Your rental property is a major investment that you depend on for income. If you experience a loss, your insurance coverage will help you return to normal, allowing you to continue enjoying the benefits of your investment – but only if you’re properly insured. Underinsurance is a serious problem that can threaten your rental business.
What does “underinsured” mean?
Being underinsured simply means having less insurance than is necessary to adequately cover your risks. Your rental property is underinsured if your policy limits don’t cover replacement costs for your property. Underinsurance can also be a problem if your policy doesn’t provide some of the coverage types you need.
Some property owners intentionally underinsure their properties to save money on insurance premiums. Since they think a major loss is unlikely, they choose low limits and restrictive coverage terms.
Unfortunately, this strategy can backfire. Major losses are always possible – and if you don’t have enough coverage to repair the damage, your rental business could be in jeopardy. Additionally, many policies have coinsurance requirements that penalize policyholders for underinsuring their properties. These coinsurance penalties apply to all claims, even if the claim is smaller than the insurance limit.
Underinsurance can also be unintentional. Policyholders may not know they need more coverage or they may not update their insurance coverage often enough. Here are nine signs to look for:
1. Your limits are too low.
Having inappropriately low limits is the biggest sign you’re underinsured. You want to make sure your limits for building insurance are high enough to cover your property’s replacement value. Also look at the other limits in your policy. For example, landlords also need liability coverage, but low liability limits can leave you exposed to uncovered litigation costs.
2. Your actual cash value and replacement costs don’t add up.
When determining your property’s full value and the size of your claim payout, there are two basic methods insurance companies can use. The actual cash value method is based on the current value of your property minus depreciation. The replacement cost value is the cost to rebuild or replace your property and needs to be accurate. As the actual cash value of your property can be much less than the replacement cost value, you may be underinsured if you’re only insured for the actual cash value.
3. You made renovations but didn’t update your policy.
Renovations can increase the value of your property. If you’re renovating your property, you need to let your insurance company know. You may need additional coverage during the renovations and you’ll need to update your policy to reflect its new value.
4. Inflation has increased prices, but your policy has stayed the same.
Even if you don’t renovate your property, its value may change due to inflation. Inflation can also raise the cost of the materials for repairs. If you haven’t updated your policy to keep up with inflation, you may be underinsured.
5. Your deductibles are too high.
Policies with higher deductibles often have more affordable premiums – you may have selected a high deductible for this reason. If you file a claim, you’ll need to cover the deductible. If the deductible is more than you could afford, you’re underinsured.
6. You never upgraded to landlord insurance.
You may have purchased your property as a primary home for yourself. Now that you’re using it as a rental property, your risks have changed. If you haven’t switched your policy to landlord insurance coverage, you are probably underinsured for some exposures.
For example, as landlords have greater liability risks, they need more liability insurance coverage than a homeowners insurance policy may be able to provide. They also have revenue to protect, meaning they need business income coverage. Since many homeowners policies exclude commercial activity, you might not have any coverage for your rental business. If you’re trying to manage with homeowners insurance, you may be dangerously underinsured.
7. You haven’t checked your policy for a while.
Small changes in market value, inflation, and renovations can add up over time. If you haven’t checked your policy in a while, these small changes may mean you’re now underinsured.
8. You haven’t shopped around.
Insurance companies frequently adjust their insurance rates and coverage offerings. Sometimes, new niche insurance brokers enter the market, with packages designed for certain industries. If you haven’t compared insurance quotes, you may be settling for generic insurance protection that doesn’t quite match your exposures or paying more than you should.
9. You opted out of additional coverage you actually need.
Since adding coverage can increase the cost of your policy, you don’t want to buy anything you don’t need. However, if you reject coverage you actually need, you may be underinsured. For example, many older buildings can benefit from ordinance or law coverage and buildings with a flood risk need flood insurance.
Could my rental property be overinsured?
Overinsurance is a problem, too. If you have more insurance than you need, you’re throwing money away. This often occurs when policyholders buy coverage types that don’t make sense for them. For example, landlords don’t need insurance to cover tenants’ personal property – your tenants should buy their own renters insurance to receive coverage. If you have a homeowners insurance policy, you are probably paying for personal property coverage you don’t need.
You don’t want to pay for insurance you don’t need, but you also don’t want to be stuck with uncovered claims. You need to find the right level of coverage for your rental property.
There are ways to keep landlord insurance costs down that don’t involve skimping on limits and critical coverage types. Honeycomb makes it easy to receive a customized insurance quote – and you could save up to 40%. Get a quote.