Does Homeowners Insurance Typically Cover a Rental Property?

Some landlords assume their homeowner's insurance policy will cover damages to their rental properties as well. 

Unfortunately, this isn't usually the case. In fact, many homeowners policies specifically exclude rental properties from coverage.

Protecting your investment is a top priority, and with the right insurance policy in place, you can rest easy knowing that you're covered in case of the unexpected. This article will explain the types of coverage available for landlords and how to make sure your property is protected.

Homeowners Insurance Typically Doesn't Cover Rentals

Homeowners insurance is for people who occupy their homes as a primary residence. The most common type of homeowners insurance covers your home and contents for most types of perils, including fire, wind, hail, and theft. It also provides personal liability coverage, which can pay for damages and legal defense costs if you or someone in your family causes injury to another person.

However, many new landlords and real estate investors are surprised to learn that a standard homeowners insurance policy does not typically provide coverage for rental property. There are a few reasons for this. 

First, homeowners insurance is designed to protect the policyholder's primary residence. This means that it generally does not cover secondary properties, such as investment properties.  A homeowner policy CAN cover a secondary residence, so long as it is owner-occupied.  We see this with seasonal homes.  The differentiator is that the residence is owner-occupied versus tenant occupied.

Second, homeowners insurance typically excludes damage caused by tenants. This exclusion exists because landlords are considered responsible for their tenants' actions. As a result, any damage caused by tenant activity would not be covered by a standard homeowners policy. 

Finally, personal property and loss of use coverages are specifically tailored for the different needs of a homeowner versus a landlord.  With the wrong policy in place, coverage needs may not be met in the event of a loss.

How Landlord Insurance Protects Rental Property

Landlord insurance is a type of property insurance that helps protect landlords from financial losses due to damage to their rental property. It can also provide liability coverage if a tenant is injured on the property.

The main coverages provided by landlord insurance policies are:

• Property damage - Protects against damage to the physical structure of the rental property and any belongings owned by the landlord that are kept on the premises for use by the tenants. Covered losses may include fire, smoke, water, or other perils.
• Liability - Protects the landlord from legal liability that may arise from the operation of the rental property such as  injury or property damage  including any associated legal defense or to help pay for the medical expenses of any tenants injured on the property.
• Loss of income - Protects against loss of rent while the property is being repaired due to the property being uninhabitable from a covered loss.

Each of these coverages provides important protection for the landlord, and landlords should ensure adequate coverage before renting out their property. When choosing a landlord insurance policy, it's important to make sure that you have enough coverage to protect your investment.

Different Types of Landlord Insurance Policies

There are three types of landlord insurance policies: DP1, DP2, and DP3. Depending on the policy type, covered claims are paid out based on RCV (replacement cost value) or ACV (actual cash value). RCV is the amount it would cost to replace, rebuild or repair your rental property without considering depreciation. ACV (actual cash value) is the replacement cost value minus any depreciation. The differences below are examples only and not inclusive of all the differences between policy types. 

DP1

DP1 landlord insurance policies offer the most basic level of coverage, providing protection for the dwelling itself as well as any attached structures. In addition, claims for covered events are paid out based on ACV(actual cash value)-basis, which will usually result in an owner receiving less than the amount needed to make repairs.

DP2

DP2 landlord insurance policies provide more comprehensive coverage than DP1 policies, covering not only the dwelling and attached structures but also personal belongings and contents inside the rental property. Landlord policies do not cover the tenant’s personal property.  The tenant must purchase a renter’s policy for this type of coverage. The landlord’s personal property would be covered on an ACV basis, but the structure would be on an RCV basis provided the coverage limit selected is adequate to cover the actual cost to rebuild / replace / repair. Often, carriers offer buy-up coverage for personal property to be covered on a RCV basis.

DP3

DP3 landlord insurance policies offer the most comprehensive coverage, protecting the dwelling, attached structures, personal property inside the rental property. In addition, this type of policy usually includes liability coverage if a tenant is injured on the property due to the owner’s negligence. As with the DP2, the landlord’s personal property would be covered on an ACV basis, but the structure would be on an RCV basis provided the coverage limit selected is adequate to cover the actual cost to rebuild/replace/repair. Often, carriers offer buy-up coverage for personal property to be covered on a RCV basis.

Additional coverages to consider

Every landlord has different insurance needs, which is why insurance companies offer additional protection that can usually be added to a standard policy for a fee. Some extra coverages to consider include:

• Flood insurance: Protects your property in the event of flooding, which is not typically covered by landlord insurance policies.
• Earthquake insurance: This protects your property in the event of an earthquake, which is not typically covered by landlord insurance policies.
• Water backup: Helps protect against damage caused by sewage and water backup into the rental property from water that enters from outside the property.

How to Choose the Right Insurance Coverage for a Rental Property

The best way to make sure your rental property is adequately protected in case of an accident or natural disaster is to purchase the right insurance coverage. But with so many different types and levels of coverage available, it can be challenging to know which one is right for your rental property.

Here are a few things to consider when choosing insurance coverage for your rental property:

1. The value of your property: You'll need to insure your property for its full replacement value in case it's completely destroyed. Make sure to get an up-to-date estimate to rebuild from a qualified resource before buying insurance. The cost to rebuild is not the same as a real estate appraisal value.
2. The location of your property: If your rental property is in an area prone to natural disasters like floods or earthquakes, you'll need to purchase additional coverage to protect against those risks.
3. Your personal liability: Your insurance should also cover your liability in case someone is injured on your property, or you're sued for damages related to negligence on the premise.
4. The deductible: Be sure to choose an insurance policy with a deductible that you can afford to pay out-of-pocket in the event of a claim. A higher deductible will result in a lower premium but ensure you can still cover the cost if you need to file a claim.

Where to Find the Best Landlord Insurance Policy

There are a few ways you can go about finding landlord insurance for your rental property. For example, you can work with a captive agent, who represents only one carrier. Alternatively, you can use an insurance broker.

While a local agent may be the path of least resistance, there are potential drawbacks to purchasing landlord insurance the old-fashioned way via a captive agent. You will only have access to a single insurance carrier. This lack of choice will limit your options and potentially lead to higher premiums. 

Another drawback is that the process can be more time-consuming. You may have to meet with the agent in person and go through the entire application process before you can compare rates and coverage options.

On the other hand, there are some significant benefits to using an insurance broker - especially one like Obie. The process is much simpler and can be done entirely online. This allows you to compare rates and coverage options from various carriers without ever leaving your home.

Additionally, Obie uses technology to streamline the process of purchasing landlord insurance. This includes instant rate quotes, electronic applications, and the ability to purchase insurance in all 50 states. More than $4 Billion in property is insured with Obie to date.

Ultimately, using Obie is one of the simplest and most efficient ways to find the best landlord insurance for your rental property. Get started today by entering your property address on the Obie website to receive an instant quote and see how easy it is to protect your rental property. If that wasn’t reason enough, landlords see an average savings of 25% on their insurance when switching to Obie.