A Quick Guide to Landlord Insurance

For the first time, landlords renting out a residential property (house, vacation cottage, apartment) may believe that their homeowners insurance will cover all costs in the event of a natural disaster, accident, or other damaging event. That's a rookie error.

Why You Need Landlord Insurance

Your policy most likely only covers owner-occupied residences. When you start renting out your property to others, the coverage ends. And, because renters are generally not held liable when a large appliance malfunctions, a person is injured on the property (through no fault of the tenant), a forest fire damages or destroys your home, or burglars simply empty the place, you may be left hanging for these or other misfortunes brought on by humans or Mother Nature.

Here is where landlord insurance comes into play. These policies come in a variety of shapes and sizes. Consider what you need to specifically address and protect against in your rental property before you begin price shopping.

What Does Landlord Insurance Cover?

A good, all-inclusive landlord insurance policy will include three key safeguards:

• Property Damage—This coverage protects the real estate or furnishings in the event of a natural disaster, fire, electric/gas malfunction, earthquake, vandalism, or irresponsible tenants. If at all possible, try to obtain a policy that provides replacement cost rather than actual cash value (especially if fixtures and furnishings are old) or a predetermined lump sum of cash.
• Lost Rental Income/Rental Default Insurance — If your property becomes completely uninhabitable (due to severe mold, termites, a rat infestation, or a sinkhole), this feature provides temporary rental reimbursement to cover the rent money you'd otherwise receive if tenants could occupy the property.
• Liability Protection— Liability protection is coverage for medical or legal costs that may arise if a tenant or visitor is injured as a result of a property maintenance issue (such as icy walkways, architectural collapse, or an out-of-control hive of bees).

Underwriters may also refer to different packages as DP-1, DP-2, or DP-3 (DP stands for "dwelling property"). Each of these denotes a different level of coverage, with DP-1 being the most fundamental and DP-3 being the most comprehensive.

Additional Coverage

Several common riders are available with landlord insurance policies. They aren't as important as the preceding provisions, but they may come in handy and save you money in the long run.

• Guaranteed Income Insurance—This protects the landlord if a tenant falls behind on rent one month (or fails to pay at all).
• Flood Insurance—Because many landlord insurance policies do not cover flood damage caused by natural disasters or municipal plumbing, this coverage should be added if the property is in a flood-prone zone.
• Emergency Coverage—If a tenant calls you out to repair something, such as a leaking dishwasher, or if they are accidentally locked out of the house, this feature can help cover some or all of the costs you incurred to travel to the property and resolve the issue.
• Additional Construction Expenses—Expenses incurred as a result of having to bring a building up to code after it has been damaged.

How Much Does Landlord Insurance Cost?

According to Policygenius, the average cost of homeowners insurance in July 2022 is $1,899, though prices can vary greatly depending on where you live, the age of your home, and other factors. According to the free real estate investment tracking site Stessa.com, landlord insurance on the same property will cost about 15% more because rental properties are more prone to damage and incident.

The price of your premiums is also inversely related to the length of time the property is in service. For example, according to Houselogic.com, an informational website run by National Association of Realtors members, expect to pay nearly double in annual premiums if you rent out your home for only 12 weeks rather than the entire year. Short-term tenants, on the other hand, are less likely to notice (or even mention) maintenance issues. They may be more careless, or they may not understand the layout of the house and where the plumbing, load-bearing supports, and electrical wiring are located. All of this increases the likelihood of problems and the insurer's risk.

When shopping for policies, make sure to inquire about bundle options with your homeowners insurance provider. You may be eligible for a discount if you purchase both homeowners and landlord insurance from the same company.

The Bottom Line

Examine your homeowners insurance policy before renting out a piece of property. Don't expect it to cover damages and liabilities while you're not residing there. Landlord insurance is required if you want to protect your home while also renting it out.

You might also suggest that your tenants get renter's insurance so that their personal belongings are covered in the event of an accident.