What Does Landlord Insurance Cover?
When renting out a property, it's a common mistake to think that homeowner's insurance will cover the property if there are any accidents. In reality, many coverages of homeowner’s insurance no longer apply once a resident is living in the home. This is why many landlords invest in landlord insurance. In this article, we’ll give an introduction to what landlord insurance covers, what you can expect as far as price, and why, as a landlord, it can save you when things go awry.
What’s covered by landlord insurance?
When you invest in landlord insurance, there are two parts to most plans:
- The base plan itself
- Optional add-ons (aka riders)
Riders can be purchased for additional coverage. Below is the coverage you can generally expect from a base plan alone: Reminder: These items may be initially covered by your homeowner's insurance. However, once you place a resident at your property, it no longer applies.
Physical Damage
The coverage for physical damage done to the main dwelling includes destruction from events like a fire or bad weather, as well as accidental damage caused by the resident(s). Depending on the policy, it may also apply to kitchen appliances, TVs, and other furnishings. Regarding intentionally resident-caused damage, since landlord insurance does NOT cover it, as a landlord, you would take the replacement funds out of the resident’s security deposit.
Detached Structure Damage
Included in landlord insurance is coverage for “other structures”. This protects any structures on the property that are detached from the main dwelling, such as:
- garages,
- sheds,
- fences,
- or gates,
This is coverage is especially relevant in case of bad weather or a fire.
Damaged Equipment Coverage
Damaged equipment coverage applies to landlord-owned equipment that is used and required for the maintenance of a property. For example, if you leave your personally owned lawnmower onsite at the rental property and that lawnmower gets damaged through an event like a tree falling on it, through insurance, you can receive compensation. The same goes for other maintenance equipment such as a snowblower in case of accidental damages. Note: If any appliances or equipment become unusable due to wear and tear or purposeful damage, coverage does NOT apply.
Vandalism
Vandalism damages and/or losses from a burglary may or may not be included in the coverage. You can discuss this with your insurance provider and find out exactly what they are willing to cover in this situation. If the answer is that they don’t cover it, then you may want to add a rider to your policy. Also, a resident’s personal belongings are NOT covered by landlord insurance. We suggest that property owners require residents to purchase renters insurance in case of any incidents where their belongings are harmed to avoid any disputes and ensure that renters are protected.
Lost Income
Another element of landlord insurance that is included in most policies is lost rental income (or rental default) insurance. This means that if something happens that makes your property completely uninhabitable (termites, water damage, etc.), for a short amount of time, landlord insurance can cover the rent money that’s lost from not having a resident living in the home. Depending on the coverage, to receive this benefit, it may be required to purchase it as an add-on to the existing policy. Again, it’s important to find out this information from your insurance provider. In case you’re looking for insurance, providers such as State Farm, SafeCo, and Liberty Mutual offer plans with loss of rent insurance options.
Landlord Liability Protection
Liability insurance will cover you in case of medical bills or a lawsuit if you are found responsible for instances involving a resident, such as an injury. As an example, a resident trips over an uneven kitchen tile, falls, and breaks their leg. The court determines that you are responsible because you failed to maintain the home properly. In this situation, a landlord liability plan would assist in paying for medical, court, or other related costs. Another instance is if a landlord fails to take the proper steps to stop a resident from obnoxious or law-breaking behavior on the property, the landlord might be held responsible.However, if a resident causes a fire or leak that causes damage to a neighboring property, or if the resident causes harm to another individual on the property through an accident, then the resident would be held responsible, and they can invest in something called renters liability insurance. To learn more about this topic, we suggest you read this article: 3 Ways to Avoid Being Sued When Renting Your Home
Additional Coverage
Although landlord insurance covers substantially more than going without, there are still some aspects that may not be covered with a basic policy. To amend this, several common riders can be added to landlord insurance policies.
Flood Insurance
Oftentimes, flood insurance isn’t included with landlord insurance, homeowner, or renters insurance. Depending on factors such as where the property is located (on a flood plain, coastal region, or any low-lying plain near a body of water), if there’s a history of flooding, and if the property is located in a flood zone, adding a flood insurance rider is worth considering. It’s important to remember that even a small amount of water can cause damage with a high price tag.
