Landlords need to have the right insurance for their rental property because homeowners insurance does not offer all the protection that a landlord requires. Homeowners insurance changes the occupancy requirements and is not designed to cover rental properties. A landlord insurance package provides standard rental property coverage, including coverage for the dwelling, other structures, and personal property. It also provides loss of use coverage, which is crucial for landlords in case the rental property becomes uninhabitable. Additionally, landlords can choose from three types of dwelling property coverage, each providing a different level of protection for perils such as fire, windstorms, and vandalism.
It is important for landlords to understand the difference between replacement cost and actual cash value and to purchase endorsements or additional coverage for exclusions such as earthquakes and neglect. Overall, having the right insurance for a rental property is essential for landlords to protect their investment and their tenants.
1. What are Landlord Insurance Types and Coverages?
There are three primary types of insurance coverage designed for landlords depending on your needs, budget, and current state of your rental property, they include:
1. Dwelling Property 1 insurance (DP1) is basic coverage for nine covered perils (or risks), including:
- Fire or lightning
- Volcano eruption
- Riots or other civil disturbances
- Vehicles crashing into your property (unless perpetrated by yourself)
- Windstorms and hail
- Smoke damage
- Vandalism (Insurer dependent, may require adding it on
2. Dwelling Property 2 insurance (DP2) is broad protection for 18 named perils (or risks) that include everything in DP1, as well as:
- Burglary damage
- Freezing pipes
- Sudden/accidental damage from artificially generated electrical current
- Weight of ice and snow (that could damage your roof)
- Unintentional discharge, leakage, or overflow of water or steam
- Glass breakage
- Falling objects (from aircraft)
- Framing/Structural collapse
- Sudden and accidental tearing apart, cracking, burning or bulging
3. Dwelling Property 3 insurance (DP3) is the best type of insurance policy for landlords in the United States. DP3 is what’s known as an “open peril” policy, so it essentially covers all perils (especially those in DP1 and DP2 policies).
All dwelling property coverages have exclusions, meaning they are not a covered peril, including:
- Ordinance/Law (e.g. when states require changes to their building codes)
- Water Damage (from floods like sewers backing up or rising lakes)
- Power failure
- Neglect (landlord insurance is not a maintenance plan)
- Nuclear Hazard
- Intentional loss
- Government action
- Mold (depending on your insurance company)
Note: You can have your landlord insurance cover more by buying endorsements or additional coverage for some exclusions.
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2. What is Replacement cost and Actual Cash Value?
DP1 is an actual cash value policy, whereas DP2 and DP3 are replacement cost policies. Actual cash value includes depreciation, meaning you’ll only receive compensation for the used value, not to replace the item as new as you would with a replacement cost policy.
For example, let’s say you get into an accident with a 10-year-old car, your auto insurance policy may only pay out $2,000 on a vehicle you originally bought for $20,000. A replacement cost policy will reward you with the cost to replace the item anew.
Now, let’s break down what you’re protecting in a simple, straightforward, and easy to understand language to make complications a thing of the past.
3. What is the right Insurance Coverage for Landlords?
You may assume you have landlords insurance if you have homeowners insurance, but no, homeowners insurance doesn’t offer all the protection a landlord requires, most notably loss of use coverage.
Homeowners insurance changes the occupancy requirements, meaning HO2, HO3, HO5, HO6 (condo) HO8 are all owner-occupied or primary residence policies.
Let’s go over the standard rental property coverage you get with a landlord insurance package.
A – Dwelling Coverage
Dwelling coverage protects against the cost of repairs or reconstruction in the event of a named peril, risk, or hazard, including fires, lightning, hail, explosions, and vandalism.
B – Other structures
Other structures cover the detached structures on your property, such as a fence, shed, or gazebo, as well as a detached garage.
C – Personal Property
Typically, personal property for landlords left at a rental property is covered, especially if used for property maintenance (e.g. lawnmower).
