Rental Property Insurance is for the unexpected. Despite best efforts to mitigate risk, it’s nearly impossible to account for human errors and “acts of God.”
That’s why landlords pay for rental property insurance— to account for things like unpaid rent, natural disasters, and liability coverage (if someone injures themselves on your property and opts to sue).
If you want to safeguard your real estate revenue stream, it pays to know how landlord insurance works.
1. What is Rental Property Insurance? Why do Landlords need it?
Rental property insurance, or landlord insurance, covers landlords’ specific risks in renting out their home, condo, cottage, or vacation property for an extended period. (Short-term rentals such as Airbnb, HomeAway, etc. are often another specialty category).
A standard landlord’s policy covers four types of major risks, including:
- Property coverage: protects the building itself and any detached structures like fences, sheds, and gazebos from perils (risks) such as fire, vandalism, and theft.
- Landlord’s belongings: protects items the landlord owns, such as the furnace, hot water tank, and fridge. It can also protect the couch, electronics, and flooring if it’s a fully furnished unit (and you add-on the extra coverage).
- Personal Liability coverage: protects the landlord personally from legal action taken against them for slip & fall injuries resulting from a loose handrail or slippery walkway.
- Loss of rental income: pays rental income to the landlord if the unit becomes uninhabitable due to an insured peril such as fire or flood and the tenant needs to live elsewhere.
Homeowners insurance vs. rental property insurance
The key difference between a typical homeowners insurance policy and landlord insurance is the loss of rental income and liability coverage (see the table below). You can’t claim loss of income on a homeowners policy, meaning you could be out months of unpaid rent, which could significantly impact your cash flow.
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Which Insurance is Right for Your Risks?
|Coverage||Homeowners (HO3)||Landlord (DP3)|
|A - Building (Property Coverage)||Covers the building and all attached structures||Covers the building and all attached structures|
|B - Other Structures||Covers other buildings on the property not attached to the main structure (typically at 10% of building value)||*May require an endorsement or add-on, Covers other buildings on the property not attached to the main structure.|
|C - Personal Property (Landlords Belongings)||Household belongings like furniture and clothing. Some items like electronics may have limited coverage||*May require an endorsement or add-on. Some policies may include coverage for appliances or a lawnmower, for example. Tenants should have renters insurance policy to|
|D - Loss of Use (Loss of Rental Income)||Coverage for living elsewhere when the home is not livable.||May need to be endorsed* Called Loss of Rents. Recover lost rent while the property is not rentable due to a covered claim.|
|E - Personal Liability||Covers accidental property damage or bodily injury that you are liable for.||Protects the landlord from legal action taken against them for slip & fall injuries. $1,000,000 in liability coverage is common for a landlord. Tenants should have renters insurance for extra liability protection.|
|F - Medical Payments||Covers guests’ medical bills if they are injured on the property.||Not included.|
*Ask your insurance provider or review your policy documents to confirm your coverage and limits.
2. What Does Rental Property Insurance
We outlined that rental property insurance covers the house and detached structures. It also provides liability coverage if someone injures themselves on your property.
For most landlords, property insurance does not cover your personal belongings. A basic landlord policy will have coverage for essentials like appliances after a fire, or other items a rented home requires. If you’re renting a furnished home, consider adding contents insurance to your policy to cover anything left behind in the home. Communicate with your insurance agent about options to increase your contents limits if needed.
There are three levels of dwelling policy (DP) coverage:
DP-1 is the most basic, no-frills policy with many exclusions
Dwelling Policy 1, or DP-1, The DP1 insurance policies are good for vacant homes, or landlords on a budget, but it leaves many gaps in coverage. Here are the nine named perils in a DP-1 landlord insurance policy:
- Fire and lightning
- Internal and external explosions
- Windstorm & Hail
- Volcanic explosions
Sounds ok? It has fire. What else could go wrong? Well, know that insurance companies are experts in risk. Notice how vandalism isn’t covered in a DP1 policy? Vandalism is a high-risk to vacant homes. Water damage isn’t covered, either—and there are many ways water can enter a home (sewer backup, rising lakes, or fast thawing snow to name a few).
Also, DP-1 insurance claims are paid out as Actual Cash Value. The landlord receives the depreciated value, not the current market value. DP-1 may be the only coverage you can get in high-risk areas known for flooding and fire.
DP-2 gives you access to coverage against more risks
With dwelling policy 2, you get a broader coverage selection that may not be included in DP-1.
So, while you can buy fire and vandalism protection with DP-1, DP-2 also gives you coverage for falling objects which is critical if you live near an airport. Typically, with DP-2, you can buy a replacement cost policy. You get the value to replace the unit anew (or without depreciation factored in).
What coverage is available will vary by insurance company, but perils typically include everything in DP1 as well as:
- Vandalism & damage by burglars (like glass breakage)
- Freezing pipes, weight of snow, and discharge from water or steam
- Electrical damage
- Collapse, cracking, or bulging of your foundation
- Volcanic eruption
Again, policies can vary, so be sure to speak with your insurance company and ask whether or not you have coverage for each of the perils listed above.
