For investors, having the right policy in place is essential- and as their agent, you play a critical role in educating clients on proper coverage for rental and investment properties, ensuring their unique risks are fully addressed. Protecting rental assets and avoiding costly claims starts with understanding the key distinctions between homeowners and landlord insurance. The guide below can be used to aid in conversations with clients regarding how policy types differ and why landlord insurance is essential for rental properties.
Liability Protection
Homeowners insurance: Liability coverage under this policy generally protects the homeowner against claims related to their personal activities and incidents that may occur on the owner-occupied property. Liability limits under a homeowner policy are typically much lower than that of a landlord policy, often in the range of $100,000 to $500,000. These amounts may be adequate for a personal residence but are likely insufficient for the heightened risks associated with rental properties.
Landlord Insurance: Liability coverage under a landlord policy is tailored to the unique exposures of rental properties. Having tenants, their guests, and even contractors on the premises can increase the likelihood of liability incidents like slips, falls, or property damage which the landlord (investor) could be held responsible for. Because of this, landlord policies start with higher liability limits, often $1 million or $2 million per occurrence. Landlord liability typically includes coverages such as accidental injury, wrongful death, medical expenses, and defense costs.
Loss of Use vs Loss of Rents
Homeowners Insurance: This policy often provides Loss of Use coverage, which pays the owner occupying the property for additional living expenses should the home become uninhabitable due to a covered event. It may help cover the cost of hotel stays, meals, and other expenses for the homeowner until they can return to living at the residence.
Landlord Insurance: Instead of Loss of Use, landlord policies typically offer Loss of Rents coverage, which compensates the landlord for lost rent if the property is damaged by a covered event and the tenant(s) is unable to occupy the unit. This type of coverage is vital for investors who rely on rental income as part of their financial strategy.
Coverage Gaps & Exclusions
Homeowners Insurance: These policies almost always contain exclusions that make them unsuitable for rental properties. For example, a homeowners policy typically excludes coverage for damage caused by tenants and pollution or carbon monoxide exposure. Additionally, homeowners policies often limit (or exclude altogether) coverage for theft and vandalism, which is more common in rental properties.
Landlord Insurance: Landlord policies are designed to fill the gaps mentioned above and more, offering comprehensive coverage tailored to rental property risks. For example, landlord policies often include options for Theft and Vandalism coverage as well as offering additional products like Property Management Errors & Omissions, Equipment Breakdown, and REInsurePro’s Tenant Protector Plan. These policies are structured to offer the specific protections investors need, ensuring they are not left uncovered for risks that have the potential to result in significant financial loss.
Risks of Insuring Investment Properties Incorrectly
It’s not uncommon for investors to mistakenly insure their rental properties under a homeowners policy. New investors who are unfamiliar with insurance policies might not realize the crucial differences between homeowners and landlord insurance. Some investors may choose to stick with what they know, opting for the more convenient route of maintaining their existing policy rather than exploring a new, more suitable landlord policy. But perhaps the biggest reasoning investors use to justify insuring their investment properties under a homeowners policy is cost. Emphasize to clients, while homeowners policies often appear cheaper, they do not offer the necessary coverage needed for a rental property.
Opting for a lower premium at the expense of appropriate coverage can leave your clients vulnerable to denied claims. Additionally, if a rental property is misrepresented as owner-occupied, any resulting claims could be denied on grounds of material misrepresentation- a form of insurance fraud. This scenario can leave investors personally liable for damages and losses that would otherwise be covered under a properly designed landlord policy.
It’s also important to consider how each insurance policy is structured. Your clients’ personal assets, such as their primary residence, and business assets, like their investment property, need to be kept separate, especially in cases of liability issues. If investment properties are included under a personal liability policy, investors risk exposing all of their assets in a legal dispute. For example, if a tenant dies from carbon monoxide poisoning and the lawsuit exceeds the $300,000 homeowners liability limit, both personal and rental assets could be at risk. Similarly, a personal incident, like a car accident, could threaten their rental properties if they are insured together.
The Bottom Line
Educated clients are happier clients. Take the time to explain the nuances of a homeowners policy versus a landlord policy for rental properties. Not only will it help them avoid the pitfalls of inadequate coverage, but it also gives them the confidence to know their investments are properly protected.
