these cases are minor injuries, slip and falls. While it doesn’t matter who it is, they can indeed sue you for the full brunt of their medical costs, pain and suffering, and even their legal fees.

Note for the Legal Eagles in the crowd: An insurance policy will not protect you from more serious types of bodily injury lawsuits where a case for gross negligence is made or other types of landlord-tenant disputes exist. Those lawsuits will require higher levels of asset protection, a topic I will write more about in the near future. That said, good liability coverage is your first layer of asset protection.

Property damage is a little more straightforward and simply refers to any incident originating on your property that causes damage to another person’s property. Suppose your house gets struck by lightning and a fire breaks out. Before first responders can arrive, the fire spreads rapidly and causes damage to both houses next door. You wouldn’t want to pay for the full cost of someone else’s house, of course. That’s why you want to be sure property damage is covered in your policy.

Building Coverage

Building coverage mitigates and restores the building from covered losses. Whether you think you will need this or not, it’s important to note that this coverage is generally required by lenders to secure loans. Real estate is subject to all sorts of risks no matter what you do. Even if you built a house in a bubble, there’s a chance that the bubble itself could cause damage. That is to say, you can do everything right (and you should aspire to), but we all have to plan for the unexpected.

Building coverage helps take care of the inherent liabilities of real estate. Think the types of emergencies that could affect any piece of property, like fire, wind, water, vehicle impacts, and other elements of structural damage. No amount of due diligence can possibly predict these incidents, but building coverage protects you in the event one of them affects your rental.

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Loss of Rents/Business Income Coverage

This type of coverage pays for loss of rental income when a building that is rented to others is damaged by a covered loss. So if your property is damaged by, say, a flood and your tenants cannot live there, loss of rents and business income coverage helps you stay solvent while fixing the problem.

Two key points to consider about this type of coverage are the following:

  1. Replacement cost is better than actual cash value (ACV) for the investor. But if you have an older property, ACV may be your only option. And it’s definitely better than nothing.
  2. The highest level of coverage is special form, followed by broad form. If your company only offers basic coverage, this is still better than nothing, but water and theft claims are excluded in basic coverage. If you’re struggling with this issue, speak with a trusted insurance agent.

Bottom Line: Get Professional Help

In addition to being an investor myself, I have spent my career serving fellow real estate investors. Whether you are acquiring your first property or your thousandth, I hope to provide information that will guide you through the evolution of the types of policies you will need as your business expands and your portfolio grows. The special types of challenges real estate investors face—when to “go commercial,” if an umbrella policy is necessary and which type is best, and many more that lead otherwise levelheaded investors towards frustration and madness—are all topics I hope to address here on BiggerPockets so that you can be armed with the information you need about the insurance world.

Not only can I help you navigate these waters, but I can also help you understand what you really need and what you don’t. Here’s a little secret my fellow agents might not want me to share with you: Insurance agents that are bound to a single provider are limited to selling you the options that business offers and typically can only operate in one state. Those options may not be the best ones for you. And frankly, it doesn’t make sense.

For instance, I have done the work to be able to select from policies from providers nationwide and make it my job to be up-to-date on which offerings are out there. This is a quality you should seek out in your insurance agent. Instead of being boxed in by the options available by, say, Progressive or Geico, look for an insurance provider who can offer you the full range of policy types—many of which the average person is not even aware.

Whether you’re planning to flip, buy and hold, operate a vacation rental, or use a different strategy, there are insurance options for you. There are many stresses to deal with as a new real estate investor. Insurance doesn’t have to be one of them. Always get help from a qualified agent who will explain your options and make the appropriate recommendations. Let the experts worry about finding your best insurance options so you can focus on getting your real estate business started on the right foot.



Do you have an insurance topic that you would like more information about?

If so, please let me know in the comments section. Some of the subjects I hope to cover here on BiggerPockets in the future include how to vet your insurance agent, how to select the right policy for you, and what investors need to know about umbrella policies. If there is content you want to see or a question you would like to ask, leave a comment here and I will do my best to give you a brief answer or write about it in the near future. Thank you for reading and continuing the conversation!

About Author

Jason Bott

Jason Bott specializes in creating insurance programs for Real Estate Investors, currently insuring over 20,000 units in 30 states. He is a shareholder of Robertson Ryan & Associates, the 37th-largest privately-held insurance agency in the U.S. He has assisted everyone from new investors who need to insure their first property to major groups with multi-millions in spending capital–and everyone in between–with their insurance needs. Jason loves sharing his insider info and teaching real estate investors about insurance. He is currently serving as the President of the Independent Insurance Agents of WI. When he’s off the clock, Jason loves hanging out with his wife and their four awesome kids.

