Landlord Insurance 101
There are three standard insurance policies that landlords should be familiar with: DP-1, DP-2, and DP-3. The standard DP-1 policy generally covers less than DP-2, and DP-3. For instance, DP-3 policies cover most perils such as theft and vandalism and liability coverage, whereas DP-1 and DP-2 may not. In the case of liability coverage with DP-3 policies, if a tenant injures themselves on your property you can then turn to your policy to cover legal or medical expenses.
As noted above, most landlord insurance policies don’t cover the contents of the units—this is the responsibility of the tenant. That said, most DP-3 policies cover landlord-owned contents, such as appliances or furniture. DP-3 policies also include loss of rental income, meaning if the unit is off-market while you make repairs. Here are some of the common insurance policy features you’ll want to consider:
· Property protection (structure)
· Personal property protection (contents)
· Rental loss protection (only if the unit is unhabitable for various reasons)
· Acts of nature (be sure to ask your broker what is covered, and what isn’t)
Rental Loss covers lost income when the property becomes uninhabitable and does not typically protect against tenant default or vacancy. You can buy additional insurance to cover tenant default, which may be worth considering if you can’t cover your mortgage without the rental income and if you think it will be hard to find a new tenant and/or difficult evict a tenant who is withholding rent due to no fault of your own.
It’s worth noting that if you have an HOA, there will be insurance associated with the ownership structure of the HOA. For instance, a condo building with an HOA will have their own insurance to cover certain things. In this case, it’s important to work with your broker to ensure you aren’t doubling up on coverage that is already under an HOA policy.
My pre-paid policy doesn’t expire for many months?
Don’t worry, you can switch insurance providers at any time and you will get a prorated refund for unused coverage. Talk to your insurance broker or a new insurance provider for the details. Don’t let your current policy hold you back!
So what is the cost of landlord insurance?
The general rule is that landlords can expect to pay roughly 15% more for landlord insurance than a standard homeowner policy. According to Insurance.com, the national average cost of a homeowner policy is $1,288. Therefore, most landlords can expect to pay roughly $1,481 a year for landlord insurance.
The higher cost is because insurers are taking on additional risk for landlord insurance because of the presence of renters. Here are some other factors that affect the price of your landlord insurance:
· Security features
· Age and condition of the property
· Smart home devices that provide early warnings of potential issues
· Number of rental units
· Safety equipment on the premise
· High-risk features such as wood fireplaces, pools, and hot tubs
· Long-term vs short-term tenants (different coverage is needed for each case)
· Questions to ask your insurance broker
It is critical that you speak with a licensed insurance broker prior to purchasing any rental property. You should also obtain insurance quotes. Consider using a broker if you don’t already get a packaged deal from an insurance provider because brokers can shop around for the best prices and policies. A single insurance provider however may give you a bulk deal if you work only with them. Be sure to explore both options.
Not only should insurance be a part of your investment due diligence, but many lenders also require it as part of the financing process. When speaking with your broker, here are some questions that may be worth asking:
· Are there any upgrades/repairs I can do to this property to reduce my insurance costs?
· Does this policy cover flooding, and what type of flooding (natural disaster vs sewer backup vs tenant error)?
· What are all the deductibles on my policy?
· Are there additional coverages I should add on given my location?
· Are there any insurance discounts that may apply to my situation?
· Does my policy cover both short and long-term rental periods?
· What if my property is damaged by the negligence or criminal acts of my tenant?
· How is the replacement cost or cash value calculated under this policy?
· Does my policy cover other structures on my property such as a shed or coach home?
· Should I get a separate umbrella policy to cover myself if I max out my liability coverage?
· Will having safety equipment on premises reduce my landlord insurance premium?
· What is NOT included in my landlord insurance?
· Is my policy covered in the event of a terrorist event?
Be sure to conduct your due diligence with your insurance broker, and speak with other landlords in your area to better understand the most common scenarios that could arise.