What You Need to Know About Landlords Insurance
By Jason Marshall
, last updated December 16, 2011
If you are renting out a home or apartment building to tenants, chances are you need landlord insurance. Don’t make the mistake of thinking that your regular homeowner insurance policy will cover your losses if you are renting. Most homeowner policies exclude properties that are being rented. This is true even if you are a casual renter, like renting out a vacation home to short term tenants. But what does landlord insurance cover and what do you need to know about it before buying a policy?
First, there are many different types of landlord insurance policies and there is always additional coverage you can add. There are three broad types of landlord insurance: DP-1, DP-2, and DP-3. The DP-1 policy is generally the cheapest. It covers basics like fire and property damage. The DP-2 policy goes on to cover specific threats. So if your area is prone to hailstorms or earthquakes, you will want to add that coverage onto your policy. For the most comprehensive coverage, you will want to go for the DP-3 policy. This policy is referred to as an “open peril” policy, meaning that your property will be protected however it is damaged unless a threat is specifically excluded. If your property is damaged in a flood or terrorist attack, you will be covered unless those perils are explicitly excluded in the policy. These are more expensive policies, but they are necessary if you want to ensure compensation after damage has occurred.
DP-3 policies are also better because they pay replacement costs, whereas DP-1 policies only pay actual cash value. So if a tree falls through the roof of the house you’re renting out, the DP-3 policy would give you the money to replace the roof. The DP-1 would only give you the depreciated cash value of the roof. That can be a difference of thousands of dollars, all of which would have to come out of your pocket.
There are other clauses a landlord can add on to his policy that are well worth considering. Truly comprehensive policies will also cover landlord’s liability should he be sued by a tenant. Without coverage, a landlord can be faced with outrageous legal fees should she be taken to court. Insurance will cover a good portion of those legal fees.
Landlords also have to be careful of losing out on rent from tenants who are unable to pay or skip out without paying. Don’t think you will be fine because you trust your tenant or he has always paid on time. The best tenants can be hit with hard times and come up short on the rent. Rental default coverage will cover the lost payments. Some policies will cover up to six months, which should be more than enough time to find a new tenant.
It’s also a good idea to opt for coverage that covers tenant theft. It isn’t unheard of for tenants to leave the premises with appliances or other items that are yours. Some policies will even cover your costs if you choose to take your former tenant to court.