However, speak with your insurance provider about valuables left at the rental property (e.g. bicycles, tools). If you’re renting a fully furnished home or apartment, ask about contents insurance to protect everything from your couch to your television and other personal belongings.
NOTE: You can stipulate that your tenants buy renters insurance for their belongings in your lease. It can help avoid disputes over who’s responsible for what in case of damage or if someone slips and injures themselves in the rental property. The other significant factor is additional living expenses which pay for the tenant to live elsewhere if they can’t live in the rental property due to a named peril.
D – Fair Rental/Loss of use
Fair rental income protection can help to replace lost rent payments if your rental property becomes uninhabitable after a risk becomes a reality. Your tenant won’t pay rent, but the loss of rental income could be detrimental to affording your mortgage.
E – Liability coverage
Liability insurance protects against claims resulting from injuries to people or damage to other people’s property. It covers legal costs, medical bills; sometimes even a death benefit should someone die on your property.
4. What is Covered by Landlord Insurance?
To summarize, landlord insurance covers:
- your building
- detached structures (e.g. fences, sheds)
- personal property left for maintenance (e.g. snowblower)
- loss of use for when you can’t charge rent following an insurance claim
- and liability in case someone injures themselves on your property
Depending on your coverage (DP1, DP2, or DP3), you can have coverage for specific perils or risks, such as fire or “open perils” that run the gamut of most dangers from burglary to burglary windstorms.
You can also buy additional coverage such as:
- Guaranteed income insurance if a tenant fails to pay rent one month (even with a rental assistance program)
- Rental property under construction for when you’re doing upgrades or renovations between tenants and need to protect the structure (your insurer may require it)
- Vandalism coverage may be included or an add-on to help cover the cost to repair or replace any damage and replace belongings.
- Burglary coverage may also be an add-on or included to repair or replace anything stolen from your rental property, depending on your insurance company.
- Ordinance/law coverage covers the cost of extensive upgrades to bring your aging home up to current building codes.
Speak with your insurance company to clearly understand how your coverage works and any gaps depending on the type of landlord insurance you purchase.
5. What is Not Covered by Landlord Insurance?
Landlord insurance does not cover breakdowns in mechanical equipment in your rental property, such as a hot water tank, furnace, or air conditioner. Be sure to have your systems regularly maintained and set aside a percentage of your income for when they need replacement.
To easily track and monitor your maintenance expenses for each property, check out our free expense management tool for landlords and simplify the chaos of bookkeeping.
Landlord’s insurance does not cover a tenant’s personal belongings, their liability, or if your tenant needs to live elsewhere if the rental becomes unlivable.
It’s also worth mentioning that you often won’t qualify for landlord insurance if you’re renting out a room or another floor (e.g. basement apartment). Instead, see if you can add extra liability protection and ensure you have your tenant buy their own insurance coverage.
Finally, insurance doesn’t cover your deductible. The deductible is the portion of the claim you’re responsible for before your insurance company pays the remainder. A higher deductible means cheaper insurance, just make sure you can afford it should you need to make a claim.
Our Final Thoughts
You understand your risks like flood and fire. You know what you’re protecting from the property to your liability and any loss of income. Now, you can confidently customize a landlord insurance policy to suit your needs and understand what risks you’ll live with to fit your budget. Happy shopping!
Landlords need landlord insurance to protect their investment. Insurance ensures the cash continues to flow to the lender should the tenant fail to pay rent; either from lack of income or an insured risk becoming a reality.
Renters insurance does not cover the landlord's property or where the tenant lives; that is the landlord’s responsibility. However, it’s worth noting that a landlord can choose to sue a tenant for damage done to the property, so a renter should buy tenant’s insurance to protect themselves from legal liability.
By law, tenant insurance is not a requirement, however, a landlord can require renters insurance as part of the lease agreement. Renters’ insurance is affordable and protects their belongings, their liability in case of civil action against them, and additional living expenses if they can no longer live in the rental space.