Owning and managing a rental property can be a great source of income and an important revenue stream, but it also comes with a fair amount of risk. Properties face wear and tear with time, but also face all of the same risks that your own home does, including water damage, flooding, and fires.
If you own a rental property or you are preparing to invest in one, you need to know what kind of insurance will protect your investment and how house insurance claims work when a loss occurs to a rental property.
#1 Basic Elements of Landlord Insurance
There are four basic elements that insurance for your rental property should have to protect you and your investment.
Property coverage: This provides financial protection against damage to the structure of your building, such as water damage, a fire, or a tree falling on the roof. Not all types of damage are covered, and you may need additional insurance for issues like sewer backups or earthquakes.
Landlord contents: Your insurance policy covers your belongings alone, not anything owned by tenants. They need their own insurance for that, but if you tend to keep belongings (including appliances) on a property, this will be important coverage.
Liability: Liability coverage protects you if someone gets hurt on the property. For example, if a tenant slips on ice on the property, this coverage protects you financially.
Loss of rental income: Renting a property is a lot like owning a business, and losing income due to a fire or other damage can make it difficult to meet your mortgage and tax obligations. Coverage for loss of rental income provides protection when you cannot rent the space out due to damage.
#2 Frequently-Purchased Insurance Add-ons
Beyond the core elements of landlord insurance, some landlords buy insurance add-ons to further protect themselves against risk. These are some of the most common insurance add-ons for landlords:
Flood insurance: Often not included in standard insurance policies, flood insurance protects your property from sewer backups and overland water flooding.
Airbnb coverage: If you plan on using a rental property for Airbnb, you should have a special endorsement. If you do not have this coverage, or you do not tell your provider that you are using your unit as an Airbnb, you could wind up having your claim denied.
Non-payment of rent: While it is not common, some insurers have added a form of protection that can help cover costs when a tenant fails to pay rent.
#3 Tenants and Third-Party Liability
For landlords, managing a claim on an income property can become a bit messy, especially if a tenant is responsible for the damage done to the unit. A common example would be a tenant starting a kitchen fire out of negligence that does considerable fire damage to the kitchen walls and appliances, as well as smoke damage to their own personal belongings.
Many tenants (and landlords themselves) do not know how an insurance claim works in these circumstances.
First, the landlord’s insurance is designed to cover structural damage and any of their own belongings stored on the premises. They are not responsible for any of the tenant’s belongings or covering their costs when they need a place to live while repairs happen. The tenant should have renter’s insurance to cover those costs.
Additionally, the tenant could be liable for structural damage because their negligence caused the fire. Renter’s insurance covers liability, and many landlords require renter’s insurance because otherwise, they may not be able to recover those funds.
If you own or plan to own an investment property, make sure you get an insurance policy that will protect your investment if a loss occurs.