If you own a residential unit, which is your investment property acquired for the purpose of generating income by renting to your tenants, you need a landlord insurance. Insurance agents call it DP3 or Dwelling protection form 3. It is also known as a Dwelling Fire insurance policy.
Landlord insurance policies are written on one of the following forms:
- Basic. Coverage provided only due to certain causes of loss. Losses outside of that list are not covered.
- Broad. Just like basic, it covers against specified perils (cause of loss). This list is slightly larger by a few additional causes of loss.
- Special. That’s the one you want. It’s more expensive, of course, but it’s an open peril form, which means, that any causes of loss are covered except the ones specifically excluded.
When shopping online, generally, everyone compares insurance company’s rates based on 3 things: Dwelling coverage, liability and deductible. You choose the one that’s cheapest and think you did a great job. Maybe you did, but not one policy is the same. Some policies are written on a Basic form while others – on a Special, which is a big deal between these two. Also, there are many policies that are just very basic as far as add-on coverages that come with Landlord insurance policy and there could be lots of exclusions and limitations, so, working with insurance agent that understands that type of coverage may help you avoid future claims that may not get paid.
The main purpose of this policy is to protect the physical structure of the dwelling and liability protection for the landlord..
Typically, Landlord insurance policies offer the following coverages:
- Coverage A (Dwelling). This is one of the most important coverages. This coverage insures the structure of the property up to the limits you purchased. Often landlords do not buy enough and underestimate how much it cost to rebuild the building. It is your responsibility, not bank’s or agent’s, to insure your building up to the replacement value. Another misconception is that landlords and even some agents think that Coverage A amount should equal the mortgage amount or a market value. Mortgage amount, market value and replacement cost of the property are 3 different things. For the purposes of insurance you need to determine the replacement cost of your property, which is the amount of money needed to rebuild your property after the fire. The replacement value should include the cost of removing debris, cost of labor and materials. Insurance company is not going to pay off your loan in case of fire, neither they will give you a check for amount of insurance you purchased, nor a check for what your home is worth. They will pay to a contractor to rebuild the property up to the limit of liability; however, if you failed to insure the property up to its replacement value, insurance company may pay a proportionate amount. For instance, if you insured your property for $200,000 but it costs $400,000 to rebuild it, you insured only 50% of your property. In this case insurance company may end up paying you only 50% ($200,000 *50%=$100,000) of your coverage (penalizing you for being under-insured).
- Coverage B (Other structures). This is not automatically included in DP3 policies. If you have other structures on your property that are not part of the main building you need to add this coverage up to the amount sufficient to cover those structures. Example of other structures are: a fence, detached garage, shed, etc.
- Coverage C (Personal Property). This coverage is not automatically included. Landlords rarely have their personal belongings on the premises that are rented out to others; however, if you do have some belongings, such as appliances or other things, you need to add them to your policy.
- Coverage D (Loss of use or Fair rental value, or Loss of rent). This is important coverage to pay attention to. If your property is uninhabitable due to a covered loss, such as fire, and you can not put a tenant in your property that will provide you with the income – does not mean that your mortgage company will stop billing you every month. While property is being rebuilt or repaired and your tenants are forced to live somewhere else, you depend on the money you’d generate if your property was habitable. This coverage will pay for additional expenses that your tenants may generate (loss of use) or loss of rental income (fair rental value or loss of income). Time to rebuild your property may depend on many factors; therefore, having enough coverage to last for 1-2+ years is advisable.
- Coverage E (Personal liability). This coverage is one of the most important coverage for landlords. Since you own the property, you are responsible for it and for keeping your tenants safe and secure. As a landlord, you could be facing a liability lawsuits for variety of things; therefore, purchasing sufficient liability limit is very important (and adding Umbrella policy is advisable as well). Since many rental properties are owned by individuals or families under their own names or their trusts, your personal assets are at a huge risk. Imagine a liability lawsuit for $3 million dollars when you only have $100,000 liability limit. $2,900,000 may spill over to you personally. This coverage is one of the most inexpensive coverages, but one of the most important coverages out there. Make sure you purchase sufficient amount of Personal Liability coverage.
- Coverage F (Medical Payments). This coverage will pay for medical expenses regardless of fault.
- Additional endorsements. Important to go over them and understand them. Endorsements that you may need are: Extended Replacement coverage, Building Ordinance or Law, Personal Injury, Wrongful Eviction, Privacy Invasion, Water Back up and Sewer/sump Overflow, Loss Assessments, and other endorsements…
If you are a landlord, make sure you work with the agent that will help you get correct policy type, proper form, necessary coverages, sufficient amount of coverage, needed endorsements, that will add necessary protection in case of loss; and make sure you understand all the exclusions and limitations that come with your insurance policy.
Contact one of our knowledgeable agents for your rental properties.