Landlord Insurance: How to Protect Your Rental Property

Insurance: you know it, you may not like it, but you reluctantly accept it as a way to protect your bottom line against health scares, car accidents, and property damage. But with 41% of landlords admitting they’re improperly insured in TurboTenant’s October 2024 survey, how sure are you that your rental property coverage is right? What does landlord insurance cover, and how can you guarantee that your investment is protected from rental income loss, tenant damage, and natural disasters?

In this deep dive into the world of landlord insurance, we’ll answer all those questions and more.

Let’s start with the basics. Landlord insurance is a policy designed to protect your rental units. The cost of insuring your rental property depends on the property’s value, location, age, and other risk factors, but we’ll give you ideas about the average cost of landlord insurance later. Landlord insurance isn’t mandated by law, but many lenders will require you to have something in place to protect your investment property.

Though your specific policy could vary, a comprehensive landlord insurance plan covers the cost of:

1. 1. Property damage: Whether a tree has fallen through your roof or your unscreened tenant destroyed the place on their way out, a good policy will come in handy when the physical structure of your property has been damaged.
   2. Loss of rental income: If something happens that makes your rental uninhabitable, like severe mold or a bedbug infestation, this coverage provides temporary rental income reimbursement.
   3. Liability: Even the best landlords can find themselves facing lawsuits, bodily injury claims, and settlement costs, which is why liability coverage is a must for landlords. 

Savvy readers will note that landlord insurance does not cover normal wear and tear or renter’s belongings. That’s why it’s critical to require renters insurance – but we’ll talk about that later.

Now that we’re aligned on the basics of renters and landlord insurance, let’s dive deeper into different types of coverage, the number one insurance mistake landlords make, and how to prepare for natural disasters – along with so much more.

Different Types of Rental Property Insurance

There are several strategies that landlords can use to insure their property properly, and all come with their own pros and cons. 

First, landlord insurance is a blanket term, but we should get more specific. The two most common policies you’re likely to see are dwelling fire form 1 (DP1) and dwelling fire form 3 (DP3), according to our friends at Steadily.

DP1 is the most cost-effective landlord insurance policy, but its coverage is limited. DP3 offers the most comprehensive coverage for landlords, but it’s the costliest option.

DP1 Policy for Rental Properties

Considered to be a bare-bones policy, DP1 is built to cover rental properties and vacant homes at the most affordable rate. Steadily lists the following perils covered by DP1 policies:

1. Fire and lightning
2. Windstorms and hail
3. Explosions (both internal and external)
4. Riots and civil commotion
5. Aircraft and vehicles
6. Smoke
7. Vandalism
8. Volcanic eruptions

Common occurrences not listed, like freezing pipes and falling objects like trees, are not covered under this policy. Also, DP1 policies “only pay out claims based on the actual cash value of the damaged property, not the full replacement cost,” Steadily notes. This factors in depreciation, so count on receiving a payout equal to the current market value of the damaged goods, not the cost to fully repair or replace them.

DP1 policies also cover other detached structures like garages and sheds. Loss of rental income and personal liability are sometimes included in these policies or could be added as optional coverage.

On average, DP1 policies cost between $700-$900 annually.

Want to ask insurance experts questions about policies, your coverage, and more live? Register for our upcoming webinar for free!

DP3 Policy for Rental Properties

Unlike DP1 policies, DP3 coverage is expansive, and this plan is considered to be the most comprehensive landlord insurance option due to its open peril coverage.

That means a DP3 policy covers all risks except anything specifically excluded in its documents. Steadily lists the following as typical DP3 policy exclusions:

• Floods and water damage from exterior sources
• Earth movements (think earthquakes and sinkholes)
• Power failure or utility service interruption
• Neglect, improper maintenance, and normal wear and tear
• Intentional damage or losses caused by the policyholder
• Damages caused by war, nuclear hazards, and government actions
• Mold, fungus, wet/dry rot

Additionally, DP3 policies pay out claims at full replacement cost, not depreciated actual cash value like a DP1. In other words, if your roof needs to be replaced because a tree fell on it, your installment of a new roof using current material and labor costs would be covered without any depreciation deducted. 

DP1 pays claims at actual cash value, which factors in depreciation. DP3 pays claim at full replacement cost value.

DP3 policies also often include rental income loss coverage, which reimburses landlords for rent payments missed if tenants have to temporarily vacate the premises due to a covered loss. Finally, DP3 policies sometimes include coverage for personal property, such as appliances, though they could also be added to your policy as needed.

On average, DP3 policies cost $1,100-$1,300 annually.

