Any property owner understands the importance of insurance. It protects against financial destruction if your property suffers damage from natural disasters, vandalism, or theft. The biggest question, though, is do you have the right coverage?
Sometimes real estate investors are surprised to learn they don't have the coverage they need, especially regarding homeowners and landlord insurance.
Say, for example, you have a secondary home you have decided to rent out as an investment property. Do you sit back, enjoy the rental income, and hope your homeowners insurance will cover any damages? Certainly not, because it doesn't! That's where landlord insurance comes into play.
While both homeowners insurance policies and landlord insurance are categorized as property insurance, they are quite different in several ways.
What is Landlord Insurance?
Landlord insurance is coverage designed specifically for property investors with rental units. The dwelling must be non-owner-occupied or tenant-occupied to fit under this coverage.
Generally, landlord insurance covers perils like fire, windstorms, hailstorms, vandalism, burglary, falling objects, and liability claims from a tenant or guest. But the kind of coverage you get will depend on your policy type.
DP1 is the most basic coverage, protecting against 9 perils only:
Windstorms and hailstorms
Riots or civil commotion
It is a named policy, meaning the insurer does not cover any peril that is not named in the policy. DP1 pays out claims as actual cash value (ACV). That means the insurance company will deduct depreciation from the payout amount during a claim. So, the older the property or damaged item is, the higher the depreciation amount and the lower the payout.
Due to the limited number of covered perils, the DP1 package is the most affordable coverage but also the least comprehensive. As a rule of thumb, it may be best for landlords with vacant properties.
DP2 is an in-between package of DP1 and DP3. While it is also a named peril policy, it covers more perils than DP1. In addition to covered perils in DP1, DP2 will provide coverage for:
Accidental water or stream overflow
Weight of snow and ice
Cracking, bulging or tearing
Damages to the primary structure
Damages to detached structures
DP-2 pays out claims based on replacement cost value (RCV), which doesn't factor in depreciation in the payout. Instead, covered claims are paid out based on the cost of making repairs at current prices.
DP3 provides the most comprehensive coverage for rental property and is often the most desirable insurance package. It is an open peril policy that covers all perils unless that peril is explicitly excluded in the coverage.
In addition to more coverage for more perils that are covered in DP1 and DP2, DP3 provides coverage for loss of use, premises liability, and personal property you provide for use by your tenants. This is also an RCV type of coverage, saving you from potentially paying thousands of dollars out of pocket in event of a claim.
What is Homeowners Insurance
Homeowners insurance or home insurance is property coverage for private residencies where the policyholder resides on the property. It covers damages and losses incurred by homeowners to the structures of their homes and personal property.
It also includes personal liability, allowing property owners to protect themselves against claims from individuals injured on the property or from damages the insured is found liable for. In addition, this liability coverage can sometimes extend to damages caused by one's pets or family members.
The Differences Between Landlord Insurance and Homeowners Insurance
One of the significant differences between landlord and homeowners insurance is who occupies the premises at any given time.
With landlord insurance, the property must be a rental, meaning it must have tenants for an extended period. The policyholder, or the landlord, in this case, is not the resident of said property. On the other hand, homeowners insurance is meant for owner-occupied properties. In other words, the policyholder must be a resident of the covered property.
Some individuals rent out portions of their homes while they still reside there. Under such circumstances, one should reveal to the insurance company that they are collecting rental income on the property. The reason is that your homeowners coverage may not cover any property damage due to the tenant's negligence. Neither would the insurer cover damages to the tenant's personal property.
Such a rental arrangement would require additions to your homeowners insurance. This will come at an additional cost but provide the necessary coverage for your property.
Both homeowners and landlord insurance provide coverage against damages to the primary structure and detached structures. However, coverage for personal property varies.
For instance, your homeowners coverage will cover everything on the property, including personal property, like jewelry and household goods. But as a landlord, personal property such as kitchen appliances, landscaping equipment, or furnishings included on the premises must be considered to ensure you have enough coverage should your property be damaged in the event of a claim.
A landlord's insurance policy does not cover the tenant's personal property. If allowed by local and state landlord-tenant laws, a landlord may choose to require tenants to have renters insurance, which clarifies who is liable for what. Your landlord insurance provider may also require that your tenant have renters insurance. It provides coverage for things such as the tenant's personal property, defense costs should your tenant be named in a lawsuit, and living expenses, if they must temporarily move out of the property during repairs.
Loss of use vs. the loss of rent
Both policies provide coverage when the property is uninhabitable and under repair, but the type of coverage differs.
Homeowners insurance provides loss of use coverage. This is where the insurance company reimburses your living expenses, like hotel accommodation and meals, if your home becomes unlivable due to a covered peril.
Under landlord insurance, the landlord receives rental income reimbursements if the property is uninhabitable due to a covered peril in the amount they would otherwise collect if tenants were still renting the property. The idea is to help landlords cover expenses like mortgage and utility bills while the property is under repairs.
Landlord insurance is pricier than homeowners insurance. This is because historical data shows owner-occupied properties have fewer losses than tenant-occupied properties. The increased risk of tenant-occupied properties can be due to periodic vacancies, less maintenance and loss prevention upkeep to the property, and general differences in mindset and behaviors of renters. These added risk factors contribute to the increased price of landlord insurance. In fact, landlord insurance can cost about 25% more than homeowners insurance.
Which One is Right For You?
If the property is your primary residence, homeowners insurance is for you. But if you are using it as a rental and do not reside there, landlord insurance is what you need to protect your investment.
With so many landlord insurance plans on the market, choosing where to start is difficult. The ideal approach to get started is to become knowledgeable about the various coverage available.
Here are some things to think about when selecting a landlord insurance policy:
Take a look at the sort of property you're renting. For example, if you're renting a single-family house out, your policy will be different than if you were leasing a multifamily unit or condo.
Consider how much coverage you'll require. How much insurance do you need for your personal belongings, for example? Repairs or replacements? Weather exposure? Protect against water backup? Make sure to obtain quotes from various providers so that you can evaluate coverage levels and pricing.
Pay close attention to the terms of the coverage. What is the deductible? Are there any exclusions that might impact you if something goes wrong? Make sure you understand all of the policy conditions before signing on the dotted line.
One option is to engage a local insurance agent or broker. This can be a good choice if you want to work with a specific insurer. However, it's crucial to remember that not all insurance salespeople and brokers are created equal. Some may be more focused on selling you a policy than assisting you in obtaining the best coverage for your requirements.
Working with an online insurance broker like Obie is another simple and cost-effective approach to obtaining landlord insurance. Obie is a great resource for getting a landlord insurance quote and straightforward, low-cost, and transparent coverage entirely online.
There are no paper applications to fill out or lengthy waiting periods. Simply answer a few property questions to obtain the right insurance and coverage for single-family rental property, multifamily dwellings with 2-4 units, short-term rentals, and condominium units based on your specific needs. On average, people save 25% with Obie.