Insurance 101: Landlord and Tenant Risks & Solutions

Whether you are a property owner contemplating renting your property to a tenant on an annual lease, or a tenant with the prospect of renting a property from a property owner, there are specific, and detailed coverage options each party should understand and seek out for property and liability coverage.

For Property Owners: Why You Need Landlord Insurance

Homeowners insurance typically covers properties that are owner-occupied. However, once you start renting out your property, your homeowner’s insurance may no longer provide adequate protection. Renters are generally not held responsible for incidents such as appliance malfunctions or injuries occurring on the property (unless caused by tenant negligence). Additionally, natural disasters, theft, or vandalism may leave you unprotected if you are relying solely on your homeowner’s insurance.

The cost of repairing or renovating your property after a disaster can be substantial. Landlord insurance helps protect you from these risks, but policies vary widely in terms of coverage. Before comparing prices, it is important to identify the specific risks and needs that apply to your rental property.

What Does Landlord Insurance Cover?

A comprehensive landlord insurance policy typically includes three core protections:

1. Property Damage: This covers the physical structure of your property and any furnished items in the event of damage from natural disasters, fire, electrical or gas malfunctions, vandalism, or negligent tenants. For added protection, look for policies that offer replacement cost coverage instead of actual cash value, particularly if your fixtures and furnishings are older.

2. Lost Rental Income/Rental Default Insurance: If your property becomes uninhabitable due to issues like mold, pests, or structural damage, this feature provides reimbursement for lost rental income while repairs are made.

3. Liability Protection: This covers medical and legal expenses if a tenant or visitor is injured on your property due to maintenance issues, such as icy walkways, structural problems, or other safety hazards.

Insurance providers often offer policies under different terms, such as DP-1, DP-2, or DP-3, where DP refers to "dwelling property." DP-1 is the most basic coverage, while DP-3 provides the most comprehensive protection. Always opt for a “special form” or “broad form” of coverage to address certain risks that are inexpensive to cover.

If you employ a property manager, be cautious of red flags that may indicate fraud, such as late rental payments, improper expense documentation, or conflicts of interest like hiring family members for property maintenance.

Additional Coverage Options

While the core protections listed above are essential, there are several additional coverage options that may be useful:

• Flood Insurance: Since most landlord insurance policies do not cover flood damage, it is wise to add this coverage if your property is in a flood-prone area.

• Earthquake Insurance: This is a separate coverage that can be considered if the rental property is in a state or region where earthquake and seismic risks are elevated. Traditional property policy commonly excludes coverage for losses caused by earthquakes or natural land movement.

• Sinkhole Insurance: A growing risk in coastal areas, sinkhole risks are becoming more prevalent in areas where ground water, saturation and limestone foundation deteriorate, and can collapse causing properties and structures to collapse. Like Flood, or Earthquake, the peril of Sinkholes is not covered under a traditional property policy and must be added via policy endorsement or with a separate policy altogether.

• Additional Construction Expenses: This covers costs related to bringing a building up to code after it has been damaged.

How Much Does Landlord Insurance Cost?

Landlord insurance coverage for property can vary based on factors such as location, size, value, loss history, and the original age of the property. Landlord insurance is typically 15% more expensive than homeowners’ insurance due to the increased risk of property damage and liability in rental properties.

Short-Term Rentals

Premiums for short-term rental properties (those rented out for fewer than 12 weeks a year) tend to be higher. This is because short-term renters are less likely to notice or report maintenance issues, may be more careless, and often do not have the same familiarity with the property’s layout and systems, which increases the likelihood of problems.

Bundled Policies

When shopping for insurance, ask about bundle options with your homeowners insurance provider. Combining both homeowners and landlord insurance with the same company can often result in a discount.

Landlord insurance does not cover renters' personal belongings, so encourage tenants to consider renters insurance to protect their own possessions. We suggest no less than $100,000 in personal liability coverage on a bound and issued policy as part of the lease agreement; when appropriate, requiring $500,000 in personal liability coverage is best.

What Do You Need to Insure as a Landlord?

A standard landlord insurance policy typically covers property damage, liability protection, and lost rental income, but you may wish to customize your policy to suit your specific needs. We always recommend having a separate personal liability policy or ‘umbrella’ of at least $1,000,000 which will extend to any tenant occupied properties that you own.

Landlord Insurance vs. Homeowners Insurance

While homeowners’ insurance covers property and liability for owner-occupied residences, landlord insurance is necessary if you rent out your property, as homeowners’ insurance will not cover rental units.

Landlord Insurance vs. Renters Insurance

Renters insurance protects tenants' personal belongings and liability, while landlord insurance covers the property owner against damage and liability related to the rental unit. Traditionally, a ‘renters’ policy’ is very inexpensive for the coverage it provides. We recommend no less than

$25,000 in renters’ contents coverage, and that factor should be appropriately based upon the valuation of all contents owned by the tenant.

Landlord Staged or Furnished Properties

As the property owner, if you stage or furnish your property for your tenant(s), you should have coverage to protect your major appliances, furnishings, décor, and other personally owned contents that are not permanently affixed to the property.

The Bottom Line

Before renting out your property, carefully review your homeowner’s insurance policy to ensure it provides sufficient protection for rental scenarios. If not, landlord insurance is essential to safeguard your investment. Additionally, encourage tenants to take out renters’ insurance for their personal property and liability coverage.

-We can help.

Experts in insurance solutions for successful individuals, families, and businesses.

Jason M. Pond, CAPI, CPRIA – Shareholder / Personal Risk Management

972-715-8703 – Direct / 972-342-8645 – Mobile / jason.pond@swinglecollins.com