Landlord Insurance vs. Homeowners Insurance Costs
by Fraser Sherman
Landlord insurance doesn’t cover the renter’s possessions.
If your home catches fire or your dog bites the neighbor’s kid, homeowners insurance often protects you. If you own a rental property, though, you need even more protection: You can end up liable for your tenant’s injuries, or if your tenant injures someone else. Your renter may trash the house, as he doesn’t own it. That’s why landlord insurance typically costs 15 to 20 percent more than a homeowner policy would.
An HO-3 homeowner policy covers your house and its contents against all “perils” not specifically exempted. Flood damage, for example, is never covered. The policy also provides coverage to pay medical bills if someone outside your family is injured on your property. If the injury becomes a court case, the policy pays court costs and damages as well. Of course, the payouts are limited by the amount of coverage you bought. Above the maximum, you’re on your own.
Landlord insurance often doesn’t cover as many perils as a homeowners policy, but it covers the major ones, such as fire, ice and wind damage. Like homeowners insurance, a landlord policy usually covers the house, other buildings on the property and the owner’s possessions (never the renter’s). The policies also provide liability coverage. They may include payments to cover lost rental income if the house becomes too damaged to live in until you have it repaired.
If you run a home business, your homeowner policy gives minimal or no protection to your business assets. People visiting you on business aren’t covered by your liability. If you rent out part of your house, you have an increased liability your regular policy also may not cover. You can pay more to add coverage to your homeowner policy or take out an umbrella policy, which offers you extra liability coverage. No policy will protect you, however, if you deliberately injure or assault someone else.
Added Landlord Insurance
Unlike homeowner policies, landlord insurance is designed to cover you in a business situation. Even so, increasing landlord insurance liability coverage is a good idea if you have lots of assets. The Bankrate website says $1 million in liability for a rental is a safe level. That much insurance only costs, on average, $200 to $300 more a year than $500,000 in coverage. If you have multiple rentals, an umbrella policy offers you extra protection. This costs an average of $250 to $300 a year, but, as with homeowner umbrella policies, it offers much greater coverage than regular insurance.
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About the Author
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he’s researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in “Newsweek,” “Air & Space,” “Backpacker” and “Boys’ Life.” Sherman is also the author of three film reference books, with a fourth currently under way.
Insurance 101: Home Insurance vs. Landlord Insurance
Here’s Chapter One of our new series on rental property insurance. Here we’ll introduce you to the basics of landlord insurance. Check back soon for a follow up where we’ll dig deeper into this subject.
If you are in the process of purchasing or considering purchasing an investment property the question of insurance may have come up.
The most frequently asked insurance question we get from investors is “What is the different between insurance for my investment property and insurance that I have on my primary residence?”
Homeowner’s insurance policies are specifically designed for the owner-occupied resident. This sort of policy protects the home, the owner’s personal contents, and most importantly his/her liability.
The landlord policy (commonly referred to as a dwelling policy) is very different. This policy is specifically designed to protect your investment as a landlord. Let’s look at the different categories of insurance to see what type of coverage is available for a landlord vs. a homeowner policy.
Coverage A – Dwelling
Both policies have coverage for the main structure in the event of a loss. Depending on the type of insurance policy you purchase will determine what perils (wind and hail, water damage, vandalism, etc.) the home is covered against. Be sure and ask your agent about replacement cost vs. actual cash value. This can make the difference between a small inconvenience and a big financial mess.
This portion also covers major appliances in the case of a natural disaster (i.e. tornado, fire, etc.). However, it does not cover these appliances in the case of normal wear. If this is something you are concerned with, you may want to consider purchasing an additional warranty for your appliances.
Coverage B – Separate Structures
This type of coverage refers to sheds, fences, and other detached structures. Coverage for separate structure is typically automatic with a Homeowner’s policy (owner-occupied policies). Often times the separate structures coverage must be added on as an endorsement to the landlord policy if desired. Be sure and speak to your agent about whether or not you need this coverage.
Coverage C – Personal Property
This is generally not included on a landlord policy unless specially requested. Most investors do not furnish their rentals so there is usually no need for this type of coverage.
Coverage D – Loss of Use Vs. Fair Rental Value
With a homeowner’s insurance policy, the insurance company will pay for you to rent a home while yours is being rebuilt. But, what if you are a landlord? What about your tenants? If your investment property is uninhabitable, how will you generate an income from your renters? The solution is simple; make sure your insurance policy comes with Fair Rental Value. The insurance company will cover the lost rents resulting from a claim. It is important to give your agent the correct amount you are collecting for rent monthly so that you will be properly reimbursed.
Coverage E – Liability Insurance
This is by far the most important piece of coverage to a landlord policy. Landlords often require greater liability protection against claims brought against them. This type of coverage will protect you if someone files a lawsuit against you for negligence causing bodily injury or property damage. A landlord has a lot less control over their investment property than they do their primary residence. We always recommend selecting as much liability insurance as possible. Depending on your personal situation, you may want to consider an umbrella policy.