13 Comments

  1. Christopher Smith

    Very interesting, I’ve been investing well over 20 years and know many others like myself none of whom have ever been sued. Everywhere I go I always ask the same question have you ever been sued and the answer so far among all of them is no without exception. The only people who seem to keep harping about being sued are those selling insurance or Asset protection related services.

    Again very interesting.

    • Jason Bott

      Christopher, I do have clients who have never had a liability claim/suit brought against them, but also have several larger clients (500-1000 units) that get sued 1-2 times per year. The class of property and tenant is a good predictor to having a Liability claim. The nicer the property and tenant, the less chance of a claim.

      With many new investors starting out with class C properties, it’s good to know that for $50-$100 per year/per unit, you can pass this risk on to the insurance company.

  2. Kristen Williams

    I actually came to Bigger Pockets to check into a special situation on a property I manage, and here was your article! I currently manage a home for a couple who live in the UK and are not US Citizens. They originally purchased it for a vacation home to see their son who lives near the home in the US. They quickly realized they wouldn’t be able to travel much so they decided to rent it out. Their first manager knew nothing about taxes, insurance and such like and even bilked them out of their monies.. upon hiring us, we initially knew that their son handled many of the items, including insurance, until last year. They asked us to handle their property taxes, and all other payments, which we do and include on their monthly P & L statements. Recently, the insurance company who covered their rental canceled their policy because it was considered an interim or temporary type of coverage. They have asked us to purchase insurance for them before they return to the US soon, but since they do not have citizenship, most companies ask for social security numbers, for credit reports and so forth. I understand the coverage they need, but not certain how to go about assisting them. Should I put it back in their court to find it on their own, or can I remain a resource by giving them options? Do you have any suggestions on this as well? Thank you in advance. Warm regards, Kristen from Wichita.

    • Jason Bott

      Kristen, I wish my timing was good all of the time!

      Your client has 2 insurance issues they need to work through.
      1) They had a “Material Change” to the policy midterm
      2) They are not US citizens.

      In regards to to #1, A material change can be defined as “a substantial and continuing change that affects and increases the risk involved with insuring your property”. This owner’s property changed form a lower risk Owner Occupied home to a higher risk Rental Property / Short Term Rental (STR). When this happens, it’s best to start a new policy that correctly reflects the operations/occupancy of the property.

      Secondly, most personal lines insurance companies, think of all of the companies you see running radio and TV commercials, do not want to insure anyone outside of the US. So if these are the only companies you are contacting, you will continue to run into the same roadblocks.

      It’s best to connect with a commercial insurance broker like myself who commercial insurance companies comfortable with business policies and offshore property owners. This is actually very easy to get done once you find the right companies.

  3. Garrett Diegel

    As the owner of an agency in Northern Nevada I’d have to say this article is pretty spot on. When in doubt, sit down, face to face with a professional. If the cost of good insurance coverage is breaking your IRR or cash flow numbers maybe it’s not the right deal for you.

  4. Chad Shaver

    Jason,

    Thank you for the article.

    I have been considering this very topic for several weeks now and just happened to jump on Bigger Pockets to keep myself in the loop of real estate investing. As a newbie it was exactly what I was looking for.

    Thanks again and I look forward to reading your future articles.

    • Jason Bott

      Thank you Chad! I am so glad you found the article helpful. I have some more forthcoming that may be of interest to you as a new investor, and of course am open to feedback on any future topics you’d like to learn more about.

  5. Jason Bott

    Alejandra, great question, and one that most rookie investors ask.

    When you go t buy a second property, you will want to have a Homeowners policy on the property you live in and a Rental Dwelling/Non owner occupied rental on the property you are renting out.

    That being said, your insurance company may be able to add this rental property policy to your existing Home and Auto program. From your perspective this may seem like you are just adding “An addition” to your Home Owners policy, but it is a second policy.

    If your insurance company will not allow you to add it to your Home and Auto program, you may be forced to go out shopping for a policy for the new rental. In this case, you want to be asking for any of the following “Rental Dwelling”, “Landlord” or “Non Owner Occupied Rental”. They are all basically the same, but the different insurance companies have them named differently.

    Best of luck with that first rental!

  6. JP Murphy

    Enjoyed the article. Looking forward to the future articles you mentioned. As a (somewhat) new investor, I need to learn about this, and then find a professional that I can trust to keep my assets protected! Thanks again!

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