Solved! How Much Landlord Insurance Do I Need?

Q: I have an investment property that’s almost ready to rent out. I’m in the process of getting landlord insurance and I want to be sure I get enough coverage. How much landlord insurance do I need?

A: It can be tricky to determine exactly how much landlord insurance is needed, and this is because every landlord has different coverage needs. At minimum, landlords will want to get at least enough coverage to rebuild the structure of their rental property if a covered peril—such as a fire—destroys it. Additionally, rental owners can consider the amount of liability insurance they need to carry, which will help cover their expenses in the event a tenant is injured on the property and decides to sue. It can be worthwhile for a landlord to talk with an insurance agent to determine how much coverage is needed to protect both the landlord’s liability exposure and the property itself.

The amount of insurance a landlord needs will vary depending on the property’s replacement value, along with a landlord’s own liability concerns, financial situation, and appetite for risk.

Like most insurance policies, residential landlord insurance isn’t a one-size-fits-all solution. The best landlord insurance companies work with landlords to create customized coverage based on the policyholder’s needs. To get the right coverage, a landlord may want to consider—at minimum—the cost of rebuilding their property in a worst-case scenario. Weighing potential liability risks—if a tenant were to fall and injure themselves on the property due to improperly installed handrails, for instance—can also help landlords determine how much coverage they need with an insurance policy.

However, rebuilding costs and liability concerns are the first of many factors landlords need to consider when getting coverage for a rental property. Landlords may also want to consider their personal risk tolerance and financial situation when shopping for a policy. Landlords who have several income-producing properties, for example, may have more to lose financially, so they may want a policy with higher liability limits to protect their assets. Meanwhile, a single-unit landlord may want to purchase extra loss of use coverage to recoup any lost rental income if they are unable to rent out the property for an extended period of time following a covered peril.

At a minimum, though, a landlord insurance policy should provide enough coverage to rebuild the property in the event of a total loss.

Because rental properties are considered business property, standard homeowners insurance will not cover them. As such, property owners will need landlord insurance to protect their investment. Even owners who live on the premises of the rental property themselves will need to purchase landlord home insurance. Standard landlord insurance includes dwelling coverage to protect the structure of the rental property from perils such as fire, lightning, and wind damage. The purpose of a landlord policy is, in part, to provide enough coverage to rebuild the property in the event of a total loss. In fact, lenders are likely to require property owners who take out a mortgage to obtain enough insurance to cover the cost to completely rebuild the structure of the residence in the event that it is destroyed by a covered peril.

There are three types of dwelling policies for landlords to consider: DP1, DP2, and DP3. DP1 and DP2 landlord insurance policies are considered “named peril” policies. These insurance policies protect a landlord’s rental property from perils that are specifically outlined in their insurance policy and nothing more. For example, both DP1 and DP2 policies list fire as a named peril. If a kitchen fire destroys a rental unit, the landlord’s insurance will generally pay out a claim. The difference between the two policy types is that DP1 has a much more limited scope of named perils it covers. For instance, DP2 landlord insurance policies may cover burst pipes and acts of vandalism, while a DP1 policy won’t cover either of those losses.

The other type of dwelling coverage for landlords—the most common type of policy for a rental dwelling, in fact—is an open peril policy or DP3 policy. With a DP3 policy, the insurance company will pay for damage from any peril unless it’s specifically listed as an exclusion. Common exclusions in a DP3 policy include flooding, earthquakes, and neglect. Knowing the differences between these dwelling insurance options can be important for landlords when they’re determining how much landlord building insurance is needed.

Regardless of the market value of the property, landlords only need enough dwelling coverage to pay for building costs if the structure is destroyed.

When determining how much insurance coverage to purchase, a landlord may be inclined to look at the market value of their property. However, the current value of the property isn’t the same as the cost to rebuild the residence—and in fact, the value of the property and the land combined is likely to be significantly higher than building costs alone. For this reason, a landlord could potentially purchase more coverage than they really need. However, working with an insurance agent or using an insurance calculator to determine the correct value of a property can ensure landlord insurance requirements are met.

For example, if a landlord rents a home with a current market value of $400,000 but the cost to rebuild the home is determined to be $300,000, it would be unnecessary to insure the structure of the residence for $400,000. This is because the insurance company would only pay the cost to rebuild the home and doesn’t account for the value of the land. When getting landlord insurance cost estimates, property owners may be presented with dwelling coverage recommendations based on the insurance company’s own assessments. However, it’s worth remembering that these recommendations are, in turn, based on the information provided by the customer—size of the building, number of bedrooms, additional amenities and features, and the qualify of construction. Because of the many details involved in assessing a property’s value, it may be worthwhile for a landlord to speak directly with an insurance agent to determine how much insurance is necessary to adequately insurance a building without paying for more coverage than they need.

Landlords may also want to purchase sufficient liability coverage to protect their financial interests in the event a tenant sues them.

In addition to covering the structure of the property, landlord insurance includes liability coverage in addition to dwelling protection. General liability insurance for landlords helps cover the cost of legal fees, medical bills, settlements, and other damages in the event a landlord faces a lawsuit related to their rental property. If a landlord is found liable for an event that causes injury to a tenant or third party—or damages their property—liability insurance on rental property can help cover medical bills, repair costs, and other expenses. For example, if a property owner neglects to clear an icy sidewalk and a passerby slips and breaks their arm, then the landlord’s liability insurance would help cover that person’s medical bills, and if the injured party decided to sue, it would also help cover legal fees and any judgments up to the liability limits of the policy.

