Queen City Risk Management

(716) 970-4200 • jason@queencityrm.com

Who Needs Landlord Insurance?

If you own property and rent that property to others, chances are, you need a Landlord Insurance policy. For some readers the answer to this is easy. If you run a rental business you’re already well aware of your need for Landlord Insurance. But for other property owners, the lines are a bit more blurred especially if you became a landlord “unintentionally,” or if you own a second home, which you occasionally rent out to offset the times you’re away. While Landlord Insurance is not required by law, it would be in your best interest to fully protect your own investment.

We meet landlords who typically fall into four main landlord profiles: the Accidental Landlord, the Primary Residence Landlord, the Vacation/Second Home Landlord, and of course the Professional Landlord. Unless you live with your tenants, or only take renters a few weeks in a year, you are probably in need of Landlord Insurance. Insurers can and will deny a claim if you fail to label your property under a Landlord Policy, even if in some cases, you didn’t realize the difference between a homeowners policy and a landlord’s policy.

Which Type of Landlord Are You?

Accidental Landlord:

We like to call some landlords “accidental landlords.” These are property owners who bought a new home and couldn’t sell their current property so decided to rent out their old home. Typically these property owners had to relocate, or move from a smaller space (like a condo,) to a bigger house and suddenly finding themselves requiring a separate policy to adequately cover their previous home.

Vacation/Second Home Landlord:

Some landlords are property owners who take on a vacation home or a second home with the purpose of earning rental income.

Primary Residence Landlord:

If you rent out a room within your primary residence for a short-term period (companies vary, but generally under 6 months), or convert your garage or in-law space into a rental unit, some insurance companies will provide coverage under your homeowners policy. In other cases, companies may require an endorsement (aka rider) to accommodate the tenant rental. In both cases, you’ll need to notify your insurer of the tenant arrangement.

However, if you rent out your home for short periods, on a regular basis to different renters at a time, many companies will consider this as a business, which would require a Business Owner’s Policy since it functions much like a hotel or guest home/bed-and-breakfast. Your homeowner’s policy will not properly cover your primary residence in this rental situation.

Professional Landlord:

Professional landlords are property owners who typically own multiple properties for the sole purpose of making rental income.

If you find yourself to be an Accidental Landlord, Vacation/Second Home Landlord, or Professional Landlord, you will definitely need Landlord’s Insurance or a type of Dweller’s Policy to give you proper coverage.

What’s the difference between a Homeowner’s Policy and a Landlord’s Policy?

While a Homeowners Policy and a Landlord’s Policy have similar coverage packages, a Landlord’s Policy will typically cost up to 25% more than a standard Homeowners Insurance policy due to a landlord’s increased risk and liability.

Landlord policies also do not include coverage for personal property such as electronics and jewelry because those items are the tenants’ personal property. If you are renting out a furnished home or apartment, you will need a separate policy for your personal property. Your tenants on the other hand would be responsible for purchasing Renters Insurance.

Lastly, a Landlord’s Insurance policy is considered a business expense, and therefore tax deductible.

What Should I Know About Landlord Insurance?

Evaluating the right Landlord Insurance for your rental property, is similar to looking for the right Homeowners Insurance Policy. You’ll need to consider these 4 main things:

  1. The level or type of protection you’ll need for property damages. This is known as Dwelling Protection.

  2. The type of payout terms: Actual Cash Value or Replacement Cost.

  3. The additional coverage or endorsements (aka riders) your rental property will need.

  4. The level of liability coverage.

An agent who is invested in your best interest will walk you through the nuances of all the different options and will help you find a policy that fits your needs along with your budget.

What Does Landlord Insurance Cover?

Different insurance companies will have different ways to package their policies, however, Landlord Insurance will typically include these main coverages:

  1. Property Insurance – covers damages made to the physical structure of the property that’s caused by a covered peril, typically by fire, lightning, wind, storms, or snow; and items associated with the property such as appliances, light fixtures, tools used to maintain the property, and the carpet.

  2. Liability Insurance – covers legal and medical fees related to bodily injury claims, funeral costs, settlement costs, and other liability claims that occurred on your property. If a tenant’s friend slips on wet pigeon droppings from pigeons nested at the top of the front entrance, you could be sued for negligence, and also be made to pay for any medical fees associated with the injury. Likewise, if a leaky pipe suddenly burst open form a wall and wets your tenant’s expensive Powerbook, you could be liable for the expense to replace the computer.

  3. Loss of Rents (aka Loss of Income) – covers any loss of income as a result of a covered peril that may have caused your tenants to evacuate your rental property.

In addition, you can also add specific endorsements or other coverages to your policy, including, but not limited to:

  • Building Ordinance - covers the cost of cleanup and demolition when your rental property is partially or fully destroyed. It also covers the cost to rebuild when more recent building codes require different building specifications, as well as the loss of value if the property can’t be rebuilt.

  • Natural disaster coverage - most insurance companies won’t cover certain natural disasters like floods, earthquakes, hurricanes, tornadoes, and certain water-related damage caused by storms. If your rental property is in a natural disaster zone, you may want to consider adding on these coverages.

  • Sewer and Backup Coverage - this is excluded in most policies and is the most common endorsement property owners add, especially in for homes with older sewer or plumbing systems.

