Home Insurance For Rental Properties – The short answer is that it depends. We recommend requiring renters insurance from your tenants to increase your protection.
If your tenant damages your rental property, your landlord insurance may cover the loss, but it depends on the type of damage and your coverages. Insurance companies classify tenant damage in three different ways:
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This is exactly what it sounds like. Anything the tenant does accidentally, like starting a kitchen fire or breaking a window, falls into this category. Accidental fires will be covered under any landlord insurance; however, other damages will depend on your policy.
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Your policy can also protect you if the damage leads to a loss of rental income. Your landlord insurance will not cover replacing your tenants’ personal property. They will need renters insurance to protect their belongings.
This is also sometimes called malicious damage. This type of damage occurs when a bad tenant steals from your property or takes a sledgehammer to the walls. Your coverage here again depends on the insurer and the terms of your policy.
People often confuse this damage with vandalism, which is covered in most policies. But it’s important to note that some policies treat willful damage and vandalism differently.
This means items like stained carpets or scratchy floors that aren’t covered by landlord insurance policies. A common way to cover this as a landlord is to use the tenant’s security deposit for such damages.
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What is covered and the amount of coverage depends on the type of home insurance policy. Like the different home owner’s insurance policies, there are three levels of renter’s insurance policies. Insurers call them basic residential property insurance, sometimes called fire insurance (DP-1), broad residential property insurance (DP-2), and special residential property owners insurance (DP-3).
The amount or extent of the housing coverage and additional coverages increases with each plan. For example, you can upgrade to replacement cost versus actual cash value.
The three most significant protections that landlord insurance provides are property damage coverage, liability coverage, and rental income protection:
The insurance provider will pay repair costs to your rental property for any covered losses. The standard list of covered hazards includes:
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However, please note that homeowners do not cover losses from floods and earthquakes. (You can buy flood insurance and earthquake insurance in addition to your homeowner’s policy.)
Landlord liability insurance usually only provides coverage for claims related to your rental. Compare it to your primary residence’s homeowners policy, which covers you and your live-in family from claims resulting from accidents at home or elsewhere.
Rental income protection, also called rent arrears or fair rental value, pays you the rent you would have lost from a tenant while your home is being repaired after a claim. Many policies limit coverage to 12 months of lost rent.
Sometimes landlords think the policy covers the tenant’s short-term living expenses while elsewhere. They would need a renters policy for this, and this issue adds another reason that many landlords require their tenants to purchase renters insurance.
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Additionally, you can decrease the chance of losing your rental income and lower your liability. All of these benefits prompt us to strongly recommend that you require your tenants to purchase renters insurance.
Both renters and landlords often have misconceptions about how renter’s insurance works. Generally, renters insurance will only cover the renters’ belongings and liability if a guest suffers an injury. Renters insurance usually will not cover any destruction to the building, such as fire damage to the kitchen.
We recommend that you require your tenants to purchase renters insurance, even if you have renters insurance. Why? It reduces the chance that tenants and their guests will sue you for injuries or personal damages. In the worst-case scenario, when a renter’s negligence injures a guest, a renter’s policy can cover the legal fees that you and the renter might otherwise pay out of pocket.
Your landlord’s liability policy will not cover the loss if the tenant’s carelessness damages the structure or injures someone. However, assume your tenants have renters insurance. In that case, it will pay for their lost belongings and cover medical expenses for guest injuries, adding a layer of protection for both the renter and you, the property owner.
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Renters insurance for your renters can also help prevent an increase in your premiums because it reduces the number of claims you have to file with your landlord insurance. Homeowners insurance premiums may increase after a claim, or you may even lose the ability to renew if you have too many.
When renters have renters insurance, they will file a claim for you in many situations. For example, if a tenant’s guest slips and falls due to a drink spilled in the kitchen, they can file a claim to pay their friend’s medical expenses. Otherwise, you would be the subject of a lawsuit and need to make a claim on your homeowner’s policy.
Another example to see both policies in action, imagine a tornado hits your rental and destroys part of the structure and your tenant’s personal property. Your homeowner’s insurance would cover repairing the property because natural disasters are a covered loss. Your tenant’s renter’s insurance, not your landlord’s policy, would pay for their damaged personal property.
Free Resource: We’ve written an Ultimate Guide to Homeowner’s Insurance. It gives a nice overview of what home owner insurance is.
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Our recommendation is yes, and most insurers would agree. The best way to protect your property and income is to make sure you have landlord insurance and require your tenants to have renters insurance. You will reduce the risk of an uncovered loss and the likelihood that someone will come after you for damages due to your tenants’ negligence.
Your renter’s insurance liability coverage can help you skip a claim. A good example occurs when the renter’s insurance covers medical payments for the injuries of a tenant’s guest.
As a little summary and help before you get an insurance quote, you can break down each type of coverage like this: Renters insurance policies typically cost about 25% more than homeowners insurance policies, according to the Insurance Information Institute. The average cost of renter’s insurance was $1,478 in annual premium, and the average cost of homeowner’s insurance was $1,192, as of a few years back.
For example, we received insurance quotes for a typical 3-unit Chicago rental property from five different companies, and the insurance premiums ranged from $2,400 to $6,600 for the same coverage.
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The main reason for the difference becomes apparent when you think about who lives in the home. Insurance companies see fewer claims and lower average loss rates in owner-occupied homes than rentals. Common sense says that no one will take care of a property quite like the owner.
And another difference appears when you look at the amount of liability insurance. Landlords have higher coverage levels to protect themselves from lawsuits and legal fees that arise from injured tenants or guests. It is normal for a homeowner’s policy to have a liability limit of $1 million.
Discounts exist, but it is not treated as much as other types of coverage such as auto insurance. For example, State Farm gives prizes for good grades or driving lessons. You won’t find anything like this with homeowner’s insurance.
That depends. Answer how often you rent the property and how long people stay to decide what insurance you need. Check out these three scenarios to help you choose:
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As a general rule of thumb to help, personal insurance does not cover business activity. For example, many personal finance experts suggest an umbrella policy to protect you from liabilities above your homeowner’s limits. But your umbrella policy would not apply to your rental investment property if you set it up as a separate business or LLC.
No, you do not need to purchase both a landlord policy and a tenant policy. Some confusion comes from the fact that landlord insurance is sometimes called rental property insurance. Renters insurance covers houses, and renters protects your tenants’ personal property and liability.
Many landlords require their tenants to purchase renters insurance because it reduces headaches when personal property claims arise. For example, if a fire damages your rental and destroys your tenants’ property, they can seek damages against you even though they should be protecting themselves with tenants.
And landlords ask that tenants purchase renters insurance to protect the tenants after a major claim. Let’s go back to the fire example. If the tenant had to move out until repairs were completed, how would they pay for living expenses? The renter’s policy would cover that for them, while your landlord’s insurance would compensate you for your loss of rental income while the home becomes habitable.
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Let’s take a look at a real rental property to break down what insurance coverage it has and the costs. This 3,700 square foot apartment building with three rental units is located near downtown Chicago on Fullerton Avenue. It last sold for $950,000 in 2018, and the owner believes its replacement cost would be around $740,000 at $200 per square foot. It is fully leased and brings in a monthly rental income of $6,000.
The owner got three