DP-3 is the most comprehensive and widely used
DP-3 is the standard comprehensive coverage to which you are accustomed. It covers the broadest range of perils. You can typically make it a replacement cost policy to get the full value of your items reimbursed should disaster strike.
Optional rental property insurance (or what insurance doesn’t cover)
Depending on your risk tolerance and location, you may consider adding additional coverage, otherwise known as endorsements. Check if they aren’t in your policy already (policies will vary by an insurance company).
- Vandalism coverage: coverage for deliberate physical damage to the home. While it usually comes standard on a home insurance policy, it’s not always the case for an income property. Be sure to get an insurance quote and speak with a professional who can better asses your unique needs.
- Flood insurance: Typically, only floods from burst pipes have coverage (and even then, only if your house isn’t freezing cold (so keep your house warm when you’re away). You can add-on (and highly recommended) coverage for sewer backup.
- Sewer backup sometimes called Water backup, provides coverage for damage to your property caused by a clogged sewer line, failed sump pump and backed-up drains. You don’t want to clean that toxic mess yourself, especially if you have a finished basement.
- Depending on your provider, they may also offer Overland water protection when water enters your home through heavy rains, rising lakes, or thawing snow. sewer drains backing up into the property.
- NOTE: Flood insurance is complicated. It’s imperative to speak with your provider about what is and isn’t covered. Pay careful attention to how you’re covered.
- Earthquake insurance: coverage against landslides and fire following an earthquake should a gas line break. It may be a requirement depending on your location.
- Rent guarantee insurance: pays a landlord if a tenant refuses to or simply can’t pay rent. It’s a relatively new product offered by a few providers. Still, if the rental assistance program falls short or doesn’t meet conditions, this could help.
- Ordinance and Law Coverage: provides limited protection for costs associated with repairing or rebuilding your home after a covered loss (peril) and you’re required to bring the property up to code
Of course, the more you add on, the more property insurance will cost.
There are more coverages available – get an instant insurance quote and get connected to a broker who can detail your options and get you the best rates.
3. How much does property insurance cost?
According to the Insurance Information Institute, the average cost of homeowners insurance is $1,445 per year or about $120 per month. Rental property insurance is typically about 25% more expensive than homeowners insurance, which varies significantly by state. A landlord should expect to pay around $1,800 per year on average or $150 a month for rental property insurance.
Your cost depends on your location, though.
In Louisiana, the average homeowner’s insurance policy is $1,987, and so a landlord policy is $2,483 per year or just over $200 per month.
In Oregon, the average homeowner’s policy is $882 per year or $73.50 per month. Add 25% to that for the cost of a landlord insurance policy and your premium is $1,102 ($91/month) or less than half the cost of insuring your rental property in Louisiana.
That’s why it’s critical to get a landlord insurance quote to find your best price.
These price variations are why bookkeeping software that can manage multiple properties in different locations and their relative insurance costs is vital to a successful rental property management business. Check out Baselane’s free rental expense management software to see how you can keep your finances organized—from property taxes to insurance costs.
4. What are property-casualty insurance claims?
Property and Casualty insurance, or P&C insurance, is an umbrella term for insurance that covers anything related to the property (homeowners, rental, contents, condo, HO4, even car insurance) and casualty (losses from injuring someone or damaging their property).
Property and casualty insurance is different from life insurance and health insurance.
You can typically bundle anything under the P+C umbrella to save money. A landlord could opt to have their auto insurance, home insurance, and rental property insurance all with one company.
With everything under one umbrella, you only have to deal with one company when you need to make a claim.
A few pointers on insurance claims:
- Understand your deductible – the portion of the claim you’re responsible for paying before your insurance company pays the rest
- Perform regular appraisals – will keep values up to date. Have a county property appraiser value your house and adjust your home’s value accordingly. Any construction, renovations, or additions need to be known, or you risk being underinsured.
- Do a contents audit – keep an up-to-date and thorough list with photos and detailed receipts to ensure you get the total value of your belongings at claims time and reduce disputes.
- Only file the big stuff – any claim you make could cause your insurance rates to go up or impact your eligibility. Any claim should be significantly more than the deductible you have to pay, or it’s not worth it.
Contact your insurer as soon as possible – your insurance company can help you find contractors and get you started with the insurance adjuster.
Final Thoughts on Rental Property Insurance
Insurance is a funny product. You pay for it but never want to use it. However, having the right insurance and coverage in place buys you peace of mind which for a rental property manager is worth its weight in gold.
Technically, you don't need rental property insurance if you're mortgage-free. But, opting out of insurance can be a dangerous game to play. For an average of $120 per month, you could save tens of thousands after a significant claim. For example, a flooded basement could cost $30,000 to remediate.
If a renter's personal property is damaged, the tenant will file a claim under their renters insurance. If a tenant damages the landlord's property through a covered peril, the landlord can go through their rental property insurance or sue the tenant for liability insurance coverage to repair the damage done. Keep in mind personal property coverage is typically limited with landlord insurance.
Typically not. The IRS only charges taxes on income, not on the payout following an insurance claim.