According to the IRS, as many as 10.6 million Americans earn an income from rental properties. Many rental properties however start out as the owner’s primary residence, and later gets converted into a rental property as the owner acquires a new property either as an investment or from inheritance etc.
If you are now renting out your property, don’t make the mistake of assuming that your homeowners insurance policy will still cover your needs. This is a common misstep that can result in high out-of-pocket costs and financial hardship if you are faced with a costly claim. Once you move out and start renting out the property, the property should be treated as a business and not just a second home.
Rental Dwelling Policies vs. Homeowners Insurance Policies
To understand why a homeowners insurance policy doesn’t cover your needs as a landlord, it’s helpful to see how rental dwelling or landlord policies differ from homeowners insurance policies.
- Homeowners insurance policies typically provide four types of coverage, according to the Insurance Information Institute (III): coverage for the building structure, coverage for personal belongings, liability insurance and additional living expenses coverage. Liability coverage limits typically start in the $100,000 range and may not be sufficient for the needs of a business.
- Landlord insurance policies typically provide building structure coverage, liability insurance and coverage for rental income loss. With landlord insurance, liability coverage limits typically start in the $1 million range, reflecting the increased liability exposures faced by business owners.
Although there are similarities – for example, both types of policies provide building structure coverage – there are also key differences. Some of the big differences involve things like whether the policy covers personal belongings or rental income and how much liability coverage the policy offers. When you dive deeper into the details of coverage, including the various exclusions and limitations, even more differences become evident. If you ever experience a disaster or lawsuit, the importance of these differences will become painfully clear.
Why Do You Need Commercial Landlord Insurance? Six Reasons
If you’re relying on homeowners insurance to cover your rental property, you’re paying for coverage you don’t need and going without coverage you do need. Your investment property is a business, so you need commercial insurance designed for businesses.
- Homeowners insurance policies often require the owner to occupy the property. If you’ve moved out and started renting the property, you’re in breach of this requirement. The insurer could deny claims or cancel your coverage as a result.
- Homeowners insurance policies typically exclude business risks and activities. If you file a claim that’s connected to your rental business, your claim may be denied on this basis.
- Homeowners insurance may not provide enough liability coverage. Lawsuits against businesses – and this includes rental businesses – are often in the six and seven-figure range. You need sufficient liability protection, and a policy designed for homeowners probably won’t provide it. There are countless reasons that landlords get sued – from injuries caused by failure to maintain common areas to tenant discrimination and wrongful eviction. Some landlords have even faced class action lawsuits from multiple tenants who claim to be adversely affected by a landlord’s decisions or actions. Business owners must be prepared for these scenarios.
- You need to protect your rental income. Think about what would happen if you couldn’t rent out your property for a period of time. For example, what if there was a fire and the building was uninhabitable for nine months while repairs were being completed? What if there were further delays due to supply chain disruptions and labor shortages? These are real possibilities that some landlords are experiencing right now. Without your rental income, you might not be able to afford your mortgage, property taxes and other expenses. If you depend on rental income for your personal finances and savings, the impact could be greater. Landlord insurance commonly provides rental income coverage, but homeowners insurance does not.
- Your tenants might cause damage accidentally. You hope that your tenants take care of your property, but they might cause accidental damage. For example, they might forget to leave the faucet dripping during a winter storm, allowing the pipes to freeze and burst. Or they might forget to turn the stove off and cause a kitchen fire. Landlord insurance typically excludes malicious damage and wear and tear damage, but accidental and sudden damage is often covered.
- You may need additional endorsements and coverage types designed for landlords. For example, rental properties can be subject to strict building codes, so you may want to add law or ordinance coverage if your building is older. Equipment breakdown insurance can also be useful if equipment stops working. This can provide coverage for your HVAC systems, elevators and other types of machinery in your building. If you or your employees use a personal vehicle for business, you may need hired and non-owned auto coverage. Landlords with employees may need even more coverage types. A commercial landlord insurance policy can be tailored to include protections for the unique exposures of your business.
Don’t Put Your Property and Business at Risk
Many landlords don’t think about their insurance coverage needs until they file a claim – and by then it can be too late. Don’t make the mistake of using an HO3 or a DP3 policy. Protect your property and your rental income with commercial insurance that’s designed for your business. Honeycomb specializes in landlord insurance, and we make it easy for landlords to obtain custom coverage at affordable rates.