Property insurance is a financial tool used to protect rental property owners (and their investment) against calculated business risks. Selecting the right insurance coverage is among the most crucial business safeguards available.
Rental property owners should begin by considering the peace of mind offered by purchasing landlord insurance. Landlord insurance protects against damages/injuries related to an investment property and can be fine-tuned to meet the tenant’s exact rental situation.
The fundamental risks needing coverage will vary but generally include the risk of:
- Damage to the physical structure and the property.
- Liability lawsuits in which the owner becomes the defendant, which can be a tenant or a guest of a tenant, etc.
- Damage to the unit or owner’s property used in regular service.
- Rental income losses.
The type of insurance needed for an investment property varies. This is the reason why property owners must understand different coverage types.
Rental property insurance is broadly categorized as either property protection or liability protection.
Property protection covers physical property. Also known as hazard insurance, property insurance covers physical property and is offered as follows:
The dwelling coverage reimburses for damages covered by what the policy defines as ‘a covered loss.’ This may include damage caused by fire or theft or any other covered peril.
A hazard policy will also reimburse owners for damages to property structures not attached to the main dwelling, like a fence or detached garage, etc.
Personal Property Used to Service the Rental
Typically, landlord insurance covers the owner’s property/equipment that is servicing the rental unit, like the owner’s lawnmower.
Of note –
- Owners must know the exact coverage to ensure appropriate protection. Is property coverage a part of the standard policy, or is it offered as an added feature (by endorsement) for the policy?
- Rental property insurance does not typically reimburse the tenant’s personal property.
A property owner, when renting, must fully understand the risk (exposure to danger) created by the landlord-tenant relationship not necessarily present for owner-occupied residences. But note,
- There is a real risk that a tenant (or a guest) may become injured in the unit or property. If the owner is determined to be legally responsible, rental property liability coverage may reimburse for legal and related medical expenses.
- However, a property owner can choose to increase their property liability protection by purchasing umbrella insurance– which begins when a standard policy hits its limits.
- Rental property insurance is subject to deductibles that vary by policy but are often customizable by the insured.
Supplementary Coverage Options
Policy endorsements offer additional coverage. A partial list includes:
- Vandalism Damage – helps pay for the repairs caused by vandalism.
- Burglary Damage.
- Building Code Upgrades – helps pay for repairs that may lead to legally mandated (unanticipated) code upgrades to the electrical wiring or ventilation, etc.
- Rental Unit Construction – during unit renovation, owners can cover the structure prior to a tenant occupying it.
Most rental property owners do not realize how important their landlord insurance is and what coverage to get until it’s too late. Consider if you’re in a scenario where something happens which makes the rental property uninhabitable for 6-9 months and you have no rental income. Having the right coverage can be the difference between sleeping soundly or possibly struggling to pay the mortgage and foreclosing on your rental property.