The Truth About Landlord Insurance

Landlord Insurance is a term that is thrown around a lot, but it isn’t actually a real thing. In the insurance industry, the proper term is a dwelling fire policy. Dwelling fire is a strange term that is really fun to say. Now that you know it, you should work it into your normal vocabulary! Nonetheless, we all know what you’re referring to when you say landlord insurance, so that is alright too. :)

Insurance for real estate investors doesn’t have to be tricky.

Knowledge is power, and with insurance, going in confused means you’re likely to walk away from a claim angry! After reading this article, you’ll know the basics around landlord insurance (errr, I mean...dwelling fire policies!): what it is, why you need it, and how to get it.

What is Landlord Insurance?

As mentioned, “landlord insurance” refers to a dwelling fire policy. Dwelling fire is a fancy (or archaic) way of saying that you are protecting a residential property that is not owner occupied. So if you’re interested in house hacking, this policy is not for you! You’ll want to get a homeowner’s policy. A residential building is occupied by one to four families (in separate units of course). For all of you real estate investors that aspire to acquire larger multi-families, anything 5 units or more must be written on a commercial policy.

Why do you need Landlord Insurance?

Now that we know the technical name, let’s talk about the moving parts included in a landlord insurance policy and how various coverage protects you as the owner. Similar to your homeowners policies, you have the coverage letters A through E. Did the term coverage letters pique your interest? Perhaps even confuse you? Don’t worry, they’re just letters! Let’s dive deeper.

Coverage A is for the dwelling limit.

This is the dollar amount that covers the primary building. Lenders generally require that this amount is greater than or equal to the loan amount.

For example: If you purchase a property for $100,000 and the loan is for $75,000, the lender will expect you to furnish an insurance policy for at least $75,000. However, for your sake, you should want that to be at least $100,000, because in the event of a total loss, this will provide some cushion so that you can clean up the debris and leave a clean lot without losing any money.

Generally, I’d suggest to try and add at least $25,000 above the loan amount to the Coverage A amount.

Coverage B is for any other structures on the property.

It is commonplace for this to be included. It will usually be 10% of the Coverage A amount.

So, in the above example, if your policy has Coverage A of $100,000 then Coverage B would be included at $10,000. Of course, you can increase this if you have a large and fancy garage on the premises. However, real estate investors beware, if you’re working with a company that specializes in landlord insurance, it is likely that Coverage B is not automatically included. If this is important to you, please be sure to check your policy for this or discuss the importance with your local and independent insurance agent.

Coverage C is for your personal property.

This is exactly what it sounds like, property that belongs to you.

In a landlord insurance policy, keep in mind that this is only property that belongs to you, the landlord (this does not in any form, shape, or fashion, cover the belongings of your tenant). Your tenant needs to purchase and maintain their own insurance policy, this is commonly called a renters insurance policy. For landlord insurance, this coverage commonly covers appliances or any furniture provided by you.

Coverage D is the loss of rents.

In a homeowners policy, this is called “loss of use.” It is the same in function. In the event that a covered loss occurs, Coverage D will step in and either pay for additional living expenses or the loss of rents for the minimum amount of time while the property is renovated or repaired.

For example: If your rental property is rented for $700 per month and there is a small kitchen fire and it takes 2 months to repair, this section of the policy would pay out $1,400 (or fair market value equivalent). Naturally, you need to adjust for your deductible, but most likely that will be exhausted in the kitchen fire claim (Not sure about what deductible to carry? Check out this post).

Keep in mind that most lease agreements may require that you pay for lodging of the displaced tenant as well. However, if your tenant has a renters policy, their policy would cover this under the same Coverage D, loss of use. If you haven’t caught on, not just requiring, but also enforcing that your tenants carry renters insurance is super important! (Saying this for myself too, I am not 100% certain that all of my residents have a renters insurance policy, and I’m not proud of it! Read more on that here)

Coverage E is for personal liability.

This is the general liability section and is broken up into both “per occurrence” and “per year” or aggregate totals. General liability coverages protect against liability claims for personal injury, bodily injury, or other mishaps that may happen on or around the property. If someone got hurt on your property, and wanted to sue you, it would come out of this portion of the policy.

Personal liability limits generally look like this: $1,000,000/2,000,000. The first and lower number is the limit of coverage per occurrence. This means that if you have one incident where a tenant slipped and fell, you would be covered up to $1,000,000. If the tenant has a serious claim that exceeds $1,000,000 anything above that will be your responsibility to cover. The $2,000,000 limit is for the entire year. So, you can have one more slip and fall incident, however, because of your per occurrence limit, it cannot exceed $1,000,000. Unfortunately for the insured, this isn’t a math problem. If the first slip and fall settled for $500,000...you wouldn’t have a remaining balance of $1,500,000; the per occurrence limit of $1,000,000 is still applicable and cannot be exceeded.

Coverage F is for medical payments.

In a landlord insurance policy, medical payments is very similar to the coverage on auto policies. This coverage is for the immediate medical expenses for those hurt on the premises of your rental property. Some insurance agents (not me) jokingly refer to this as the “I’m sorry, don’t sue me” money! This coverage is primarily used to ward off potential lawsuits by paying the medical bills up front so they do not blossom into giant liability claims.

How to get Landlord Insurance

If you’re looking to get a landlord insurance quote, the best place to start is with an independent insurance agent (yes, I am biased since I am one!). I always recommend choosing to work with an independent insurance agent because they have the latitude of working with several different insurance companies to get you the best coverage and then the best rate.

Not to mention, if something goes wrong with the insurance company, with an independent agent you can switch insurance companies without losing the relationship with the insurance agent. Super important.

This wraps up the nomenclature of your landlord insurance policy. Still have questions? I’d be happy to help! Hit me up here on BP, or leave questions/comments below!