Rental Property Insurance – What Homeowners Need to Know
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With ownership comes a long list of financial decisions.
You have a lot of priorities, but one of the most important things you can do to protect yourself financially is to choose a good rental property insurance policy.
Incidents that cause financial loss to property owners are not uncommon. About one in 20 insured households have one claim every year. And between 2014 and 2018, the average claim for property damage was $ 13,687, according to the Insurance Information Institute. For owners of large multi-family buildings, the financial losses can be even greater. Plus, it’s not just the property damage you need to worry about. “Apart from protecting a large investment, there is an issue of personal liability which is quite important,” said Eachan Fletcher, founder of NestEgg, a rental property management app for landlords.
Is rental home insurance necessary for all homeowners, and how much will it cost you? Read on for our full guide to what’s covered in this insurance policy, when it’s needed, and how much it will cost.
What is homeowner’s property insurance?
Homeowners’ property insurance is designed to protect owners of homes or buildings who rent at least one unit against financial loss. If a tenant damages a rental property or sues the landlord for any reason, landlord property insurance can help cover the expenses.
If you are renting a property that is not your primary residence, purchasing an insurance policy for rental property is essential to protect your finances. If you have a mortgage, your lender will likely require this type of insurance.
Home insurance policies do not cover rented properties or even damage to a rented room. “Let’s say you are my Airbnb owner, I rent you out and destroy your washing machine. Your home insurance policy won’t cover it, ”said Quentin Coolen, CEO and co-founder of Waffle Insurance, a national insurance group. To make sure you’re covered when you really need it, you’ll need to purchase a rental property insurance policy.
What does homeowner’s home insurance cover?
Homeowner’s home insurance can provide the following coverages:
- Property damage: This covers repairs to the structure of a dwelling due to incidents such as vandalism, fire and some natural disasters. It can also cover items you leave behind to help maintain the property, like a lawn mower or other equipment.
- Liability guarantee: If medical or legal expenses arise from a tenant’s injury or illness due to poor property maintenance, such as slipping on an icy walkway, this coverage helps manage landlord costs.
- Protection of rental income: “There is a whole set of insurances that also cover your rental income,” said Fletcher, which is especially important to know amid the economic downturn caused by the coronavirus crisis. Rental income protection can help cover your operating costs if a tenant is unable to pay their rent. In addition, if a unit becomes uninhabitable for certain reasons, you may be required to prorate your tenant’s rent. Rental Income Protection helps ensure that you always receive the rental income you rely on in the event the tenant fails to pay rent due to default, breach of lease, or accommodation elsewhere while the unit is uninhabitable.
One expense that homeowner’s property insurance does not cover is tenant’s personal effects. For this reason, landlords often require tenants to purchase a tenant insurance policy, which is usually very inexpensive. “You can state in your lease that you require tenants to have home insurance, and that’s actually a really good thing to do,” Fletcher suggested. Renters’ insurance provides personal property protection, liability coverage, and loss of use coverage if you have to pay for alternative accommodation.
Is Home Insurance Necessary?
If you are renting a home that you do not occupy, homeowner’s insurance is essential coverage, and in some cases it is mandatory. “If you have a loan, it’s absolutely necessary. Any lender will require that you have some degree of insurance, ”Fletcher said. He added that business loans for multi-family units sometimes have high insurance requirements and you can’t always choose your insurer.
If you rent a room in your primary residence, your home insurance may cover you temporarily if you notify your provider in advance, or the company may require you to purchase a rider covering the rental.
How much does rental home insurance cost?
According to the Insurance Information Institute, insurance policies for rental property owners typically cost around 25% more than home insurance policies for the same home. Compared to tenant insurance, Coolen said homeowners’ policies typically cost around seven to eight times as much as a tenant’s policy for the same unit, but the cost depends on many factors.
When choosing an insurance policy for rental property for owners, you need to consider more than the cost. “What really matters in insurance is not so much the service provider, [but] what’s the cover, ”says Coolen.
That said, the following home insurance providers offer excellent homeowner’s insurance coverage and have a solid reputation for financial stability and customer satisfaction:
- State Farm: State Farm has an A ++ financial strength rating from AM Best and is ranked above the industry average in JD Power’s USA Home Insurance Study 2020. State Farm offers all basic coverage in addition to Equipment Breakdown Coverage, Tenant Moving Expenses, and Heating or Cooling Loss Reimbursement. You can even save money by bundling your homeowner’s policy with another company policy.
- Allstate: Allstate has an A + financial strength rating from AM Best and is ranked sixth in JD Power’s 2020 US Home Insurance Study. In addition to basic coverage, you can add special endorsements like building code and burglary coverage. Allstate also offers great discounts on multiple policies, so you can bundle your homeowner’s insurance coverage with home insurance for your primary residence or auto policy.
- Erie Insurance: Erie has an A + financial strength rating from AM Best and is ranked fourth in JD Power’s 2020 US Home Insurance Study. In addition to third party liability, property damage and rental income coverage, Erie offers several attractive endorsements, such as workers’ compensation coverage for employees, earthquake coverage, and more.