Important Clauses in Landlord Insurance Policies
Not all insurance policies are created equal. Landlord Insurance policies differ from your typical insurance policies. Standard property insurance policies assume that the homeowner lives in the property.
Landlords rarely ever live in their rental property. So they need a different type of policy – a Landlord Insurance Policy.
Most landlords don’t realize that if they file an insurance claim on a rental, and the policy is NOT listed as a Landlord Policy, the insurer can deny the claim – no if’s, and’s, or butt’s.
Whats the Difference?
Simple…there are different risks involved with rentals vs. homeowner occupied properties.
Landlord Insurance Policies cover typical issues that a landlord might have, such as “loss of rent”. Also landlord insurance policies are covered under a different pricing structure within the insurance company.
When people are forced to move, and don’t want to sell their house, the common solution is to rent it and become a landlord.
It’s easy to forget to tell your home insurance carrier that you’ve moved, after all, the property is still the same. It’s natural to ask yourself “Why does it matter who is staying there if I own it?”
In order for your existing home insurance policy to fully cover the property, you need to inform your insurance carrier that the property is being converted to a rental. Also you need to let them know you are not occupying it as your primary residence.
Your insurance company will then label it as a “Landlord Policy”, and ask you a few questions about the amount of coverage that you might need.
Always Be Prepared
Being a landlord can be a great way to make a living. It is so very important that you make sure you’re completely covered if something goes wrong.
It’s important to have the proper insurance policy. This will keep you from unnecessarily losing money or assets that may be impossible to recover.
Some important clauses that you need to consider when creating your Landlord policy:
Clauses in a Landlord Policy
1. Dwelling Coverage w/ “Guaranteed Replacement Cost”
Dwelling coverage is most basic type of home insurance. If you don’t own your property outright, your lender will force you to have this type of coverage.
Dwelling coverage insures just the dwelling. It protects you against financial costs related to structural damage of your property.
Structural issues, plumbing and gas systems, fixed appliances, cables and piping are covered. Also, internal fixtures and fittings, and outdoor items like exterior blinds and awnings are covered as well.
Consider getting “Guaranteed Replacement Cost” coverage. This will pay to replace/rebuild the property, regardless if the cost of building materials exceed the amount you were originally insured for.
Dave Ramsey says:
“Several years ago, a lot of the major insurance companies quit offering guaranteed replacement cost insurance—a policy in which your home is replaced no matter what it costs.”
Without guaranteed replacement insurance, you will only be covered for the value of your home at the time you took out the policy. This doesn’t always cover the cost to replace it.
2. Water/Flood Coverage
Water and/or Flood Insurance is an extra policy that is added to your base policy.
It covers water damage to the building or anything inside is the property. Basic dwelling policies will cover broken pipes or water heaters. A flood policy is needed in order to cover floods, rains, sewer backups, water issues from natural disasters, etc.
Prices and rates are regulated by the U.S. Government’s National Flood Insurance Program, therefore the cost will be the same no matter who the insurer is.
3. Personal Property Protection (Contents)
Personal property coverage is essential if you’re renting a furnished apartment. Many landlords prefer to have it even if they rent empty units. Contents coverage protects you against damage to carpets, curtains, furniture, domestic appliances, household goods, and light fixtures. Some landlords choose to have contents coverage, not all do. Compare the potential benefits of having the insurance against the monthly cost of the added coverage.
4. Acts of Nature
Acts of nature include wild fires, tornadoes, hurricanes, earthquakes, and even riots.
Although some types of insurance may not include all types of coverage – tornado insurance is not something you need in California, but it is absolutely necessary in Kansas.
In some cases, this clause is not included by default and you have to ask for it.
Really weigh the pros and cons of each add-on. Hurricane insurance is so expensive in Florida, sometimes it’s cheaper to rebuild your house out of pocket than carry a hurricane insurance policy.
5. Fair Rental Income Protection
Rental default insurance, sometimes known as loss of income, is a type of insurance that allows you to collect the rental amount of the property for a certain length of time if you are unable to do so because of repairs or a catastrophe.
However, most standard Landlord policies won’t cover the lost rent due to an eviction or dead-beat tenants. The coverage works in conjunction with a damage claim that makes the property uninhabitable.
Allstate’s policy says:
If your rental property becomes uninhabitable due to a covered loss, Allstate Fair Rental Income Coverage can help pay you the rental income you would otherwise lose. If your tenants have to move out, Fair Rental Income could keep the rental income flowing in for up to 12 months, while the unit is being repaired or rebuilt.
Loss of income insurance might seem like a great deal at first, but it’s important to determine how much your premium will go up for this coverage, and that you weigh the benefits.
If you can self-insure, and can live without rental income for a month or two, paying for years of loss of income coverage may not be a wise financial decision.
6. Legal / Liability / Medical Coverage
If a tenant or employee – even a contractor working on a part-time basis – sues you for damages, legal and liability coverage can keep you from having to go out-of-pocket. This is coverage that every landlord should have. It’s easy to build up huge legal fees or be forced to pay large settlements for things that are out of your control.
As with any policy, this coverage has its limits. If you have multiple rental properties, then you might want to consider getting an Umbrella Policy to cover you and your personal assets if a liability claim goes beyond the limits of your landlord policy.
Most of the time, lenders will require that you have liability coverage, in order to protect their investment/loan.
More protection is better than less.