Let’s Talk Property Insurance: What An Owner Needs, Wants, and Should Have
Don’t unnecessarily expose yourself.
When you’re renting out property, risks are a part of the game. Insuring yourself against the most common and most dangerous risks should be a standard operating procedure. Unfortunately, many landlords don’t know what’s out there, much less what they need. That’s why we’ve compiled a shortlist of insurance that we think every rental property owner should have.
Dwelling insurance is the ‘standard’ policy for a property owner. It covers two very important things: your physical assets, and your liability as owner.
The physical assets covered include the main building, secondary buildings, and major personal assets like appliances. The main building coverage is often expressed in a dollar amount per square foot. For example, if you’re covered for $50/sq. ft. and 2,400 of your home’s square feet go up in flames, you can expect a check for $120,000 from the insurance company — even if the home costs twice that to rebuild. Secondary structures and assets are generally evaluated when the policy is created and each is assigned a dollar value. If that structure or asset is destroyed, you’ll get the agreed-upon amount.
The liability coverage is at least as important as the asset coverage. If there’s a lawsuit related to your property — which can happen under an unbelievable variety of circumstances — the liability coverage provides a lawyer to fight the case. If the lawyer wins, his fees are paid by the coverage. If he loses, his fees are still paid by the coverage, and then the remainder of the coverage amount goes to pay off the damages.
Personal Umbrella Policies (PUP)
A Personal Umbrella Policy provides extended liability protection. It’s a high-end policy, offering coverage in million-dollar increments for around $500/year. While an owner of a single rental property is probably OK with just his Dwelling Insurance, your vulnerability multiplies with each property you own. If you have more than three properties and you don’t have a PUP, you’re vulnerable in a big way.
Your dwelling policy covers a lot of ground — from riots to airplane crashes to broken water mains — but there are some things that are almost never present in dwelling policies. These are covered by separate ‘disaster policies,’ and include:
- Earthquake damage
- Hurricane/Tornado damage
- Wildfire damage
- Hailstorm damage
- and, in some states, Mudslide damage.
If you live in an area prone to any of these disasters, you’ll want the appropriate kind of coverage.
Technically, you can’t force your tenant to take out renter’s insurance, but you should make it a priority to encourage them. That’s because, in the event of a lawsuit, any monies are taken out of the renter’s policy first, before the owner’s is touched. For even more protection, try to get your tenants to name you on their policy as an “additionally insured.” This way their policy may actually cover you!
Tenant Liability Insurance
Tenant Liability policies insure you against the tenant in many ways. If the tenant lets their renter’s insurance lapse, or they didn’t get a high enough coverage amount, it can kick in to help them. It protects you against frivolous lawsuits filed by tenants (and often pays for itself with that aspect alone.) It protects you against lawsuits for property damages that your tenants may inflict on your neighbors. It will even pay your other policy’s deductibles if your tenant does something stupid and damages your property. All told, it’s a no-brainer.
Be sure to review your insurance policies in detail with your agent and ask a lot of questions. If they dismiss your questions or don’t seem inclined to assist you, get a new agent! This is a big deal and you need professionals you can trust as opposed to those who just see you as a dollar sign.
There’s no excuse for leaving yourself vulnerable when almost anything you could ask for has an insurance policy that covers it. Yes, it can get expensive, but your other option is the profound risk of a sudden and unpleasant bankruptcy.