If the property cannot be rented out due to extensive damage following a covered peril, landlords may want to have enough loss of use protection to recoup any lost rental income.

Insurance for landlords will often include coverage for loss of use, which pays a landlord lost rental income if their unit can’t be rented out due to covered damage. For example, if a fire caused extensive damage to a rental unit and left the home uninhabitable for a period of time while repairs were made, loss of use coverage could cover part of the landlord’s lost income while the unit sits empty. To estimate coverage needs, a landlord can multiply their monthly rental income by the maximum length of time the insurance will pay for loss of use. It may also be a good idea for landlords to consider reasonable repair time frames when determining coverage needs, as they may decide they want enough loss of use coverage to provide income throughout a prolonged repair process.

Additional personal property coverage may be necessary for landlords who want to insure items on the premises—tools, lawn care equipment, appliances, etc.

It’s common for landlords to keep some personal property on the premises of their rental property, either for maintenance purposes or as amenities for their tenants to use. Lawn care equipment such as mowers, for example, reduce the need for professional landscaping services as landlords—or even tenants—can take care of those maintenance needs themselves. Major appliances, such as refrigerators and washing machines, are also commonly owned by the landlord and located on-site for renters to use. These personal items are often covered by landlord insurance.

However, a basic landlord insurance policy may have low coverage limits for the landlord’s personal property, depending on the policyholder’s coverage selections. For example, a policy might limit personal property coverage to $3,000. If a covered peril destroys multiple appliances in a unit, such as a refrigerator, oven, and dishwasher, the $3,000 may not be enough to replace all of them with comparable items. However, policyholders can increase their personal property coverage at an additional cost if necessary.

Detached garages, tool sheds, and fences that are part of a rental property may be covered under other structures coverage.

A landlord insurance policy will typically include coverage for detached structures on the property. Known as other structures coverage, this protection is similar to dwelling coverage but applies to property such as garden sheds, detached garages, and fences. Other structures coverage generally covers the same perils as the dwelling coverage of the main rental structure. For instance, landlord insurance typically covers hail damage as part of both its dwelling and other structures coverage, so if a garden shed is damaged by hail during a storm, it will likely be covered, less the deductible.

Other structures coverage limits are often separate from a policy’s dwelling coverage limits, and in many cases, they are set at a much lower amount. It’s a good idea for landlords to carefully read their insurance policies to learn more about other structures coverage terms—in particular, how much detached garages, fences, sheds, or other freestanding structures will be insured for in the event of a covered loss. Landlords will likely be able to increase their other structures coverage amount, if necessary, for a slightly higher monthly premium.

Not all landlord insurance policies cover vandalism, but endorsements may be available to help protect against intentional acts of property damage.

Although there are many similarities between landlord insurance vs. homeowners insurance, these types of policies may treat vandalism coverage differently. Whereas acts of vandalism are typically covered with any standard homeowners insurance policy, that may not always be the case with landlord insurance. A cheap landlord insurance policy with limited coverage options won’t protect against vandalism. For example, DP1 policies tend to be the least expensive type of landlord insurance, but most won’t include vandalism as a named peril.

Landlords whose policies exclude vandalism may have the option of adding vandalism coverage as an endorsement. An endorsement—or rider—is an add-on to an insurance policy that expands coverage to include more types of losses. Endorsements generally increase the cost of landlord insurance, so adding a vandalism endorsement will likely increase the landlord’s insurance premiums.

Insurance companies may also offer endorsements to protect against flood or earthquake damage, which may be essential depending on the rental property’s location.

A landlord with rental property located in an area of high seismic activity may want to consider adding earthquake coverage when deciding how much insurance they need. Landlord insurance companies may offer earthquake coverage as an endorsement, but that won’t always be the case. Depending on their policy provider, some landlords may have to purchase a separate earthquake insurance policy to cover their rental properties.

As is the case with earthquake coverage, flood coverage is typically only available as an endorsement or stand-alone policy. Although flood insurance may be optional in many cases, a mortgage lender may require property owners to purchase flood coverage on a rental home located in a high-risk flood zone. Landlords who are planning to finance the purchase of a new rental property may want to check with mortgage lenders to see if flood insurance is required and how much flood insurance they need. Those who determine that either earthquake or flood coverage is necessary will need to budget for that extra expense.

Landlords who require more coverage—either through higher limits or endorsements—may want to consider switching providers and finding a policy that better suits their needs.

Landlord insurance is an important tool to help protect landlords from perils such as fire or storm damage, liability claims from tenants or other third parties, and lost rental income if the rental property is left uninhabitable after a covered loss. As property owners calculate how much landlord insurance they need, they may find their current coverage isn’t enough. This is especially true for landlords with specialized insurance needs. For example, a landlord with multiple rental units may want to work with a provider that specializes in multi-property landlord insurance—or offers a generous discount to policyholders who insure two or more rental properties through the same company.

If a landlord finds they need special endorsements or higher coverage limits, it’s a good idea to shop around to find a policy that provides the right amount of coverage at an affordable price. Comparing rates and coverage options across the best rental property insurance companies like Steadily can help landlords find the insurance policy to suit their needs.