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Landlord Insurance: Is It Worth It?

Benjamin Locke

Author

SUMMARY

Landlord insurance is essential for property owners renting out homes or commercial spaces, offering protection against risks like property damage and tenant-related liability claims. Unlike homeowner’s insurance, it addresses challenges unique to landlords, such as covering tenant-caused damages and compensating for lost rental income when a property becomes uninhabitable. With customizable options like rent guarantee and legal expense coverage, landlord insurance safeguards your investment, mitigating financial impacts of unforeseen events so you can focus on maintaining a successful rental business.
Two people reviewing paperwork and insurance costs

 

Imagine this: You’re finally done renovating that one-of-a-kind duplex you’ve rented out, feeling confident it’s ready to welcome new tenants. But just as you’re about to hand over the keys, disaster strikes—a burst pipe floods the entire first floor. Instead of panicking, imagine the relief of knowing that your landlord insurance has you covered, not only for the damage but also for the potential loss of rental income while repairs are made. In the world of real estate, unexpected events are bound to happen, but with the right landlord insurance policy, you can protect your investment and ensure smooth operations no matter what comes your way.

 

What is landlord insurance?

Landlord insurance is a specialized type of property insurance specifically designed for individuals who rent out homes, apartments, or other properties. Unlike standard homeowner’s insurance, which is geared toward owner-occupied homes, landlord insurance provides comprehensive protection tailored to the unique risks associated with renting a property to tenants.

Furthermore, landlord insurance often provides loss of rental income coverage, ensuring that if the rental property becomes uninhabitable due to a covered event, the landlord is compensated for lost income during the repair period. This can act as a lifeline for landlords relying on rental payments for income.

What does landlord insurance cover?

Landlord insurance provides a range of protections tailored to the specific needs of rental property owners and landlords. It covers various risks, including property damage, liability claims, and loss of rental income, all of which are important for landlords seeking to safeguard their investments.

Let’s break down the key areas of coverage and what each offers.

Protection against property damage

When selecting a landlord insurance policy, the coverage you receive for property damage varies significantly between low-cost and high-cost plans. For instance, with fire and smoke damage, a low-cost policy typically provides up to $100,000 in coverage, which might be sufficient for minor repairs or partial reconstruction. On the other hand, a high-cost policy offers up to $500,000, giving more comprehensive protection for extensive damage or even full rebuilding.

Similarly, vandalism coverage under a low-cost policy might cap at $50,000, enough for moderate repairs. In contrast, a high-cost policy could cover up to $250,000, making it a better option for landlords in urban or high-risk areas where vandalism is more common.

When it comes to weather-related damage, such as storms or hail, a low-cost policy usually covers up to $150,000, while a high-cost policy extends to $600,000, providing crucial protection for properties located in areas prone to severe weather events like hurricanes or floods.

Coverage Type Property Damage (Low-Cost Policy) Property Damage (High-Cost Policy)
Fire and smoke damage $100,000 $500,000
Vandalism $50,000 $250,000
Weather-related damage $150,000 $600,000

“Being a landlord is not only about keeping the property but about when inevitable things happen. Today, there are many landlords, but most of them do not consider the aspect of having landlord insurance. Often, it is an un-sung hero of rental property ownership, there to bring peace of mind when things go wrong.”

Alex Johnson CEO of Man and Van Star

Coverage for liability claims

Landlords face potential liability if a tenant or guest is injured or suffers medical complications on their rental property. Whether it’s a slip and fall, damage caused by faulty infrastructure, or any other accident, the resulting medical bills and legal costs can be substantial and add up over time. Landlord insurance steps in to cover these expenses, protecting property owners from devastating financial loss. Liability coverage generally includes medical expenses for injured parties and legal defense costs should the landlord be sued. The level of coverage can vary between basic and premium plans.