An umbrella policy is a blanket insurance policy that only covers the liability portion of the claim. Most landlord policies come with liability limits between $25,000 and $1 million. Let’s say that you are landlord and somebody dies on your property as a result of your negligence. In this scenario, they file a lawsuit against you and win in court. If you have a $1.5 million judgment against you and your liability limits are $1 million then you would be responsible for $500,000 in damages that will come out of your own pocket. You can get an umbrella policy for up to $5 million to cover all legal expenses in the event you are sued.
Coverage F – Medical Payments to Others
This coverage will protect you if someone is injured in your rental property. Let’s say there is a nail sticking out of the wall in your property and someone runs their arm across it cutting their arm and requiring 22 stitches. Your insurance can cover this sort of expense.
There are many different types of landlord policies, and each has a different level of comprehensiveness. The idea is to choose what is right for your particular situation. Keep in mind that policies may also differ if you have more than one investment property. HomeUnion®’s real estate investment portfolio properties often come with insurance included, however, depending on the market in which the property is located, your needs may exceed the insurance that is already in place.
Be sure to consult your insurance professional to determine what makes the most sense for you.
Homeowners vs. landlord insurance
Whether you invest in rental property full-time or just rent out your extra bedroom on occasion, you need more protection than a standard homeowners policy can provide. To shield yourself from potentially catastrophic losses, look into supplemental coverage for your homeowners policy or a separate landlord insurance policy. Here’s what you need to know about the differences between homeowners and landlord insurance.
Comparing homeowners insurance and landlord insurance
The table below highlights differences and similarities between homeowners insurance vs. landlord insurance:
In the home alongside tenant
In the insured home, on the premises or elsewhere
Main building and other structures on the property from losses due to:
Same as homeowners insurance
Most property is covered, including furniture, clothing and computers
Only covers items owned by you but used to service the rental property – such as maintenance equipment, furniture and appliances used by the tenant, snow blowers, etc.
You are protected when you’re responsible for damage, regardless of where the covered event occurred
Covers accidents on the rented premises for which you are legally responsible
Not insured. Experts recommend requiring tenants to carry renters’ insurance
Landlord insurance components
You can choose rental property insurance with the most basic protection, or you can insure against most kinds of losses. Ryan Scruggs at Farmers Insurance in Peoria, Illinois, explains that landlord insurance comprises three parts:
- Dwelling coverage for the structure in case of mold, sewer backups, wind/hail damage, fire, etc.
- Personal property coverage that reimburses you for damage to property left on the premises for maintenance or tenant use, such as appliances, furniture, garden equipment and snow blowers.
- Liability coverage for injuries occurring on the rental property for which you are responsible.
“In my opinion, liability is the most important coverage that can be offered on landlord policies,” says Scruggs. He also recommends that landlords consider expanded rent loss coverage. “If your tenant is unable to live in the home due to a fire, sewer backup, mold, etc., this coverage can reimburse you for lost income during the period the tenant is not making rental payments.”
Other landlord insurance additions worth evaluating include:
- Guaranteed replacement cost for your dwelling, allowing you to repair or rebuild even if the cost of building exceeds the original coverage amount.
- Water damage coverage for the building or anything inside the building from flooding, sewer backups and other natural disasters — typically not covered by a basic policy.
- An umbrella policy for landlords with multiple properties or high net worth. Umbrella policies can allow you to purchase millions of dollars in protection at a relatively low price. This coverage applies after your landlord policy benefits are exhausted.
- Renter default protection pays you for lost rental income if your tenant fails to pay rent, must be evicted due to a court order, undergoes a hardship or dies unexpectedly.
Make sure your insurer knows that you own rental property when you purchase an umbrella policy, warns real estate investor and consultant Spencer X. Smith. “I thought my personal umbrella would cover my rental properties,” he said, “And it doesn’t. Although nothing happened that forced me to learn this the hard way, it could have been a catastrophic loss.”
Common landlord insurance claims
Landlords have more to worry about than homeowners because tenants don’t always know how to prevent property damage, and they have less to lose than you do if your structures fail. Here are some common insurance claims you might face when renting out your house, their average cost, according to the Insurance Information Institute, and how to avoid them.
Average claim cost
Poor plumbing or failing pipes cause significant water leakage
Check and maintain pipes, especially in winter. Inform tenants where the emergency shutoff is and how to use it.
Applies to the contents of the unit, including carpets, appliances, counter tops, etc.
Require a sufficient damage deposit to avoid insurance claims and vetting tenants carefully.
Forces of nature, such as wind and hail
Make sure your roof is in good repair and that pipes and gutters are sturdy, properly secured, and unblocked. Reinforce doors and windows with plywood coverings outside the glass in advance of big storms.
Vandalism, criminal mischief
Thwart neighborhood hoodlums with reinforced windows, locks on gates and a visible, prominent security system. Carefully vet tenants and get a large security deposit.
Homeowners vs. landlord insurance when renting out a room in your home
Do you need special homeowners insurance for landlords if you just occasionally rent through Airbnb or other services? It depends.
