What Does Landlord Insurance Cover? A Quick Guide For Investors

Laura Olson
Aug 18, 2022

When the subject of landlord insurance for rental property comes up, property owners may wonder what a landlord policy covers and if having insurance for a rental property is really necessary. After all, do you need a landlord insurance policy when you have a homeowners insurance policy?

Some first-time real-estate investors are surprised to learn that homeowner’s coverage is only available for owner-occupied properties. A claim could be denied if the dwelling is used as a rental. Where do you turn if you have rented out your house, do not live there, and are faced with damages? Your landlord insurance coverage, of course!

This article takes a deeper look into this coverage to ensure you understand what it means, why it is essential, what it covers and how much it might cost you.

What is Landlord Insurance?

Landlord insurance coverage is designed for individuals with rental properties. Even if it is your residential property you moved from and rented out, you will need this coverage. That’s because renting out property exposes it to more risks and leaves you vulnerable to potential liabilities. Landowner insurance is the most suitable coverage if you do not live on the property and have tenants.

What Does Landlord Insurance Cover?

Landlord insurance policies come with varying coverages. However, a comprehensive policy generally covers three main categories of risks:  

1. Property coverage

Property coverage protects you against damages to the property's primary structure, detached structures, and in some cases, personal property such as household furnishings and kitchen appliances if you are renting out a furnished home. In addition, the coverage generally protects against damages caused by some natural disasters, fire, burglary, vandalism, and negligent tenants.

There are several coverage packages available - DP1, DP2, and DP3. As a rule of thumb, it’s a good idea to get a landlord insurance policy with replacement cost value (RCV) coverage rather than actual cash value (ACV).

This is because ACV factors depreciation into the amount of claim paid out, while RCV makes a payout based on the actual cost to repair or replace a covered item based on current prices. In other words, having an insurance policy based on actual cash value could leave you with a higher cash bill to foot, especially if you have an older property.

2. Liability coverage

Did you know tenants can sue a landlord for injuries incurred while on the property? The same applies to any guest of a tenant or service person injured while on the property. That's where liability coverage comes in.

Liability coverage in a landlord insurance policy can cover legal fees, medical bills , lost earnings, and other applicable compensations if a tenant or a third party gets injured on your property.

3. Loss of income coverage

What would happen if your property became uninhabitable? It could be from an electrical fire, a burst pipe, or natural disaster. If you had tenants, they would have to move out while doing the repairs or maintenance.

Apart from the cost of repairs and maintenance, a top concern would be the loss of income. As long as the property is unoccupied, you cannot collect rent. This can prove financially disastrous. But with loss of income coverage, the insurer offers reprieve with rental income reimbursement.

As stated earlier, there are different coverages for landlord insurance policies. For example, insurers will sell these policies under varying packages, DP1, DP2, and DP3. While all of these packages are for landlords, they are meant for different types of landlords and situations.

DP1, for instance, is the most basic and affordable package. It offers limited coverage, only covering nine perils, and doesn't include liability and loss of use coverage. It is ideal for any landlord with vacant rental property. DP3, on the other hand, is the most comprehensive package. It covers damages to the property and other additional structures, personal property, loss of income, and liability. Additionally, it is best for landlords with tenants and not vacant properties.

Common Riders or Endorsements

In addition to the items already mentioned, most insurers allow you to add additional coverage to your policy. These are referred to as riders or endorsements. They might not be as crucial as those discussed above but could come in handy in some circumstances:

  • Flood insurance: if you have a rental property in a flood zone area, consider adding this coverage to your policy. It covers flood damage caused by either Mother Nature or accidental bursting pipes.
  • Guaranteed income coverage: although the loss of rental income coverage offers reimbursements if the house becomes unlivable, it does not reimburse you if the tenant fails to pay or is short of the rent amount. That's where your guaranteed income coverage comes in.
  • Earthquake coverage: earth movement, like earthquakes, can wreak havoc. This makes it essential coverage if you have a property in areas prone to natural disasters such as these. Although this coverage is not available in many landlord insurance policies, some providers sell it separately or can be added as a rider in your landlord policy.
  • Law or ordinance: covers any costs you need to bring your property to current building codes during repairs or renovations required due to covered claims.

Why You Need Landlord Insurance

Protecting one's investment against possible risks is an essential business practice. That's why landlord insurance coverage is a must-have for property investors.

As a landlord, your property faces numerous potential risks, including liability claims from a tenant or guest or destruction by forces of nature. Damages caused by either of these could set you back thousands of dollars in repairs, liability costs, and loss of income.

A comprehensive landlord insurance policy reduces the risk of having to spend a significant amount of cash out of pocket. Instead, your insurer compensates you or the third party from covered property damages or liability claims.

How Much Landlord Insurance Costs

Landlord insurance is costlier than homeowner's insurance coverage, varying between 20% to 25%, due to the potential risks that come with renting out a property. Companies like Obie, which specializes in landlord insurance, are a good option for learning how much landlord insurance costs for your particular property.

You can enter your property address directly on the Obie website, get an instant landlord insurance quote, and compare policies from multiple insurers online. The process is simple and transparent, with no paper applications or lengthy waits.

When shopping for landlord insurance, the cost of a policy will be affected by several factors, including:

  • Size of the property: the square footage, number of stories, number of bathrooms and bedrooms, elevation, and lot size can affect the cost of insurance. A larger home may result in a higher insurance premium because the scope of making repairs under a covered claim is usually more significant than that of a smaller home. The price of insurance may also increase if the property has additional or detached structures that need to be insured, like sheds, pool houses, fences, and garages.
  • Property value: repairs for highly valued properties cost more than repairs for less expensive properties. As such, landlord insurance for these properties may be costlier.
  • Age and construction materials: older homes may be more expensive to insure than newly built homes. In part, that’s because the construction materials might be harder to find or replace and may require additional costs to bring all repairs up to current building codes resulting in a higher annual premium.
  • Location: insurance costs tend to increase when one has property in high-risk neighborhoods. If you own rental property in regions typically subject to natural disasters , like hail and windstorm or snow and ice storms. Your insurance costs will be higher than those of another property owner with a similar home in a different area.
  • Tenancy terms: historical data shows short-term tenants have more claims  than long-term ones. As such, rental properties with longer-term tenancy agreements tend to have more affordable landlord insurance than those with shorter-term clientele.
  • Insurance carrier: insurance companies differ in terms of packages offered, which affects their pricing. So, for example, an insurance company could be offering a more affordable policy at the expense of excluded or not covered perils. That's why shopping around and comparing offers from different insurers is vital.

Riders or endorsements: if you add coverage to your policy you’re getting more coverage than the standard policy includes, driving up your overall insurance cost.

How to Get Landlord Insurance

Regardless of your policy's coverage, having the right insurer is critical. When faced with property damage that leaves you with no rental income, the last thing you need is to deal with an insurance company that doesn't honor your claim. So, how do you get the best landlord insurance?

Working with an online insurance broker like Obie can help save you time and money. Obie can help ensure you get a policy that meets your specific needs at an affordable price (on average, Obie customers save 25%).