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Homeowners vs. landlord insurance

By Posted : 03/30/2016

Whether you invest in rental property full-time or just rent out your extra bedroom on occasion, you need more protection than a standard homeowners policy can provide. To shield yourself from potentially catastrophic losses, look into supplemental coverage for your homeowners policy or a separate landlord insurance policy. Here's what you need to know about the differences between homeowners and landlord insurance.

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Comparing homeowners insurance and landlord insurance

The table below highlights differences and similarities between homeowners insurance vs. landlord insurance:

Coverage details

Homeowners insurance

Landlord insurance

Insured resides

In the home alongside tenant

In the insured home, on the premises or elsewhere

Protection

Main building and other structures on the property from losses due to:

  • Fire
  • Lightning
  • Wind
  • Hail
  • Other covered events

Same as homeowners insurance

Personal property

Most property is covered, including furniture, clothing and computers

Only covers items owned by you but used to service the rental property - such as maintenance equipment, furniture and appliances used by the tenant, snow blowers, etc.

Liability

You are protected when you're responsible for damage, regardless of where the covered event occurred

Covers accidents on the rented premises for which you are legally responsible

Tenant belongings

Not insured

Not insured. Experts recommend requiring tenants to carry renters' insurance

Landlord insurance components

You can choose rental property insurance with the most basic protection, or you can insure against most kinds of losses. Ryan Scruggs at Farmers Insurance in Peoria, Illinois, explains that landlord insurance comprises three parts:

  1. Dwelling coverage for the structure in case of mold, sewer backups, wind/hail damage, fire, etc.
  2. Personal property coverage that reimburses you for damage to property left on the premises for maintenance or tenant use, such as appliances, furniture, garden equipment and snow blowers.
  3. Liability coverage for injuries occurring on the rental property for which you are responsible.

"In my opinion, liability is the most important coverage that can be offered on landlord policies," says Scruggs. He also recommends that landlords consider expanded rent loss coverage. "If your tenant is unable to live in the home due to a fire, sewer backup, mold, etc., this coverage can reimburse you for lost income during the period the tenant is not making rental payments."

Other landlord insurance additions worth evaluating include:

  • Guaranteed replacement cost for your dwelling, allowing you to repair or rebuild even if the cost of building exceeds the original coverage amount.
  • Water damage coverage for the building or anything inside the building from flooding, sewer backups and other natural disasters -- typically not covered by a basic policy.
  • An umbrella policy for landlords with multiple properties or high net worth. Umbrella policies can allow you to purchase millions of dollars in protection at a relatively low price. This coverage applies after your landlord policy benefits are exhausted.
  • Renter default protection pays you for lost rental income if your tenant fails to pay rent, must be evicted due to a court order, undergoes a hardship or dies unexpectedly.

Make sure your insurer knows that you own rental property when you purchase an umbrella policy, warns real estate investor and consultant Spencer X. Smith. "I thought my personal umbrella would cover my rental properties," he said, "And it doesn't. Although nothing happened that forced me to learn this the hard way, it could have been a catastrophic loss."

Common landlord insurance claims

Landlords have more to worry about than homeowners because tenants don't always know how to prevent property damage, and they have less to lose than you do if your structures fail. Here are some common insurance claims you might face when renting out your house, their average cost, according to the Insurance Information Institute, and how to avoid them.

Damage type

Description

Average claim cost

Prevention

Water

Poor plumbing or failing pipes cause significant water leakage

$7,958

Check and maintain pipes, especially in winter. Inform tenants where the emergency shutoff is and how to use it.

Accidental

Applies to the contents of the unit, including carpets, appliances, counter tops, etc.

$9,024

Require a sufficient damage deposit to avoid insurance claims and vetting tenants carefully.

Storm

Forces of nature, such as wind and hail

$8,041

Make sure your roof is in good repair and that pipes and gutters are sturdy, properly secured, and unblocked. Reinforce doors and windows with plywood coverings outside the glass in advance of big storms.

Malicious

Vandalism, criminal mischief

$4,800

Thwart neighborhood hoodlums with reinforced windows, locks on gates and a visible, prominent security system. Carefully vet tenants and get a large security deposit.

Homeowners vs. landlord insurance when renting out a room in your home

Do you need special homeowners insurance for landlords if you just occasionally rent through Airbnb or other services? It depends.

First, check with the referral service to see what protection it offers landlords. Airbnb, for example, includes Host Protection Insurance in its basic fee. This insurance provides primary liability coverage for up to $1 million for third-party claims of bodily injury or property damage, and may also cover damages caused by guests. If you work through a service that does not provide insurance, or you manage your own rental, make sure you're sufficiently protected before taking in tenants.

If you rent out all or part of your house for a short period of time--for instance, over a single holiday period or a major sporting event -- you've got a few options for insurance protection.

  1. Your current insurer may allow you to take in a short-term boarder at no additional charge--ask.
  2. Your insurance company might sell you an endorsement (or rider) for your current policy.
  3. If you plan to take in short-term boarders regularly, you may need to insure for business activities. This is something done by a bed and breakfast or small hotel.

