When you own real estate – whether an investment or a personal residence – you should procure the proper type and dollar value of insurance needed for your property. Unfortunately, many people don’t understand the basics of how insurance coverage works, and many individuals just want to spend “as little as possible” on insurance. The trouble comes about when there is an problem, like a fire, slip-n-fall, or lawsuit. If you don’t have the right type of insurance, nor enough coverage, it could end up costing you a lot of money. So let’s go over the basics herein, plus we’ll discuss renter’s insurance basics and tenant liability insurance basics too.
A standard dwelling insurance policy will cover losses on the building, separate structures, personal property, loss of use, liability, and a few other optional coverages. The one’s that are more important to focus upon are:
1. Coverage for your physical assets – building, separate structures, and personal property 2. Liability and lawsuit coverage.
Each year when you renew your policy it comes with limits on how much coverage you have in case your physical assets are destroyed. These are listed on your policy declarations page. For example you might have a 4,000 square foot structure – like a five unit building – and if it costs $100 per square foot to rebuild that structure, you should have $400,000 in dwelling coverage. Note that only the structure is covered by insurance, not the land because typically land isn’t destroyed. If you also have separate structures like pools, unattached garages, or significant personal property like appliances, you need to have your insurance agent add up the total value and procure enough coverage for all of your assets.
What happens if there is a fire and you only have $250,000 worth of coverage but it will cost $400,000 to rebuild and replace assets? You’ll get a check from the insurance company for the $250,000 dollars, and that’s all. You’ll have to spend your own money to rebuild it. So pull out your declarations page and make sure you’ve got enough coverage based on what it costs to rebuild.
Insurance also provide liability coverage in case there is a lawsuit related to your property. If a tenant’s dog bites a neighbor, you’re going to get sued too. If you do get sued, your insurance company will step in and provide a lawyer to negotiate, defend, settle, or pay a judgment – up to your policy coverage limits. So if you have $300,000 in liability coverage, that is the maximum they will pay out – you’re on the hook for the rest. You can up that coverage amount with a Personal Umbrella Policy, and you should consider doing this. You can increase your liability coverage in increments of $1,000,000 for between $300-$600 per year. So estimate your net worth and your earning potential, and make sure you’ve got enough on this issue too in case the worst occurs.
Other types of coverage that are typically not included in your regular policy are earthquake coverage, flood coverage, and others depending on the state within which you live. And, of course, discuss all insurance issues with your insurance agent, plus do your own research on the Internet and talk to other property owners. Also shop around every few years to make sure you are still getting a fair deal.
As a landlord you should also work towards moving all your tenants to having Renter’s Insurance when they renew their leases. This insurance protects the tenants from theft, water and fire damage, and liability issues. And it also protects you as claims should first go against your tenant’s policy, not your master policy. A typical renter’s policy runs about $125-$175 per year.
Tenant Liability Insurance
You should also consider Tenant Liability Insurance. This type of insurance protects you, the landlord, in many instances including if a tenant lets their renter’s insurance lapse or they didn’t procure the right type or enough insurance. You pay for it, or assess it to your tenants, and it protect you against lawsuits filed against your tenants, against property damages caused by your tenants, it may protect your from frivolous lawsuits from your tenants, or insurance deductibles you might otherwise have to pay when your property is damaged. This coverage costs around $120-$150 per year per unit. Make sure to fully understand the policy and what is and what isn’t covered, because coverages can vary by carrier and policy. Here’s more information on Tenant Liability Insurance from AppFolio.
Having the proper type and amount of insurance in place isn’t needed, if nothing bad ever happens. Unfortunately, we all know, things happen! So take a day each year, meet with your insurance agent, do some research, look at your current policies and limits, to make sure you are property covered. Because, when something does occur, you’ll breathe easier knowing you’ve got the appropriate insurance policies in place.