Becoming a landlord is an excellent way to provide a secondary income or create a portfolio that’s strong enough for your principal income. As such, knowing all the types of must-have insurance policies for landlords—including renters insurance—is crucial to protecting your assets.
Without adequate insurance cover, you run the risk of losing money and even putting your rental business at risk. While insurance might seem an unnecessary extra cost, the moment you need it is when it pays for itself. Here’s why landlord insurance is a must-have.
Why insurance for landlords is vitally important
Homeowners insurance policies cover a wide range of misfortunes caused by nature and humans. This type of insurance is vital in case of a fire, flood, or other damage to the property or appliances. Despite being the homeowner, you still need it because as soon as you rent out the property, your homeowners insurance becomes invalid.
As soon as your home becomes a source of income and you have paying tenants, you must switch to a landlord insurance policy. Tenants are generally not responsible for broken appliances, burglaries, or even accidents that occur on the property. However, if someone injures themselves on the property, you could be liable as the building owner—so you must have the right kind of insurance policy to protect yourself against losses.
What does landlord insurance cover?
Landlord insurance policies vary from one provider to the next. However, any policy you consider should include three primary protections: Property damage, rental default insurance, and liability protection. Coverage within each policy is categorized as DP-1, DP-2, or DP3. A DP-1 has basic coverage against nine perils and insures the property’s cash value. DP-3 has extra coverage and is the most extensive—and the most expensive.
Three must-have landlord insurance policies
1. Property damage
With the increasing number of natural disasters that are occurring, insurance with property damage coverage is an absolute must-have for landlords. This coverage includes natural disasters like wildfires, earthquakes, or floods. Property damage will also cover electrical or gas issues. If you happen to have problematic tenants, you will be covered if they cause damage to your property.
It may also be best to find a policy covering replacement costs rather than actual cash value. For example, a 20-year-old sofa might be worth $100, but replacing it could be closer to $1,000, as you would have to purchase an entirely new sofa.
2. Rental default insurance
There might be some situations where your property becomes uninhabitable and you face lost rental income. For example, your rental property could become infested with pests, termites, or severe mold. In that case, you would lose rental income while the necessary treatment or repairs are carried out. With rental default insurance, your income is insured during this time—which means you’re covered from rental losses when you need to be.
3. Liability protection
Suppose a tenant or visitor suffers an injury because of property maintenance faults. In that case, you could face a massive lawsuit for high medical or legal costs. However, you should always check the fine print to find out what is covered. This type of coverage could range from icy paths to injuries caused by structural collapses.
Insurance for landlords—additional cover
As with any type of insurance, it’s a personal choice whether you want to stick to the bare minimum or think it is worth adding additional cover. Depending on your circumstances, you could add other types of coverage to protect against unforeseen events.
Additional coverage may include:
- Guaranteed income insurance: This coverage kicks in when a tenant is unable to pay part or all of the rent.
- Flood insurance: Flooding from natural disasters or issues with plumbing fixtures can be a huge and expensive issue, but this type of insurance will cover the cost of water damage.
- Emergency coverage: Tenants are locked out or have a leaking pipe, and you need to drop everything and go. This type of insurance can cover part or all of the travel costs, including the cost of fixing the problem.
- Additional construction expenses: If your property suffers damage and you need to invest extra money to bring the property in line with building regulations, this type of insurance will cover the costs.
Other types of insurance for landlords
When it comes to other types of landlord insurance, what you have access to or need will typically come down to the specifics of your area and your individual situation. For example, you won’t need workers compensation insurance if you don’t plan on hiring anyone. Still, it is always better to know all the types of insurance to make an informed decision.
These extra insurance options may include:
- Rent guarantee insurance: This insurance will cover a period in which the tenant can’t or refuses to make rent payments. The coverage is typically from six weeks to six months and should be long enough to start the eviction process if necessary.
- Security deposit insurance: Instead of asking for large, upfront deposits (which can make it difficult for tenants), landlords can offer a security deposit policy, and the provider takes on the responsibilities of any damage or unpaid rent.
- Sewer backup insurance: This is a low-cost policy that covers issues related to sewer backups and can be added to your fire and hazard coverage.
- Terrorism insurance: This insurance covers you in case any terrorist activity damages the property.
- Builder’s risk insurance: Builder’s risk insurance is a special policy that covers you when you need to renovate a property, as the standard hazard and fire coverage won’t be valid.
- General contractor insurance: This covers you if you decide to become a licensed general contractor in order to renovate your property and need to apply for the correct permits.
- Workers compensation insurance: You will need this type of insurance when employing staff, contractors, maintenance workers, or property managers.
Why landlords should require renters insurance
You may not like the idea of asking your tenants to acquire extra insurance, but would be best if you always insisted that tenants have renters insurance. You can easily require this by including it as a clause in the rental agreement.
Renters insurance should be a requirement for your tenant because your landlord insurance policy doesn’t cover a tenant’s personal items—so your renters need this type of coverage in case something occurs and causes loss to their property. For example, let’s suppose there was a fire that destroys the interior of the property. In that case, the landlord’s insurance will only cover the physical property. Your insurance policy won’t provide any coverage for the tenant’s personal property that was lost in the fire.
This doesn’t seem like a big issue for the landlord, but any additional costs a tenant incurs could put financial pressure on them. As such, the knock-on effect could make it more difficult for the tenant to pay their rent. In some situations, they could also hold you, as the building owner, liable for damage to their belongings.
The good news is that the average cost of renters insurance is relatively low and affordable for most tenants.
Being a landlord can be fun—if you do it right
No matter how great you are at finding good rental property deals, you could lose everything if you don’t manage your properties correctly. Being a landlord doesn’t have to mean middle-of-the-night phone calls, costly evictions, or daily frustrations with ungrateful tenants.
What does renters insurance cover?
Like insurance for landlords, coverage from renters insurance policies varies from one provider to another. You should encourage your tenants to take out renter’s insurance that covers theft, water backup damage, some natural disasters, and injuries.
A renters insurance policy should have a list of covered items—but things like jewelry, clothing, electronics, and appliances are typically covered. It’s also an excellent idea to encourage tenants to get a renters insurance policy that covers replacement costs, not just the cash value.
What does renters insurance not cover?
Earthquakes, riots, and pests are a few things that renters insurance doesn’t cover. Renters insurance also typically won’t cover damage to cars or a roommate’s property, so pay attention to the names listed on the policy. Finally, there might be some small print regarding pets. For example, a pet dog biting someone on the property could be covered under the policy unless it is a dangerous breed of dog.
Final thoughts on must-have insurance for landlords
Must-have insurance for landlords should always include property damage and liability. Although it’s an extra expense, the cost of landlord insurance can be insignificant when you need to make a large claim.
However, landlord insurance products can become expensive if you add on items you don’t need. That said, you shouldn’t underinsure, either. Always take out the type of coverage you require to ensure you are never faced with large, unexpected bills and hefty legal expenses.