The most important thing is that you let your insurer know what you're doing.If something happens and you did not notify your homeowners insurance company about your tenants, it's unlikely that damage or liability would be covered.Landlord insurance

Attorney Larry Buckfire cautions against taking chances with temporary tenants. "It is essential that you obtain additional coverage if you are renting out your property," he says, "Even if only for short periods of time. The insurance company will deny a claim if your property is being used for 'business purposes' and your policy is a standard homeowner's policy. This will result in you having no coverage for an injury that occurs on the property, or even property damage caused by a renter. You will be personally liable for all damages."

Real estate investor Eric Bowlin warns that there may be other legal hazards if you don't insure your premises properly. "It is imperative that you do not use a standard homeowner's policy," he stresses. "Some states have very specific coverage requirements that your homeowner's policy won't include. A great example is in Massachusetts where it is mandatory to carry $750 coverage for relocation expenses in the case of a fire. These very particular requirements would never be covered in a standard policy and you don't want to run afoul of the law by accident."

How much does landlord insurance cost?

In general, landlord insurance costs 10 to 25 percent more than comparable homeowners insurance, according to the Insurance Information Institute, (III). This reflects the additional risks incurred when you turn your home into a business. There are three categories of coverage: DP-1, DP-2 and DP-3.

  • DP-1 is the bare minimum, providing fire, vandalism, wind, hail and other common perils.
  • DP-2 is more comprehensive, adding specially hazards named to the policy.
  • DP-3 is the Cadillac policy, covering replacement-cost coverage for any perils not specifically excluded.

Factors that influence your premiums include:

  • Property location (likelihood of crime, natural disasters and other incidents)
  • Duration of rental period (short-term renters are riskier than long-term lessees, so premiums are higher when you have more turnover)
  • Home value (for replacement coverage)
  • Rental income (for rent replacement coverage)
  • Safety and security features
  • Age of home and major systems
  • Claims history
  • Owner credit rating

It is not useful to cite "average" landlord insurance costs because of the number of variables involved. To get landlord insurance quotes, provide insurers with the items listed on this checklist, and make sure you're comparing similar insurance policies.

Landlord insurance application information

  • Property address
  • Current property value
  • Date of purchase and purchase price for the property
  • A list of system upgrades and improvements, especially electrical, plumbing, & HVAC
  • Current or recent rental property insurance policies and your claims history record
  • A list of all safety and security measures, including burglar alarms, motion sensors, fire sprinkler systems, guard and security gates
  • A list of potential hazards, including fireplaces or wood stoves, swimming pools, hot tubs and gym equipment
  • Copy of your standard lease agreement
  • Desired coverage, including loss of income, windstorm, flood and umbrella liability
  • List all additional structures on the property, such as garages, laundry facilities, and storage buildings
  • List of employees and their functions, such as grounds maintenance, housekeeping and office staff

How to save on home insurance vs landlord insurance

You can save on landlord insurance the same way you can on your homeowners policy--by bundling your landlord insurance with your auto and other policies, improving your credit rating, raising your deductible, adding an umbrella policy, and comparison shopping for insurance. In addition, there are six landlord-specific actions you can take to reduce your costs.

1. Maintain your property

Well-maintained homes have fewer claims, and you can be rewarded with lower premiums. These actions and equipment make you a more attractive insurance customer:

  • Keep walkways in good repair, free of large cracks
  • Handrails must be present where falling is a reasonable possibility
  • Eradicate any mold
  • Install hard-wired smoke detectors
  • Make sure hallways and walkways are well-lit
  • Add child-safe window hardware

2. Outlaw smoking

Smokers increase the chance of property damage. Give the place a deep clean, add no smoking rule to your standard lease agreement, and then request a non-smoking discount from your insurer.

3. Require renters' insurance

Another way to reduce your insurance premiums is to require that your tenants carry renters' insurance that protects their personal property and provides liability coverage in case their guests are injured on your property.

As the landlord, you insure your own possessions. Your tenant's personal things are not covered under your policy. To avoid litigation in the event that your tenant's personal property is stolen or damaged, you can require a tenant to buy renters insurance (about $12 to $18 per month) as part of the lease agreement. Eric Bowlin's website for new landlords recommends it because:

If something happens to the tenant's belongings, they will want you to pay for it, even if it's not your fault. Even if they are wrong, they can cause a lot of headaches for you to deal with. Avoid it all simply by requiring content insurance.

4. Have tenants cover pet-related liability

Bowlin also recommends that you make pet owners responsible for pet damage and liability coverage.

Liability insurance is important, but especially for pet owners. Pass the liability issues to tenants by requiring them to carry a pet liability policy.

5. Add safety equipment and new systems

Describe for your insurer everything you do to improve the safety of the property. Alarm systems, security cameras and motion detector lighting may make your property less appealing to burglars and more attractive to insurance underwriters. Inform your broker of new systems and fixes. Heating, electric and plumbing upgrades can lead to better pricing.

6. Minimize claims

As with homeowners insurance, the fastest way to increase your premiums is to file a claim. If you filed a claim on your homeowners policy within the last three years, it may be reflected in the cost of your landlord insurance. Bowlin says, "An investment property is in need of constant repairs, so in general I find it is best to have a high deductible policy. It isn't good to put in a lot of claims, so I save those for major problems that I truly need help paying for."

Landlord insurance: don't skimp

There are many ways to save on landlord insurance, but the biggest long-term savings come from simply having it. Skimping on insurance and hoping nothing bad happens could be the most expensive mistake you ever make.

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