Liability Coverage Type Coverage Amount (Basic Plan) Coverage Amount (Premium Plan)
Medical expenses $100,000 $1,000,000
Legal defense costs $50,000 $500,000

 

Safeguarding against loss of rental income

One of the key protections offered by landlord insurance is coverage for loss of rental income, which is particularly important if the landlord relies on cash flow above all else. If the rental property becomes uninhabitable due to a covered event, such as fire, flood, or tenant-caused damage, landlords may face months of lost rental income while repairs are being made. Landlord insurance helps mitigate this financial risk by compensating for lost rent during the downtime, ensuring that landlords maintain cash flow even when their property is unoccupied. The level of income replacement varies depending on whether you have a standard or extended policy, with extended plans offering longer periods of compensation.

 

Event Causing Loss of Income Income Replacement (Standard) Income Replacement (Extended)
Fire 6 months’ income 12 months’ income
Flood 3 months’ income 9 months’ income
Tenant-caused damage 2 months’ income 6 months’ income

 

How much does landlord insurance cost?

The annual cost of landlord insurance also varies based on the type of property being insured. For a single-family home, basic coverage might cost around $900 per year, while comprehensive coverage could reach up to $2,000 annually. For landlords with multi-family buildings, basic coverage averages $1,500 annually, and comprehensive coverage can go as high as $3,500. Short-term rental properties, such as those listed on Airbnb, typically fall between $1,200 for basic coverage and $2,800 for comprehensive coverage. Below are some popular companies that provide landlord insurance.

Company Coverage Price Range Best For
State Farm Property damage, loss of income, liability, equipment breakdown $1,500 – $3,000 annually Full-time landlords
Liberty Mutual Replacement cost, liability, inflation protection add-ons $1,800 – $3,500 annually Best for claims process
USAA Property damage, liability, rental income $900 – $1,800 annually (military only) Military families
Farmers Multi-unit coverage, rental income, building codes $1,200 – $3,500 annually Best for multi-unit properties

The cost of landlord insurance can vary depending on several factors, including the type of rental property, the extent of coverage, and specific endorsements added to the policy. Landlords really need to consider these factors when selecting a policy to ensure they are adequately covered without overpaying. For instance, additional coverage for flooding or earthquake protection can significantly raise the cost as well as the location of the property. Properties in high-risk areas may require higher premiums to cover potential disasters.

We spoke to the SVP of Operations at SmartFinancial, an insurance-comparison website, and his thoughts:

“Buying landlord insurance makes sense if you’re renting out any type of property you own. A standard homeowners insurance will not cover you for any damages if the insurance company finds out it’s not your primary residence. Homeowners insurance also would not cover liability expenses. If a tenant sues you for an injury or other type of loss, landlord insurance will cover your legal expenses and the cost to settle the dispute.” – Michael Orefice

Landlord insurance has different costs for different coverages

Landlord insurance premiums fluctuate based on the level of coverage a landlord opts for, and like most insurance, it’s a “get what you pay for” scale that ranges from basic to comprehensive. A basic coverage policy typically includes standard protections, such as property damage and liability coverage, while comprehensive plans offer a wider range of protections, including higher coverage limits and additional safeguards for less common risks. For instance, properties located in areas prone to natural disasters like floods or earthquakes may require additional endorsements, raising the premium.

 

Typical exclusions in landlord insurance policies and what to watch for

While landlord insurance provides a broad range of protections, it’s important to understand that not all situations are covered. There are several common exclusions that landlords should be aware of to avoid unexpected expenses:

  • Maintenance-related issues: Regular maintenance of the property, such as fixing leaks, replacing aging appliances, or repairing structural wear and tear, is not covered by landlord insurance. These are considered the responsibility of the property owner and must be handled as part of routine upkeep.
  • Tenant belongings: Landlord insurance does not cover the personal property of tenants. If a tenant’s belongings are damaged due to a fire, flood, or other covered events, they would need renter’s insurance to cover their losses. Landlords should encourage tenants to obtain renter’s insurance for their own protection.
  • Intentional damage caused by tenants: Any damage to the property that is intentionally caused by the tenant is typically excluded from coverage. This might include scenarios such as a tenant vandalizing the property or willfully neglecting it, leading to extensive damage. Landlords may need to pursue legal action or retain part of the security deposit to cover these costs.

Is landlord insurance worth it?

