Protecting your investment is always a top priority. It’s imperative to understand the ins and outs of rental property insurance to make sure everyone’s best interests are considered.
This means both you and your tenants. You don’t have to be a landlord for long to know your livelihood is directly related to that of your tenants’ financial situation.
You likely have a “dwelling policy” (DP) on your investment property unless you paid cash (kudos if that’s the case). A “DP” policy differs from a homeowner’s policy in that it does not provide liability or medical payments coverage for you. You likely have that coverage on your personal “HO” policy.”
DP policies usually only provide coverage for losses that result from fire, lightning or removal. “Removal” covers your items removed from the house only in the event of a fire or lighting strike. You can insure a rental property against almost anything for additional premium.
A standard “DP” policy, available in the DP-1, DP-2 and DP-3 (better and more expensive in that order) provides four types of coverage:
1. Coverage A – Dwelling. This coverage part will pay for loss to the actual house or building (up to four units, five units is a commercial policy).
2. Coverage B – Other Structures. A detached garage would be covered here, up to 10% of coverage “A.” If your property were insured for $100,000, you would have $10,000 here. This limit is NOT in addition to coverage “A” on a DP policy (it is “in addition to” on a homeowner’s policy).
3. Coverage C – Contents coverage is provided here. Unlike a homeowner’s policy, there is no automatic coverage amount provided here. Each and every item you want covered here needs to be listed on the policy individually and results in a higher premium.
4. Coverage D – Fair rental value. If your rental property burns down, this coverage will reimburse you for your lost income while the property is being repaired. For coverage D to apply, the cause of loss must be covered, meaning a fire or lightning strike.
It is equally important to make sure your tenants are covered. If they are in a financial bind for any reason, you probably won’t receive your rental payments.
Renters can purchase an HO-4, or “renters” policy. This policy will fill the gap on the liability, personal property, loss of use and the medical payments to other coverage found in the typical homeowner’s policy, but excluded on the DP.
It is a good idea to require your tenants to carry this coverage as a stipulation to renting from you. If anything, it demonstrates their willingness to be financially responsible. There are rental policies available for as little as $15 per month that will provide a reasonable amount of necessary coverage.