An increasing number of people are becoming landlords. From individuals leasing their spare bedrooms to entrepreneurs capitalizing on the rising demand for rental property, more people are joining the rent economy. The recent economic turmoil had a lot to do with it. As financial institutions tightened criteria, barriers to homeownership rose. That meant more people saw the advantages of renting. It sparked a surge in demand for rental properties, and an uptick in regular homeowners willing to rent out their property.
On the other side, companies like Airbnb made it easy for ordinary people (with a spare room or cash to invest) to begin capitalizing on the surging rental market. These are the ideal market conditions for both consumer and vendor – high demand, plenty of supply.
But this also means that there are now a lot of inexperienced landlords around; ordinary people that probably don’t understand the intricacies of, or even the need for, rental property insurance. The state of things is such that many people think their standard homeowner’s insurance is sufficient. In truth, they probably need a landlord insurance policy.
Landlord Insurance or Homeowners Insurance
Many people, these days, never intended to be landlords. But, for whatever reason, they have taken in a tenant or two. Maybe downsizing proved troublesome, or perhaps the vacation home turned out to be a larger than expected financial burden. No doubt, the ease with which people can now rent out their property is an attractive prospect for those looking to make a few extra dollars.
Not everyone who rents out their home, or part of it, will need to take out landlord’s insurance. If the property is leased only occasionally, the standard homeowner’s policy will likely be sufficient. But if, however, the rentals become more than occasional there are added layers of insurance complexities to contend with.
Anyone subscribing to the Airbnb-style, short-let, model of renting, will likely need to endorse their home insurance policy with “unit rented to others” coverage. That helps to cover a specific landlord-tenant situation where the lessor is living in the same home as the lessee.
If the homeowner is renting out the entire property and will live elsewhere, however, a separate policy will usually be required. Sticking with the original home insurance policy or opting for dwelling insurance will not be sufficient. Insurance companies can deny claims based on this error.
{{cta(‘7267e964-fe68-49b5-b154-749a7cb89f30′,’justifycenter’)}}
Different Types of Landlord Insurance
Like most types of insurance policies, there is the ability to choose the level of coverage required. For rental units, there are generally three categories: DP-1, DP-2, and DP-3. The level of coverage goes up according to the corresponding category number. So, a DP-1 policy is the most basic on offer.
While DP-1 will be the most attractive in terms of cost, for most landlords the provisions in this category will be inadequate – only things like vandalism and fire are covered. At a minimum, landlords should have DP-2 coverage. At this level, many named perils such as vandalism, fire, windstorm, and some natural disasters would be covered. Some insurers offer a higher level of coverage than others in this category. You can help your rental property insurance clients by going through the various options with them.
A DP-3 policy, as you might have guessed, provides the most comprehensive level of coverage. It is an “open peril” policy. That means pretty much every eventuality is covered unless specifically excluded. At this level, landlords can claim for replacement cost rather than cash value. In other words, the price of a replacement item will not be written down because of age and depreciation, as happens at the DP-1 level.
How Rental Property Insurance Works
Depending on the level of insurance purchased, the landlord will get protection from damage to the property as well as liability claims. For example, if a fire were to cause substantial damage to the property, the insurer would pay for repairs. Or, if the tenant sues the landlord because of an accident inside the property, an insurance claim would help to cover legal fees.
Landlord insurance sometimes pays for damage to the tenant and sometimes it doesn’t. It is a good idea to go through the benefits of having tenant damage protection added to the policy. Here again, whether or not that level of coverage is required will depend on how the landlord rents the property; i.e. occasionally or full time.
Rental property insurance does not cover everything. Most policies, for example, won’t cover damages to the tenant property – unless the damage was as a direct result of the landlord’s negligence. In which case, the landlord will likely have to compensate the tenant after a liability hearing. Neither, will policies cover tenant liability such as if a visitor to the apartment fell in the shower. The tenant would need to claim for liability under their insurance policy.
Home Rental Insurance and Your Clients
Rental property insurance is not a requirement by law. If you have clients that are renting out all or part of their homes on a full-time basis, their homeowner’s insurance won’t be enough. If the property is damaged, your client could find themselves having to pay for repairs; the insurance provider may refuse to pay out, and are well within their rights if a landlord does not have the correct policy.
With the right landlord insurance policy in place, your client can safeguard against not only property damage and liability costs, but also loss of income. For many of your clients, the rent from their property will be a valuable source of income. They may even be able to treat their landlord insurance premiums as tax deductible because being a landlord is a business endeavor.
{{cta(‘7267e964-fe68-49b5-b154-749a7cb89f30′,’justifycenter’)}}