First, check with the referral service to see what protection it offers landlords. Airbnb, for example, includes Host Protection Insurance in its basic fee. This insurance provides primary liability coverage for up to $1 million for third-party claims of bodily injury or property damage, and may also cover damages caused by guests. If you work through a service that does not provide insurance, or you manage your own rental, make sure you’re sufficiently protected before taking in tenants.
If you rent out all or part of your house for a short period of time–for instance, over a single holiday period or a major sporting event — you’ve got a few options for insurance protection.
- Your current insurer may allow you to take in a short-term boarder at no additional charge–ask.
- Your insurance company might sell you an endorsement (or rider) for your current policy.
- If you plan to take in short-term boarders regularly, you may need to insure for business activities. This is something done by a bed and breakfast or small hotel.
The most important thing is that you let your insurer know what you’re doing.If something happens and you did not notify your homeowners insurance company about your tenants, it’s unlikely that damage or liability would be covered.
Attorney Larry Buckfire cautions against taking chances with temporary tenants. “It is essential that you obtain additional coverage if you are renting out your property,” he says, “Even if only for short periods of time. The insurance company will deny a claim if your property is being used for ‘business purposes’ and your policy is a standard homeowner’s policy. This will result in you having no coverage for an injury that occurs on the property, or even property damage caused by a renter. You will be personally liable for all damages.”
Real estate investor Eric Bowlin warns that there may be other legal hazards if you don’t insure your premises properly. “It is imperative that you do not use a standard homeowner’s policy,” he stresses. “Some states have very specific coverage requirements that your homeowner’s policy won’t include. A great example is in Massachusetts where it is mandatory to carry $750 coverage for relocation expenses in the case of a fire. These very particular requirements would never be covered in a standard policy and you don’t want to run afoul of the law by accident.”
How much does landlord insurance cost?
In general, landlord insurance costs 10 to 25 percent more than comparable homeowners insurance, according to the Insurance Information Institute, (III). This reflects the additional risks incurred when you turn your home into a business. There are three categories of coverage: DP-1, DP-2 and DP-3.
- DP-1 is the bare minimum, providing fire, vandalism, wind, hail and other common perils.
- DP-2 is more comprehensive, adding specially hazards named to the policy.
- DP-3 is the Cadillac policy, covering replacement-cost coverage for any perils not specifically excluded.
Factors that influence your premiums include:
- Property location (likelihood of crime, natural disasters and other incidents)
- Duration of rental period (short-term renters are riskier than long-term lessees, so premiums are higher when you have more turnover)
- Home value (for replacement coverage)
- Rental income (for rent replacement coverage)
- Safety and security features
- Age of home and major systems
- Claims history
- Owner credit rating
It is not useful to cite “average” landlord insurance costs because of the number of variables involved. To get landlord insurance quotes, provide insurers with the items listed on this checklist, and make sure you’re comparing similar insurance policies.
Landlords Insurance vs. Homeowners Insurance
Landlords insurance is more comprehensive than the usual homeowners policy rider for rented properties.
- 1 Is Homeowners Insurance Higher for Rental Properties?
- 2 Estimate Landlord Insurance
- 3 Can I Rent Out My Home With an FHA Mortgage?
- 4 Can You Rent With a FHA Loan?
If you rent out a home for more than a few weeks each year, you need insurance that protects you in ways your standard homeowners policy does not. Although standard homeowners insurance and landlords insurance both cover damage to, or loss of, your structure, landlords insurance offers greater protection, and it keeps you from taking a hit from income lost while your property is being repaired.
Landlords Insurance Overview
The three categories of landlords insurance are DP-1, DP-2 and DP-3. DP-1 is the most basic, providing cash-value coverage for damage due to fire, vandalism, wind, hail and other common perils. DP-2 is more comprehensive but still covers only the perils specifically named in the policy. DP-3 policies offer replacement-cost coverage for all perils not specifically excluded. Coverage applies both to the property’s structure and your own personal property you keep there for tenant use. Landlords insurance doesn’t cover flood damage. The “Insurance Journal” notes that you’ll need to purchase separate flood insurance from the National Flood Insurance Program. It recommends that your tenants protect their personal property with their own flood insurance policies.
Although you usually can add liability coverage to your homeowners insurance for an extra fee, landlord insurance includes it, and it’s designed for the higher coverage limits landlords need in the event someone is injured on the property. Allstate, for example, expands the typical homeowner add-on for liability to include coverage for legal defense if you’re sued. Experts recommend that landlords have at least $1 million in liability insurance.
Homeowners insurance doesn’t cover you for lost income in the event a peril renders your property uninhabitable. Landlord’s insurance does. And, according to Bankrate.com, certain insurers offer “landlord protective policies” that cover the breakdown of boilers, furnaces and other equipment. Note, however, that landlords insurance only covers income lost because of a covered peril; it won’t compensate you for vacancies.
You’ll pay extra for the additional coverage that landlords insurance provides; the cost is 10 to 20 percent higher than homeowners insurance premiums. You could save money by purchasing your landlords insurance through the same company you use for auto and other insurance because insurance companies often discount bundled services. Another way to reduce your premiums is to require that your tenants have renters insurance that protects their personal property and provides liability coverage in case their guests are injured on your property.