Help me understand landlord insurance

[Arjun K.]

I am bidding on a $230K market price property, where I will probably add $20K of equity thereafter in form of upgrades. the land is appraised at $100KI by tax man. This will be a rental property.

I solicited quotes for landlord insurance and property liability (which I will supplement with a umbrella). The quote came in at $1,500 which is higher than i imagined. This includes $230K propeerty coverage, $10K personal property (coverage B), $300K business liability (incident)/$600K in annual aggregate (Coverage L), $600K in Premises Medical Payments (Coverage M), $1K loss of rents, and a ~1% deductible at $2K.

I have a slew of questions!

(1) does 1% deductible make sense, or should I go higher? How high? Where does putting in a claim increase rates?
(2) Should I eliminate the coverage B insurance?
(3) Is $1K loss of rent sufficient if property will be rented out at $2.2K/month?
(4) does this insurance package look standard in terms of features?
(5) anything else to make this insurance cheaper?

[Jim Howard]

What amount of deductible makes sense is an individual decision based on your business model, investment basis in the property, resources and operating capital, etc. Going with a higher deductible, all other things being equal, will generally result in lower premiums. So there is the opportunity cost between current premium expense and whatever peace of mind a lower deductible may provide you. Along with the other variables mentioned above you should also consider your claims history and how you run your rental business. Are insurable losses rare for you and do you manage your operations in such a way as to minimize them as mush as is possible? Then perhaps premium savings with a higher deductible makes good business sense for you. Also, my experience as an investor is that, even after a larger deductible, I have the resources and experience to get repairs done more efficiently than the typical homeowner which mitigates the impact of the larger deductible somewhat and makes the up front premium savings more attractive.

Regarding personal property, things like kitchen cabinets and the HVAC system should be covered by your dwelling policy. I know many policies automatically stick personal property coverage in as a percentage of the dwelling coverage amount. However, unless you maintain a lot of personal property in one of your rental dwellings for some reason I don't see why you would necessarily need it. If you furnish expensive appliances in the rental you might want to make sure they are covered by your policy. Other than that, I've never stored any personal property at my rental properties that I felt was valuable enough to insure.

Whether to carry Loss of Rents coverage is another business decision. If your operating situation is such that, in the event of a covered loss, it would cause you financial hardship then it probably makes sense to pay for it. If, on the other hand, you have sufficient cash flow that the loss of a particular property's rental income would be unfortunate but not devastating, maybe you don't pay for the coverage. Again, I think it should be a personal business decision not a one size fits all answer. And I would think that coverage for 6 months of rent would be sufficient. In my experience, if I don't have a property put back together in 6 months then I'm probably looking at other options anyway.

Yes, this insurance "package" does look somewhat standard - as in the coverages are pretty much dictated by the carrier and tied together like a trim package on a car. Not a lot opportunity for you to pick and choose what works best for your situation. There are more flexible alternatives out there if you research a little. That flexibility allows you to manipulate things such as coverage amount, deductible amount, policy form, etc. to more closely match your needs and risk tolerance and thus have some influence on the premiums you pay.

Hope this helps some.