In most cases, yes, landlord insurance is worth it. Landlord insurance provides essential coverage for property owners, but is it really worth the investment? To fully grasp the intricacies of landlord insurance, let’s explore two scenarios: one with insurance and one without. Both scenarios will consider common events that landlords may face, including property damage, liability claims, and lost rental income.

Cost scenarios: with and without landlord insurance

Let’s assume a fire causes $200,000 in damage to a multi-family rental property. One of the tenants also suffers minor injuries, leading to a $50,000 liability claim. On top of that, the repairs make the property uninhabitable for six months, resulting in $12,000 of lost rental income.

Scenario 1: Model with Landlord Insurance

Without insurance, these events would result in total expenses of $262,000. However, with landlord insurance, most of these costs are covered. Let’s break it down:

Repairs and liabilities: The insurance policy covers the cost of repairs and liability claims.
Loss of rental income: The insurance also compensates for the 6 months of lost income during repairs.
With an insurance policy in place, the landlord only needs to pay the annual premium and a deductible. For this scenario, we’ll assume:

Annual premium: $1,500
Deductible: $5,000

As you can see above, the total cost with insurance is significantly lower at $6,500.

Scenario 2: Model without Landlord Insurance

In contrast, without landlord insurance, the landlord must cover all expenses out of pocket:

Fire and smoke damage repairs: $200,000
Liability claim for tenant injury: $50,000
Loss of rental income (6 months): $12,000
In this scenario, the landlord is responsible for the total cost of $262,000, including repairs, legal fees, and lost income. Without insurance, the financial burden is much heavier, and these costs could severely impact the landlord’s finances.

Bottom Line: Landlord insurance is worth it if much of your cash flow is derived from real estate

Landlord insurance is a smart investment if a large portion of your income comes from renting out properties. It protects you from unexpected expenses like property damage, liability claims, or loss of rental income due to covered events. Without it, a major incident could leave you paying out of pocket, which can hurt your cash flow. For landlords who rely on rental properties for steady income, having this coverage offers peace of mind and financial protection.

Interested in learning more about how to maximize your rental income and cash flow so you can easily afford landlord insurance? Get a free consultation with us on how you can conduct a cost segregation study by clicking here.

FAQ

What are the differences between landlord insurance and homeowner’s insurance?

Homeowner’s insurance covers properties that the owner lives in, providing protection for personal belongings and liability related to the home. Landlord insurance is designed for rental properties and covers the building, liability related to tenants and loss of rental income. It does not cover the landlord’s or tenant’s personal belongings.

How do I file a claim for landlord insurance?

Filing a landlord insurance claim involves several steps. First, as soon as you discover damage or an incident like a fire, theft, or natural disaster, get in touch with your insurance company right away. They’ll usually have a hotline or a dedicated claims number for this. Next, make sure you document the damage thoroughly. This means taking clear photos or videos and even keeping receipts or proof of the value of items that may have been damaged. After that, your insurer will provide you with the necessary claim forms, which you’ll need to fill out carefully. Once submitted, an insurance adjuster will come out to inspect the damage, and they will evaluate the cost to repair or replace what was affected. You’ll need to stay in contact with your insurance company throughout this process until they finalize the claim and reimburse you for the covered damages.

Are there ways to lower the cost of landlord insurance?

Yes, there are a few ways you can potentially reduce the cost of your landlord insurance. One common method is bundling multiple insurance policies, like combining your home and landlord insurance under the same provider, which can often get you a discount. Another strategy is installing security systems, such as burglar alarms, cameras, and smoke detectors, which can make your property safer and reduce your insurance premium. You can also save money by choosing a higher deductible, which is the amount you pay out-of-pocket before insurance kicks in; just keep in mind this means you’ll pay more upfront if something happens.

Does landlord insurance cover legal fees for eviction processes?

No, landlord insurance generally does not cover legal fees associated with eviction processes. It’s designed to protect you from other types of risks, like liability claims for injuries that happen on the property or damage caused by natural disasters. Eviction-related legal costs, such as attorney fees or court costs, are not typically part of standard landlord insurance coverage. However, you can sometimes purchase additional policies or legal protection coverage that specifically handles legal expenses related to evictions. If you’re frequently dealing with tenant disputes or evictions, it might be worth exploring these extra coverage options.

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