If you are looking into investing in rental properties for the first time, you probably have a lot of questions. Frankly, there are too many topics to explore in one article, but some of the common questions for first-time landlords revolve around insurance. For example, how is it different from homeowners insurance, and how much does landlord insurance cost?
This guide should provide you with the answers you need to fully understand landlord insurance.
What Is Landlord Insurance?
Put plainly, landlord insurance provides coverage for property owners that rent out their property for others to use. If the property is residential in nature, the types of coverage may look very similar to homeowners insurance, such as fire, wind, or hail damage. However, some of the cheaper landlord insurance options allow fewer reasons to make a claim and don’t always pay the full replacement cost.
How Much Does This Insurance Cost?
Landlord insurance costs about 15-25% more than a similar homeowners insurance policy. This is because homeowners are more inclined to take better care of a property. Although most tenants are responsible and take care of the property, they do not have the same financial investment in the place, so accidents and minor damage can occur more frequently.
Keep in mind that landlord insurance prices can have higher variability. While most homeowners’ policies will be within a tighter range due to competition and other factors, this insurance premiums can fluctuate greatly. Some providers might attach higher risk to certain locations or structures, so you want to shop around for the best price with the coverage level you want.
How is Landlord Insurance Different From Homeowners Insurance?
Aside from the cost, landlord insurance differs from homeowners insurance in a couple of other ways. First, homeowners insurance is only available to someone using the house as their primary residence. Because of this, another difference is that homeowners insurance typically covers your personal belongings whereas landlord insurance only covers property used to maintain the property. On the other hand, this insurance will often include coverage for lost rental income while your property is being restored. This is not a feature of homeowners insurance.
What Are the Types of Landlord Insurance?
Landlord insurance is commonly broken down into three categories of “Dwelling Policy.” Shorthand, these are known as DP-1, DP-2, and DP-3.
DP-1 is the cheapest because it covers the least. This policy includes 10 specific reasons to file a claim. If your claim is not caused by one of those 10 reasons, it will be rejected. These include fire and lightning, internal or external explosions, and vehicles among others.
DP-2 adds a few key features not included in DP-1 policies. First, it reimburses claims based on replacement cost value (RCV) instead of actual cash value (ACV), which is the depreciated value of whatever is being repaired or replaced. In addition to paying a higher amount for damages, DP-2 also has a longer list of possible claims, including falling objects, freezing pipes, and electrical damage.
Dwelling Policy 3 (DP-3) offers comprehensive coverage. For this reason, it is the most common policy chosen by landlords. DP-3 is considered an “all-risk” policy, so it gives landlords the most protection. DP-3 policies also cover loss of income, which enables the landlord to receive reimbursement for lost rent if the tenants must move during repairs. Some DP-2 policies have this, but not all of them.
Is Landlord Insurance the Same as Renters Insurance?
No, these are two different policy types that insure completely different elements of a rental property. This type of insurance is for the property owner and covers what they own as well as any liability associated with it. Renters insurance is the responsibility of the renter because it covers all of their personal property on the premises. Landlords can encourage renters to have a renters insurance policy, but it is not the landlord’s responsibility.
Do I Need Landlord Insurance?
You should always double-check the local laws and regulations concerning your property. However, landlord insurance is typically not a legal requirement to own a rental property. If you want to risk owning a rental property without the proper insurance, you can do that, but you need to know the potential repercussions are severe.
Without landlord insurance, you are liable for any costs associated with your property. These can range from major damage and repairs all the way up to expensive medical bills if a tenant or their guest suffers serious injury on the property.
Landlord insurance has a lot of nuances that can seem more complicated than basic homeowners insurance. While they have many of the same features, key differences include the price and the policy types. Shop around to find the proper amount of coverage at the best price for your specific property.
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