  • Umbrella Coverage - covers your liability above and beyond the limits of your existing liability coverage.

Different Types of Property Damage Protection:

Again, different insurance companies will use different names to refer to their policies, but the coverages fall into three main categories that describe Dwelling Protection: DP-1, DP-2, and DP-3.  Dwelling Coverage (or simply “Dwelling”) refers to coverage on the physical structure of your rental property, whether it’s a house or a building.

DP-1 Policy

DP-1 is typically the least expensive and most basic landlord insurance policy available. It covers only those perils that are specifically named in the policy (“named perils policy”). Some of those typical perils include:

  • Fire & Lightning

  • Internal Explosion & External Explosion

  • Windstorm & Hail

  • Volcanic Explosion

  • Vandalism & Malicious Mischief

While these examples are included in most DP-1 policies, keep in mind that other companies may only offer these as endorsements (or riders) to your policy, so be aware of this and be sure to clarify this with your agent.  

Another major distinction in a DP-1 coverage that most policies offer has to do with the limit amount, or the type of payout included in the coverage. DP-1 is an Actual Cash Value policy (versus a Replacement Cost policy), which means that you will only be covered up to the market value (accounting for depreciation) of the piece of structure damaged.

For example, if a fire burns down your kitchen floor, which cost $5,000 20 years ago, you would only be covered $2,500 today because that particular flooring material depreciated in value. With a Replacement Cost policy (typically in DP-2 and DP-3 policies), you would be able to claim the full cost of replacing your floor using the same or like-quality materials.

DP-2 Policy

DP-2 is also a named perils policy, however its list of covered perils are broader than a basic DP-1 policy. Again, the policy will only cover damages that include specifically named perils. Those perils include:

  • Accidental Discharge or Overflow of Water or Steam Collapse

  • Aircraft & Vehicles

  • Burglary Damage

  • Civil Commotion

  • Electrical Damage

  • Fire

  • Freezing of Pipes

  • Glass Breakage

  • Internal & External Explosion

  • Lightning

  • Smoke

  • Volcanic Eruption

  • Vandalism & Malicious Mischief

  • Weight of Ice & Snow

  • Tearing Apart, Cracking, Burning, Bulging

  • Windstorm & Hail

But unlike a DP-1 policy, DP-2 policies are a Replacement Cost policy, which allows you to claim the full cost of replacing the damaged structure in your rental unit.

DP-1 and DP-2 policies may be an adequate option if you’re renting out a single unit condo that you initially bought to live in yourself, but decided to turn into a rental unit.

DP-3 Policy

The DP-3 policy is an Open Peril Policy (aka Special Form Policy) that includes any and every type of peril, unless otherwise specifically excluded. In other words, if the policy doesn’t name it, it’s covered. Like a DP-2 policy, it is also a Replacement Cost policy, which allows you to recover the full cost to replace the damaged structure.

Most companies include Loss of Rents (aka Loss of Income) in their DP-3 policy. It covers any rental income lost as a result of damages to the rental property. If a rental property becomes unlivable and tenants have to move out as a result of a covered peril, you may recover the loss of rental income up to a certain number of months (depending on the limits of the policy) under this type of coverage.

Most landlords choose DP-3 Policy because it provides the most comprehensive property coverage. It is best suited for non-owner occupied homes, or rental properties.  

Actual Cash Value vs Replacement Cost

ACV and Replacement Cost is the type of payout you receive for your covered losses.

When a policy is written on a replacement cost basis the insurance company is valuing your property based on how much it would cost to build a new one if the property were to be a total loss. As such, Replacement Cost policies have higher premiums.

They are beneficial for situations where a partial loss occurs. An example would be if there was a kitchen fire. The whole house didn’t burn down but you will need to replace the entire kitchen. A replacement cost policy would pay for the entire replacement cost of the kitchen. 

Normally, you are required to insure 80% of the total replacement cost of your home to be fully covered. With home market values plummeting in recent years, it’s not uncommon to see replacement costs higher than the value of the property. One of the cons with a replacement cost policy is when the property value is far below what it would cost to rebuild it. Let’s say for example, you purchased your property for $60k, but would cost $200k to rebuild in the event of a total loss. You would probably not rebuild the house anyway, and settle for recouping your investment and moving on. This is where a policy written on an Actual Cash Value basis would work best.

Actual Cash Value is generally calculated as replacement cost minus depreciation. So if you only paid $60k for a house you may only want to pay for $80k worth of insurance not $200k and save a great deal of cash while still securing adequate coverage. The downside to an actual cash value policy here is when that kitchen fire claim comes in and the insurance company only pays for the cost to replace minus the value of depreciation on how old the kitchen is and what shape it was in before the damage. On the offhand, if you’re handy and great with DIY projects, and plan to fix the kitchen yourself, you may still have enough money to do so.

When we write a landlord policy for one of our clients we do an evaluation to see what the best route will be for coverage. Evaluating the different coverage options are a great way to make sure you are not overpaying for coverage you don’t really need.

Speak to Agents Who Specialize in Landlord Insurance

When you speak with us, you’ll gain confidence in our expertise. We understand local and state regulations regarding the rental business, as well as the nuances between different company policies, and we make sure your rental business and rental properties are covered exactly as you need. We always strive for your best. Contact us for your consultation today.