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Why Is Landlords Insurance More Expensive than Homeowners?

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Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency...

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Reviewed byJoel Ohman
Founder, CFP®https://res.cloudinary.com/quotellc/image/upload/insurance-site-images/truthaboutins-live/2020/03/joel-ohman.jpg

UPDATED: Mar 13, 2020

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Insurance agents frequently get asked this question. And for good reason – it seems counterintuitive that you’d have to pay more to insure a home you don’t live in, right?

Many property investors don’t think about insurance until the last minute, which usually only compounds the frustration of hearing about the higher insurance premium.

To understand why it’s typically more expensive to insure a rental property rather than a primary residence, you need to consider the basic principles of insurance.

Shocker alert! Insurers are in business to make a profit. Profits are made by selling enough insurance to cover all business expenses and pay for all covered insurance claims.

Insurance companies pour over existing claims data from previous years and continually adjust their pricing to find a balance between charging too little and not making a profit, versus charging too much and losing business to competitors.

We’ll spare you the finer details, but as it turns out, rental properties have a higher statistical frequency and severity of claims than primary residences. Therefore, they are more expensive to insure. Period.

Why More Claims?

Human nature. Both the landlord and the tenants may be contributing factors in why there are more claims.

The property owner may perform less maintenance on the rental property than their own home. After all, it’s an investment. The idea is to spend as little money as possible to make the venture profitable.

A lack of property maintenance accounts for a large portion of claims. Maybe overhanging tree limbs fall on a roof or outdated plumbing cracks and causes a water loss. Perhaps old wiring isn’t updated and an electrical fire burns a portion of the property.

Lack of maintenance isn’t necessarily always the landlord’s fault. Claims certainly arise when a particular renter isn’t alerting a landlord to potential maintenance issues.

Landlords will be the first to tell you their tenants don’t necessarily take care of a home they rent the same way they would if they owned it.

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Common Misconceptions

Taking the above information into account, let’s dispel a few common misconceptions about why people think landlord’s insurance should cost less than what they pay to insure their primary residence.

1. “My home is worth much more than my rental property.” Insurers base their pricing mostly on claims history. Would you charge more for a home that statistically shouldn’t have a claim, or more for a home that has a much higher chance of having a claim?

Put another way, would you charge a higher premium for a 45 year-old married woman driving a Corvette, or a 16 year-old male driving a Honda? Even though the Corvette is more expensive, my money would be on the 16 year-old filing a claim. The teen is charged more than the adult every time. A rental property is more like the teen driver…it’s inherently more risky to insure.

2. “I don’t have any belongings in the home.” Homeowners insurance automatically contains coverage for your personal property. Usually at 50% of the insured value of the home. A $200,000 home would likely have $100,000 in “contents” coverage. Why would a policy with $100,000 less in coverage be more expensive?

Again, the insurer is much less worried about the odds of replacing your home’s contents than they are about a rental property, which history shows are much more likely to cost the insurer from a claims standpoint.

Can You Beat the System?

Yes. There are several insurers who specialize in insuring rental properties.

You may very well find that the insurer who covers your home isn’t interested in insuring rental properties…and as a result, charges an arm and a leg to do so.

If that’s the case, compare insurance quotes online and/or visit a local independent insurance agent who can shop your rental property insurance with several different companies to ensure you get the best coverage at the lowest possible premium.

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