Like fixing broken toilets, dealing with insurance is one aspect of rental real estate that owners have a love-hate relationship with. Property owners know they need the security that comes from being insured but sometimes wish they could avoid the hassle.
Landlords enter the business of rental real estate to make money and like to focus on this. But as TE Johnson & Sons, a property management company in Winston Salem explains, insurance actually helps owners by protecting them from adverse events that could hurt their investments.
However, with the mass of products in the market, rental property owners may find it hard to know which policies to buy. This is because insurance agents and companies simply want property owners to buy as much insurance as possible.
But simply because an owner has a lot of insurance, it does not mean they are adequately covered. It often takes a nasty experience before landlords discover that they have not bought the right insurance. What kind of insurance do rental property owners actually need?
Understanding Rental Property Insurance (Landlord Insurance)
This is also known as landlord insurance since it is designed to cover the specific risks associated with renting a property to tenants. Rental property insurance is different and separate from standard home insurance. Its terms extend to coverage that is not available with the usual home insurance.
Differences Between Landlord Insurance and Home Insurance
- Homeowner’s insurance only covers owner-occupied homes. The property owner must live in the insured home. Landlord insurance does not have this provision.
- Since owners also live in the insured property, homeowner’s insurance can include coverage for personal belongings. Landlord insurance does not offer this coverage automatically.
- If tenants are injured while living in a property that only has homeowner’s insurance, the landlord is not legally protected by the policy. But landlord insurance provides liability coverage.
- Homeowner’s insurance will not hold renters liable if appliances within a property are damaged or malfunction. Landlord insurance offers protection against tenant-damage.
- Homeowner’s insurance will not protect the owner against burglaries if they use their home as a rental property. Landlord insurance can be extended to cover burglaries.
Components of a Landlord Insurance Plan
Nevertheless, buying landlord insurance is not a guarantee that a property and its owner are fully covered. This is because landlord insurance can be highly flexible and come in all shapes and sizes.
To get the most coverage at the best price, owners must choose a policy with the best combination of features. There are three essential components to a comprehensive landlord insurance plan; property damage, loss of rental income, and liability protection.
- Property damage
This provides coverage if the property or its furnishing is damaged. Damaging events that are covered by the policy include natural disasters, gas or electric malfunctions, fire, vandalism, or irresponsible tenant behavior.
Policies may either offer the replacement cost of the damaged asset or its actual value. Landlords are better-off with policies that offer replacement cost. Owners should also have the policy extend its coverage to include such things as roof cave-in or any other unexpected damage that may happen to a property.
- Liability protection
If tenants or visitors suffer an injury while inside a property due to a covered maintenance issue, the owners are protected. If tenants slip, trip, or fall as a result of the condition of floors, stairways, and walkways, they may sue the owner. If they are harmed by bees living inside a hive on the property, they may sue. If there is the collapse of a section of the property and they are hurt or feel threatened by it, they may sue. Liability insurance covers the landlord’s defense cost and the cost of compensating tenants, as well as their medical bills. - Lost rental income or rental default insurance
Should the landlord be unable to earn income on the property due to it becoming uninhabitable, this provides temporary rental reimbursement. It also applies if a landlord suffers a personal injury that affects their ability to earn rent on a property. It may or may not include coverage for tenants failing to pay rent. - Other threats
Although landlords are reasonably covered by a policy that includes the above three components, there are other threats that need to be included in their policy. These are specific threats like floods and earthquake coverage (these are usually treated as separate from other natural disasters); guaranteed income insurance (covers an owner if tenants default on one month’s rent); and emergency coverage for some forms of unexpected repairs inside a property. One thing owners should bear in mind is that comprehensive coverage does not need to be very expensive. The best rental insurance will cover all the aspects discussed above. And it is possible to find a provider who offers a package with all the listed options. Insurance companies can throw in unnecessary and often useless add-ons to inflate the cost. Landlords should know the types and extent of coverage they need and stick with it. This will help them stay within budget while protecting themselves from most threats.