In the real estate business, “things happen,” and not having the right insurance coverage could result in significant financial damage.
Investors spend a fair amount of time searching for the best landlord insurance and reviewing various coverage options. However, the fact of the matter is that insurance policy language and fine print can be confusing even to the most experienced investors. Just as every rental property is unique, and so are an individual investor’s insurance needs.
In this article, you will learn about the different types of insurance for real estate investors so you can decide which ones are right for your specific needs.
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A standard homeowners insurance policy and a landlord insurance policy for rental property have many coverages in common, but how the home is being used is what differentiates the two.
Landlord insurance provides coverage for liability and damages when a property is rented to a tenant. In contrast, homeowners insurance provides coverage for an owner-occupied primary residence.
Having the right insurance for rental property can protect against unanticipated and potentially devastating losses from things like a tenant’s slip-and-fall claim or a natural disaster.
The challenge is choosing the right type of insurance for your rental property because every property and investor has different needs. For example, a home located in a coastal area may require extra coverage for damage or flooding caused by a hurricane. Or, an investor with significant capital reserves may opt for a higher deductible to help keep policy costs low.
The right insurance coverage is a critical part of owning and operating a rental property. Having too much insurance coverage may unnecessarily increase operating expenses and decrease potential returns, while the wrong coverage may lead to having a claim denied.
That’s why it’s vital to protect yourself and your investment by working with an insurance broker specializing in policies for landlords and real estate investors.
While every investment property and investor situation is unique, here are 10 types of insurance coverage to consider.
Covers damages from fire and hazards, including water, lightning, smoke, explosion, storms - ice, sleet, and snow. However, one thing to keep in mind is whether the compensation from a claim will be enough to cover the damage.
Rising property values and increasing inflation could result in insufficient coverage the following year or even within a few months of buying the policy. That is why many in real estate investing opt for the total replacement cost of the property instead of its current cash value when the claim is made.
Imagine a tenant, guest of a tenant, or repair person was injured at your property and decides to file a lawsuit. As the property owner, you could be liable for paying out a significant amount of money to the injured party for medical expenses, missed work, and mental duress, among other damages.
That’s where liability coverage comes in. It protects you against risks of injury or damages that occur on your property. Liability insurance will cover the pay-out and legal costs if you are found liable for these damages. When purchasing landlord insurance, be sure to choose a high enough liability limit so that all costs are covered.
A standard hazard insurance policy helps protect you against water damage on your property. For example, it could be from a broken pipe. But what happens if your house floods due to heavy rains? Flood insurance is best (and may be required if you have a mortgage) if you have a rental property in an area designated as a flood zone or are worried a natural occurrence like a hurricane could lead to flooding.
Additional coverage for sewer backup can usually be added to a landlord insurance policy at a minimal cost. Sump overflow coverage is also recommended in geographies with basements.
In many municipalities, the owner is responsible for maintaining any part of the sewer line that is on the property. A backed-up sewer can quickly render a single-family rental home uninhabitable and inconvenience all tenants in a multifamily building.
Whether you are a real estate investor with a single property or an extensive portfolio, you likely rely on the rental income. So, what happens if a disaster or peril covered in your insurance policy renders your rental property uninhabitable for a significant period?
It means you’ll endure months of no cash inflows. Loss of income insurance comes in handy here as it provides you with compensation for when you cannot rent the property following a catastrophic event, like a fire.
In addition to losing rental income due to a disaster, you could also incur the same loss if you had a tenant skip rent payment for one reason or the other. Unfortunately, things happen in life regardless of how much due diligence you do to ensure you let your property to trustworthy tenants.
If the tenant fails to pay, you could find yourself without the cash inflows. A rent guarantee policy ensures that you receive reimbursement when such happens, so you do not experience an interruption in cash flows.
A worker's compensation policy covers medical care, death, and disability benefits for employees injured at work. It will also protect you as the employer if the employee files a case against you for the injury. Having an insurance policy with worker’s comp coverage is not necessary for all real estate investors. But if you have employees in your business, consider talking to your insurance broker about adding worker's compensation coverage.
If you invest in real estate by buying and renovating houses, you may require builder's risk insurance. Coverage options vary, but as a rule of thumb this insurance may cover claims such as property damage, vandalism, or injuries to crews renovating the home.
Not every investor requires builder’s risk insurance. However, this additional special coverage may be well worth considering for extensive renovations and upgrades lasting longer than 60 days since coverage may be excluded by a regular landlord policy.
Some investors grow their rental property portfolios to the point where they can perform general contracting work independently, such as creating a rehab plan and hiring subcontractors to perform individual pieces of the project. General contractor insurance provides coverage for items such as pulling permits and individuals and companies working under the general contractor.
There may be instances when a standard landlord insurance policy may not be enough to cover damages incurred. For example, the amount needed for an injured person’s medication, rehabilitation, and legal fees is more than your coverage limit. An umbrella policy provides extra insurance that kicks in when coverage from other policies ends.
Getting an insurance policy is one thing, but getting it from an unreliable insurer could be almost as bad as having no coverage at all. That’s why it’s essential to take the time to shop for an insurance broker who can help you choose the right coverage options for landlords and real estate investors.
One of the best ways to go about this is to work with a professional insurance broker who has access to industry-best rates for rental property and casualty plans to help ensure that your investments are protected. In addition, insurance brokers have a fiduciary duty to you, meaning they are mandated by the law to have your best interest in their dealings, not the insurance companies.
A second option is to ask other real estate investors. Hearing about first-hand experiences from others can help you determine whether a specific carrier is the best match for your insurance needs.
Another very efficient way for real estate investors to find insurance is to search online. The internet is a treasure trove of never-ending information, and you can find reviews from other investors and comparisons.
For example, Obie is an excellent source for requesting a landlord insurance quote and obtaining simple, affordable, and transparent coverage entirely online. There are no paper applications and no lengthy waits.
Simply answer a few property questions and get the right insurance and coverage for single-family rental property, multifamily buildings with 2-4 units, short-term rentals, and condominium units based on your specific needs.
Before purchasing landlord insurance, it’s a good idea to compare policies and the coverage included, in addition to the price. That’s because some insurance companies compete on price by giving you minimal coverage and little customer service when filing a claim.
While real estate can be a profitable investment, there are potential risks to keep in mind as well. Having the right insurance policy for your rental property is critical because having the wrong coverage could result in receiving a lower than expected reimbursement or even having a claim denied entirely.
Your goals as an investor and the condition of your property will determine the type of coverage you need. The above types of insurance for real estate investors are an excellent start. Still, it is crucial to work with a professional insurance agent to ensure you get coverage that matches your needs.