Home insurance tips for the 'accidental landlord'

By Michele Lerner Posted : 01/31/2011

Landlord home insurance tipsAre you about to become an "accidental landlord"? Perhaps you're a homeowner who plans to rent your home rather than sell it at a loss while waiting for the real estate market to turn.

If so, it's important to realize that making the switch isn't as simple as handing over the house keys to a tenant. Landlords must purchase new insurance that differs from standard home insurance.

"A lot of people don't realize that they cannot keep their regular homeowners insurance when they rent out their property," says Ed Charlebois, vice president of personal lines with Travelers Companies. "Landlords are no longer eligible for their homeowners insurance because those policies assume you are the owner-occupant."

Homeowners insurance policies typically cover the dwelling along with the owners' personal property and liability risk. Landlord's insurance, officially called a "dwelling fire policy," includes various options.
 
Just like when you purchase a home insurance policy, landlords looking for new insurance will have to decide between:

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  • Named peril policy. Only covers damages to the property resulting from perils listed in the policy. They include fire, wind, hail or an explosion.
  • Comprehensive/all-risk policy. Covers all perils except those specifically excluded in the policy.

5 elements of good landlord insurance coverage

Some insurance companies bundle their landlord's insurance coverages, while others allow you to pick each protection separately.

"Landlord insurance started out as a property-only product but most insurance companies now include liability insurance as part of the landlord policy," Charlebois says.

Charlebois recommends five elements of coverage as part of a comprehensive landlord insurance policy.

  1. Replacement cost coverage in case the entire home needs to be rebuilt. Insurance agents can work with you to estimate replacement cost.
  2. Contents coverage to replace any personal items you have left in the home, as well as appliances that are not built-in, such as a refrigerator.
  3. Loss of rent coverage if the home is empty due to a covered loss. For example, if tenants move out after a fire, you can be reimbursed for the amount of rent you would have earned while the home is under repair.
  4. Liability coverage protects you against a potential lawsuit or costs incurred if someone gets hurt on your property.
  5. Flood insurance if the home is located in a flood zone.

James Gontjes, a regional product manager for Foremost Insurance Co., a specialty insurance division owned by Farmers Insurance, says some homeowners want insurance for the full replacement cost of the home.

Other homeowners concerned about finding affordable insurance prefer to reduce their premiums and buy only actual cash value coverage.

You'll need to make the choice, and a good agent can help you determine what coverage is really needed and tailor the new insurance policy to your needs.

As with homeowners insurance, the cost of landlord insurance varies widely according to the size and location of the property and construction materials. Both Charlebois and Gontjes say the cost of landlord insurance is similar to a home insurance policy on the same property.

"While the cost of insurance varies according to how much coverage is purchased, landlords should also realize that, unlike homeowners insurance, landlord's insurance is a tax-deductible expense," says Charlebois.

Umbrella insurance and renters insurance

Both Gontjes and Charlebois recommend you purchase umbrella insurance coverage. Such affordable insurance policies typically give you $1 million or more in protection above the liability limits on your home insurance or auto insurance policies.

"As a landlord, umbrella insurance can be extremely valuable to cover the gaps in your coverage in case a tenant sues you, or someone is injured on the property," says Gontjes. "The $100 to $300 annual cost for an umbrella policy is money well-spent."
 
Charlebois recommends you require all tenants to purchase renters insurance.

"Renters insurance covers the tenant's belongings and includes liability insurance," says Charlebois. "This can protect the landlord in case the tenant tries to claim damages for their personal property after a fire or other event. The tenant's personal property is not covered by landlord's insurance."

Charlebois suggests the lease should also cover how tenant-caused property damage will be handled. A renters insurance policy could potentially pay the landlord if the tenant causes severe damage to the home.

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