Emergency Coverage
If there is an emergency that the resident calls you for, whether it’s to repair a broken washing machine or a leak from cracks in the ceiling, emergency coverage deals with reimbursing you for the cost of traveling and resolving the problem.An emergency can include:
- Flooding
- Roof damage
- Power failure (for reasons other than a power outage)
- A blocked drain
- Door locks or other security measures that need replacing
Though, it’s worth noting that the insurance will most likely not cover the cost of any issues that arise with an appliance through age or malfunction that would require repair or replacement. Again, it’s important to talk with an insurance provider and find out exactly what they will and won’t cover.
Rental Guarantee Insurance
If your resident misses a month of rent, then it’s no problem. This rider will cover it. Companies such as RentRescue and Avail/Steady Marketplace offer versions of rental guarantees with varying requirements and coverage. There are also options from NestEgg and PayRent which each insure the resident pays in some capacity while you get paid on time.
Construction Expenses
If you decide to renovate or remodel, then purchasing property under construction coverage can protect the foundation of the property while renovations are being completed in case of any costly accidents, such as damage to the skeleton of the building. If you are purchasing a property that needs major renovations, this rider might be worth investing in.
Building Code Coverage
There are times when you might be legally required to update the wiring or other aspects of the home due to updated city or county codes. It will likely be brought to light if the property is damaged and needs repair. Building code coverage assists with additional expenses incurred because of parts that have to be changed, such as:
- Electrical wiring
- Handrails + decks
- Plumbing
- Flashing (a waterproof layering) on windows or doors
Is landlord insurance tax-deductible?
Since you are operating a legitimate business as a landlord or rental investor, landlord insurance is tax-deductible and considered a business expense. There are no federal or state laws that require residents to carry renters’ insurance; however, you as a landlord are legally permitted to require your residents to have this, along with proof of coverage, as part of the rental agreement. Here is a solid article that lays out the technicalities of deducting your entire premium, as well as a checklist for real estate expenses. (NOTE: The only state that does not allow landlords to make this requirement and instead presumes the resident to be co-insured on the landlord’s policy in Oklahoma.)
How much does landlord insurance cost?
Landlord insurance typically costs about 25% more than homeowners insurance. Depending on which state your property is located in, this amount will vary. However, for $250,000 in dwelling coverage, the average price for homeowners insurance in 2022 is approximately $1,400, according to bankrate.com. If we do the math, that roughly comes out to $1,800.Again, this depends on which state the property is located. If you’re located in Colorado, where the annual average for homeowners insurance is $1,863, your premium will be a few thousand dollars higher than if the property is in a state like Utah, where the annual average is $668. The cost also rides on the type of landlord insurance plan. There are three levels, ranging from DP(Dwelling Policy)-1 to DP-3, and the price tag is higher the further up you go.
DP-1
DP-1 is the most basic and least expensive type of insurance. It primarily deals in coverage for things like a fire or bad weather. If an event is not specifically mentioned in the coverage plan, it won’t be covered. Reimbursement is determined according to cash value, which takes into account any wear and tear before the incident occurred and derives a value from that.
DP-2
DP-2 is mainly a better deal because instead of reimbursement based on cash value, it's based on replacement cost. It still won’t cover any incidents that aren’t explicitly mentioned in the policy, though, but is more likely to include burglary and vandalism coverage, unlike DP-1.
DP-3
DP-3 is the most expensive out of the three but offers the most protection and the best deal for compensation–using the replacement value instead of the cash value of any damage. It also covers most incidents unless it’s explicitly NOT included in the policy, meaning DP-3 is an open perils policy. Disclaimer: To get a more realistic quote, call a local insurance broker who understands the area and understands the nuances depending on location, age of the dwelling, and other important factors.
Final Thoughts
There are many elements to consider when owning a rental property. It’s important to know your options for additional protection for yourself and your property.Many make the mistake of assuming their homeowner's insurance covers any damages to their property when they’re renting it out. Know your coverage. Talk to your insurance provider to see what they will cover, and consider getting a landlord insurance policy to cover the rest. Disclaimer: we at Evernest don’t offer insurance. For an in-depth look at your options, talking to a professional is the best mode of action. However, if you’re a landlord who’s looking for a property manager to help keep you out of hot water, you’ve come to the right place. Inquire about our services here. >>
