Landlord Insurance vs. Umbrella Policy: The Landlord’s Guide

Laura Olson
Dec 26, 2022

As a real estate investor, you may wonder if you need landlord insurance or an umbrella policy. 

Landlord insurance is a type of property insurance that protects landlords from financial losses due to damage to their rental property or from liability claims made by tenants. Umbrella policies provide additional liability coverage above and beyond what is already provided by your landlord insurance policy.

So which one do you need? This guide will help you understand the difference between these two types of insurance and which one is right for you.

What Is Landlord Insurance, and What Does It Cover?

Landlord insurance covers property owners or managers earning rental income. While owning rental property may be a good way to generate rental income and build long-term wealth, rentals also expose you to several risks. 

Rental property insurance can help protect you from damages to your property's structure, loss of rental income if tenants were to move out for repairs, and lawsuits from tenants and other third parties.

Property Damage

Property coverage protects you from the financial loss of repairing or renovating your property when damaged from a covered peril. There is a wide range of covered perils, including fire, smoke, explosions, and theft. Your policy will even cover the replacement cost of contents like household appliances and carpets if you rent a furnished property.

For example, imagine you're a landlord who owns a rental property, and the pipes burst due to extreme cold. The damage is extensive: water has flooded the home, causing significant structural damage and ruining carpets, furniture, and appliances. 

Without adequate insurance, you would have to pay for all these repairs out of pocket. Those expenses could easily cost tens of thousands of dollars—money you could have saved with an appropriate landlord insurance policy.

Lost Rental Income

If your property experiences damage to the extent that your tenants have to move out, the loss of rent policy compensates you for lost income. 

For example, if your rental property became uninhabitable due to a natural disaster like a hurricane, your tenants would have no choice but to leave and stay elsewhere. With a loss of rental income policy in place, you could collect any rent while the house is being repaired or renovated. However, this may result in substantial financial losses if the repairs take a long time. 

Depending on the location of your rental property, the amount of lost rental income due to damages from an event could quickly add up. The most recent report for CoreLogic reveals that single-family median rent prices in the top 10 markets range from $1,847 to $3,689 per month. Insurance coverage offers you valuable income protection.

Third-Party Liability Claims

Third-party liability claims protection in a landlord insurance policy covers the legal costs associated with any lawsuit brought against you as the property owner. Your landlord insurance policy could help protect you from financial losses if you were found liable for any claims incurred by a third party, such as bodily injury or personal property damage. 

Imagine you're renting out an older home with a neglected staircase. A tenant trips and falls down the stairs, seriously injuring themselves. Without proper coverage through landlord insurance, you may be held liable for medical expenses and litigation fees due to the suit brought against you.

While the amount of compensation awarded can vary significantly, Forbes reports that "the median award in premises liability cases — cases holding owners or landlords liable for injuries sustained due to the condition of the property — was $90,000.” With a liability policy in place, your insurer can help protect you from such financial losses.

How Much is Landlord Insurance?

How Umbrella Policies Can Help Protect Landlords

Why do you need an umbrella policy if your landlord insurance already protects you? Many landlords are surprised to learn that carriers usually only offer up to $1,000,000 in liability coverage. You could be in trouble if you get sued and the costs exceed your policy limit.

An umbrella policy can provide additional protection if you're ever found liable for damages or caught in a lawsuit, particularly if the cost exceeds your standard policy. Fortunately, umbrella policies are an affordable option for extra liability protection. Many carriers provide coverage in $1 million increments for $150 to $350 per year per Kiplinger

Many events might cause claims to exceed the limit of your landlord insurance policy. The additional coverage umbrella policies offer protects you against several liability causes, including: 

  • Property damage
  • Bodily harm
  • Auto liability 
  • Employee benefit liability 
  • Discrimination 
  • Host liquor liability 
  • Personal injury 
  • Contractual liability 
  • Your legal fees 

If a tenant falls on the rental property and sustains significant injuries due to a landlord's negligence, they could take legal action against that landlord. Without an umbrella policy, the landlord would be held liable for any damages that exceed their existing policy limit. That means paying out of pocket for any additional costs due to medical bills or legal fees.

An umbrella policy helps landlords protect themselves from unexpected costs and lawsuits while renting a property. This extra insurance coverage gives you peace of mind should any unforeseen situation arise.

When Would You Need Each Type of Coverage?

Landlord insurance is essential for real estate investors. It offers coverage for property damage and liability protection if someone is injured in the rental unit and decides to file a lawsuit. It covers the loss of a landlord’s personal assets due to theft and vandalism. Landlord insurance will reimburse you if a tenant defaults on their payments.

An umbrella policy provides higher levels of coverage than most standard landlord policies. This coverage is helpful in case someone files a lawsuit related to an injury or other claim against your rental property. 

Umbrella insurance covers legal fees, judgments, or settlements that exceed your landlord policy's limits. This extra layer of protection is particularly important if you have multiple rental properties or a limited liability company (LLC) structure for your real estate investments.

The Benefits of Having Both Types of Coverage

Although it may be costly, having two policies can be very beneficial. 

For example, if your rental property is damaged in a fire and requires your tenants to move out, you would incur significant financial loss. If you neglected to maintain the property and, as a result, someone tripped and fell, you could be held liable for any bodily harm.

Landlord insurance is key to recovering the costs of damages to your building, which could be extensive and expensive. You also lose rental income if tenants have to vacate the property for those repairs. Even if you are otherwise financially secure, landlord insurance protects you from significant losses that could destroy your rental business entirely. 

Your landlord insurance will protect you from liability charges if your tenant sues you. However, if you get sued, you could still face financial losses that landlord insurance doesn't cover. An umbrella insurance policy supplements your landlord insurance and acts as a safety net if something happens and you have to go to court or pay for an emergency. 

Landlord Insurance vs. an Umbrella Policy: Which Is Best for You?

When choosing between landlord insurance and an umbrella policy, assess your personal needs. Consider the assets you have to protect and the coverage level required. 

A basic landlord insurance policy may provide adequate protection for small rental properties. However, what if your rental property has multiple units or costly assets such as furniture or appliances? In that case, an umbrella policy could be the better choice to ensure all those items are covered adequately.

In addition, consider how much liability coverage you need and whether there may be potential risks associated with owning a rental property. Umbrella policies can provide increased levels of coverage that exceed the limits set by even the most comprehensive landlord insurance policies. 

If you live in a state where liability claims against landlords are common, or an area prone to natural disasters, an umbrella policy may be the best option for your rental property.

It's important to remember an umbrella insurance policy does not replace primary coverage; instead, it kicks in after your primary coverage gets used. Ensure you have adequate protection with your standard landlord insurance, then consider adding an umbrella policy for extra protection.

Ultimately, whether landlord insurance or an umbrella policy is best for you depends on a variety of factors. Consider your individual needs and budget when making this decision. An umbrella policy could provide peace of mind and financial security in unexpected situations. 

Talk to a knowledgeable insurance broker who can help you discuss your options and choose the right coverage for your specific situation.

Where to Find Insurance for Your Rental Property

Obie is an online insurance broker who makes finding landlord insurance fast and affordable. 

Obie uses cutting-edge technology to revolutionize the process of buying insurance. Through a platform offering coverage options from trusted global insurance companies, Obie helps you easily meet your specific needs as a landlord.

Check out the Obie website today, and receive an instant quote to see how much money you could save on coverage for your rental property.