Umbrella Insurance for Rental Properties

To squash any confusion about umbrella insurance, we need to be crystal clear – an umbrella policy extends the liability coverage of existing landlord insurance in case a claim comes in that goes beyond your original coverage. If you have multiple properties, each with their own landlord insurance policy, one umbrella policy can cover your entire portfolio in many cases.

To better illustrate how umbrella insurance works, let’s walk through a hypothetical. Your tenant is having their elderly mother over for lunch, and she falls. They decide to sue you and win a $600,000 judgment against you. If your landlord insurance only covers $500,000, you’d have to pay $100,000 out of pocket. But if you have umbrella insurance, it will cover the additional $100,000.

According to Steadily, umbrella insurance for rental properties can also pay out court awards related to:

• Slander
• Mental anguish
• Medical costs

It also protects against unusual situations not covered in some landlord insurance policies, such as damage caused by:

• Riots
• Volcanic eruptions
• Explosions

A $1,000,000 umbrella insurance policy usually costs between $150-$500 annually, but this type of coverage has minimum requirements that must be met.

For example, you’re unlikely to secure umbrella insurance if you have a bare minimum liability policy. It’s common to use the same insurance provider to build out your landlord insurance and umbrella insurance coverage.

Also, some providers allow you to extend your umbrella insurance to other types of policies, like your health and car insurance – so it’s worth asking about!

LLC

Surprise, a non-insurance option has slipped into the list! Since many landlords wonder about leveraging their LLC to save on insurance costs, it’s worth discussing the merits of that idea – and where it falls short.

An LLC, or limited liability company, is a business structure that “protects the assets of its owners from lawsuits and creditors concerned with the company’s business debts,” according to Investopedia. There are many reasons why it makes sense for landlords to structure their rental property management business as an LLC, but there are drawbacks if you try to opt out of insurance and rely on your LLC in case of emergency.

An LLC protects your personal assets, but the LLC’s assets are still at risk if a lawsuit is filed against it.

For example, let’s say your tenant falls off the balcony and breaks their legs. They decide to sue you for medical expenses and win. Though your personal assets would be safe, your LLC would be responsible for paying their judgment – likely via your business assets.

Renters Insurance

Remember how we noted that your tenant’s belongings weren’t listed under what your landlord insurance policy coverage? That’s because they qualify for their own type of insurance, aptly called renters insurance – which benefits tenants and landlords alike.

72% of landlords surveyed require their tenants to carry renters insurance, and 16% of tenants opted into a policy without being asked to do so.

So, what does renters insurance actually cover? As with everything we’re discussing, the unique details of your tenant’s policy could vary but typically include:

• Accidents and natural disasters
• Malicious actions
• Liability
• Additional living expenses

MoneyGeek recommends requiring a minimum of $20,000 for personal property coverage and $100,000 for liability coverage. You can also request to be included as an interested party to see the details and coverage of your tenant’s renters insurance to receive updates about their policy.

If you’d like to require renters insurance, TurboTenant makes the process easy. Log into your TurboTenant account and click the Account button on the left-hand side of the screen. Then navigate to the Advanced page and select the “Turn on Requirement” option.

Once you turn on the requirement, it’s simple to get proof of your tenant’s policy. When you convert an applicant to a tenant, we’ll email them to let them know about your renters insurance requirement as part of the lease. Your tenant is then prompted to provide proof of their policy within their TurboTenant account. While they can choose any provider they’d like and simply upload the policy, they also have the option to purchase renters insurance for as low as $8/month from SURE, one of our esteemed partners. After they provide proof of insurance, we’ll email you to let you know they’re covered! If your tenant purchases insurance through SURE, you’ll also be notified if their policy changes, is canceled, or expires.

Now that we’ve discussed various insurance options for you and your tenant, it’s time to crack open the conversation about homeowners vs. landlord insurance.

Homeowners vs. Landlord Insurance: What’s the difference?

Maybe you noticed that we didn’t discuss homeowners insurance as an option for landlords; that was by design. 

Unless you’re house hacking, meaning you share a residence with your tenants like 17% of the landlords surveyed by TurboTenant in October, you cannot use homeowners insurance to cover your rental property.

According to TurboTenant’s October 2024 survey, 41% of landlords who aren’t house hacking insured their rental property with homeowner’s insurance.

Homeowners insurance covers your primary residence and doesn’t include coverage related to missed late rent payments or tenant damage. It only applies to property that the policyholder lives in; if you don’t live in your rental property, you should not be using homeowners insurance. Otherwise, you risk your property damage and liability protections when a claim rolls in.

Landlord insurance is specifically used to cover rental property that the policyholder doesn’t live in, which is why it often includes loss of rental income protection. 

