Understanding Rental Property Insurance, Tips & Tricks

Homeowners around the country are renting their homes for additional income. Many homeowners own multiple homes, using the residences they don’t live in as rental properties and as long-term investments. Protecting those investments is paramount, and rental property insurance is a critical component of this financial protection strategy.

Rental property insurance protects homeowners from potentially costly liability issues. Claims of negligence or of an injury occurring to a renter can result in thousands of dollars in medical costs and legal fees if a claim is successfully litigated against the property owner. In this guide, we will introduce the major parts of a typical rental property insurance policy, helping homeowners to make smart decisions about protecting their hard-earned investments.

Home Ownership Trends

Real estate industry analysts have pointed to a surprising trend, with home ownership rates declining over the past ten years while rentals have increased. In the United States, the home ownership has dipped to just over 60%. New rental households have increased by ¾ million units in the same time period. Property owners who faced difficulties in selling their homes during the U.S. housing crisis may have opted to rent their homes, both for income and to avoid selling homes for a fraction of their market value.

Low interest rates, coupled with a general recovery in the real estate market, have led many homeowners to purchase additional properties with an eye toward earning income by renting them. Their current homeowners’ insurance policy is simply not sufficient to protect against liability, and rental property insurance is often a wise investment. In fact, it may be required by lenders as part of the home mortgage terms.

Rental Property Insurance

Before embarking on the journey to becoming a landlord, making money renting out one’s home, homeowners should first talk to their insurance agent for options. As mentioned earlier, rental property insurance may be required by lenders. Unfortunately, not all insurance companies offer rental policies to their clients, mainly due to the added risks of renting a home to others. In some cases, the current homeowners’ policy may be modified to cover a rental property, but typically another policy is issued.

Rental property insurance provides coverage against claims made by renters, such as slip and fall injuries, property damage, or negligence resulting in injury to renters or damage to belongings. Because a rental property is generally considered a commercial endeavor, this can drive up insurance costs over the average homeowners’ policy.

Rental property insurance is sometimes referred to as landlord insurance or “tenant occupied dwelling” insurance. There are three major categories, with the most basic category covering common risks like vandalism, theft, and basic property damage. The next, and more expensive, level commonly provides coverage for natural disasters such as wind damage and fires. The most comprehensive form of tenant occupied dwelling insurance covers most perils, including injury claims, natural disasters, vandalism, and water damage unless there are specific exclusions in the policy.

Within these policies are two additional considerations: cash-value policies and full replacement cost policies. In a cash-value policy, the insurance company pays out the depreciated value of the home according to tables, which can significantly reduce the final claim payout amount. A full replacement value policy is the preferred type of policy, as it can help pay out-of-pocket expenses after a claim is filed.

Landlord policies may also include provisions to provide coverage against lost rental income, such as if the home becomes uninhabitable due to disaster or extensive damage. Dwelling policies that offer this type of coverage are referred to as “fair rental income protection” policies. Speak to your insurance agent today to determine the best policy type and features for your unique needs.

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