Insurance protects against risks rental property owners cannot afford to incur. Individual landlords typically cannot bear the cost of the total destruction of a rental property out of pocket, nor can they typically withstand a judgment for $1 million or more in the event someone is hurt or killed on their property.
But no single insurance policy can take care of every risk a landlord faces. The art of risk management is combining multiple insurance plans from different vendors to create a meaningful safety net for a wide variety of potential risks.
Here are the most important forms of coverage that just about any rental property owner needs:
Don’t rent out a property without it. Some landlords make the mistake of buying a home, getting standard homeowners insurance coverage, and thinking that will do the trick. It won’t.
Homeowners insurance only protects the resident owner and his or her family. It does not protect tenants, and in the event a tenant is injured or harmed on the property, it will not pay benefits. The tenant will not have an insurance company to pay hospital bills or take care of other damages. They will have no recourse but to sue you, the landlord, to compensate them for whatever transpired on your property – and they will likely get a judgment against you. Without insurance in place, you run the risk of having assets seized or being forced to declare bankruptcy. The risk is potentially devastating, both to you and to the tenant.
For the best coverage, look for policies that cover “all risks” and provide protection in the event of loss of rental income. This is vital if you rely on the rent you receive for income or to keep up the property insurance and tax payments on your investment property.
Some people assume that damage from floods is covered under a homeowners or landlords insurance policy. That’s only true for flooding caused by something like an exploding pipe. If the flood happens because of a rainstorm, flash flood or a river jumping its banks, you will be out of luck – unless you have flood insurance.
Flood insurance has two components: structure and contents. Coverage is limited for basements and other areas below ground.
Normally, landlords purchase flood insurance from their usual property and casualty insurance agent via the National Flood Insurance Program.
You don’t have to own flood insurance. You are free to “go naked,” if you like, but if you carry a mortgage on the property, or plan on cashing out some equity, expect mortgage companies to require it before they will finance a loan on the property.
This is extremely important in coastal areas that are subject to hurricanes or other tropical storm risk. Standard, off-the-shelf homeowners and landlords insurance don’t cover this risk. To protect yourself, you’ll need to buy it separately.
Most coastal areas have state-sponsored programs that provide a backstop to limit insurers’ losses in the event of a major storm. They do this to ensure that there is a market, and that insurance carriers compete for it.
Speak with your insurance professional for specific information.
Vacant Property Insurance
Is the home sitting unoccupied between tenants for more than 60 days? If so, your property may have an elevated risk of damage from vandalism, vagrancy, squatting, flooding or mold. Unless you can arrange for a short-term house sitter, you may need to get special vacant property insurance in place.
This coverage provides the cost of repairing or rebuilding structures damaged or destroyed by fire and their contents. A fire insurance policy will typically have four components: dwelling, other structures, loss of use, and personal property. However, your tenant should be responsible for his or her own property in most cases – likely by obtaining a renter’s policy.
Many fire insurance policies also protect you in the event a fire on your property spreads and causes damage to others. You will probably want to get this coverage, especially if your property is in an area at elevated risk of wildfires.
Again, this is a specialized and location-specific risk, for the most part. Standard homeowners and landlord insurance won’t cover you.
Sinkholes are a major issue in parts of Florida. They are also occasionally seen in places like Tennessee, Kentucky, Ohio, Michigan and Pennsylvania. Basic landlord and homeowner policies don’t cover this hazard. You need to obtain separate coverage, or purchase a rider.
Personal Umbrella Policy (PUP)
This inexpensive and vital form of insurance coverage steps in when your basic insurance policies have paid out their maximums. You can get a lot of protection against a wide variety of potential hazards for very little money in premiums.
Commercial Umbrella Insurance
Do you rent out more than four properties? Congratulations. You are no longer a “small landlord” for the purposes of insurance underwriting! When the number of properties you own rises above five, most carriers consider you to be a small commercial enterprise. You’ll need to get special commercial umbrella insurance coverage.