It’s tempting to use homeowners insurance even if you don’t house hack because landlord insurance premiums typically cost 25% more, but you will regret being improperly insured when you try to file a claim. Speaking of which…

How to File a Landlord Insurance Claim

Many housing providers don’t know how to file a landlord insurance claim until an issue pops up, then they have to scramble to determine next steps.

According to a recent TurboTenant survey, only 9% of landlords have filed a claim for their rental property in 2024.

To file a landlord insurance claim, follow these steps from Reedy and Company:

• Make sure your tenants are safe.
• Call the authorities if needed.
• Assess the damage as soon as possible, taking pictures and videos.
• Document what happened, what was damaged, and what’s missing (as applicable).
• Make a list of what you need to show the insurance company.
• Contact your insurance agent.

An insurance adjuster will be sent out to the property to assess the damage, so be sure to avoid touching the impacted area and tell your tenants to avoid it as well. Your insurance agent will direct you to the proper form to file; use your pictures and videos as a guide. Finally, be sure to keep the documents you’ve collected for your records. 

Unfortunately, it’s likely that more landlords and property owners will need to know how to file insurance claims as natural disasters increase in both frequency and damage. According to the National Centers for Environmental Information, “the U.S. has sustained 400 weather and climate disasters since 1980 where overall damages/costs reached or exceeded $1 billion (including CPI adjustment to 2024). The total cost of these 400 events exceeds $2.785 trillion.”

As of November 2024, there have been 24 confirmed weather/climate disaster events with losses exceeding $1 billion each. From 1980-2023, the annual average number of disaster events was 8.5; the annual average from 2019-2023 was 20.4 events.

That means that, no matter where your property is, you should take heed of how to file an insurance claim post-natural disaster.

What should landlords do after a natural disaster?

We hope you and your tenants never face the chaos and heartbreak that natural disasters bring – but it’s better to have a game plan in place before you need one versus scrambling in the wake of a major situation. Thinking ahead is key, so check out this blog on how to prepare your rental property for wildfires, extreme weather, and other natural disasters.

When circumstances beyond your control are on the horizon, you should:

1. Provide tenants with preparation information
2. Handle physical prep, like trimming trees and installing hurricane shutters as applicable
3. Encourage tenants to follow evacuation orders 
4. Assess damages post-disaster
5. Follow up with insurance claims

If you experience a natural disaster, contact your insurance provider immediately. You need to determine how long you have to file a claim, how long it’ll take to process, and whether you’ll need estimates for repairs.

The Insurance Information Institute also recommends making temporary repairs, keeping all of your receipts, and assessing whether your tenant can safely remain on the property. Check your local laws to determine your responsibility in helping the tenant relocate, and lead with empathy regardless.

We’ve discussed different types of landlord insurance, renters insurance, and what to do after a natural disaster – but what if there has been too much risk, and your insurance company decides to stop servicing your area?

How can I maintain landlord insurance if insurance companies are pulling out of my state?

If you live in Florida or California, you’ve likely experienced insurance companies pulling their services. It’s a scary situation, and one that more folks could find themselves in as the risk of insuring properties on the coasts increases.

First, know that your insurance company must alert you if they’re going to stop insuring your properties. Typically, you’ll receive a nonrenewal notice one to three months before your policy ends. If you get that unfortunate letter in the mail or in your inbox, don’t panic. Instead, call your insurance provider immediately. There may be a quick fix, like paying a higher deductible or trimming back vegetation in your yard to limit the spread of wildfires. If they tell you there’s nothing you can do to insure your property, your next move is to scope out your state’s Fair Access to Insurance Requirements (FAIR) plan.

According to the Center for Insurance Policy and Research, FAIR plans are “are state-mandated property insurance plans that provide coverage to individuals and businesses who are unable to obtain insurance in the regular market. These plans are typically used as a last resort and provide basic coverage for properties that are considered high-risk or difficult to insure due to factors such as location, age, or type of construction.”

Many states in the U.S. have their own FAIR plan, though the structure and regulations vary. Some states have just one state-run insurance plan, while others have multiple plans operated by different insurance companies. Expect to pay more for this type of insurance than you did for your original policy.

If your state doesn’t have a FAIR plan, explore surplus line insurance. This type of policy covers risks not typically covered by standard insurance policies, which means it’s also more expensive than standard insurance on average. However, the benefit to leveraging surplus line insurance is that it can be sold by insurers not licensed in the policyholder’s state, providing you with more options to consider when trying to insure your rental property after insurance companies pull out of your area.

Though you’re likely put off by the mentions of more expensive policies and may want to avoid getting new insurance, don’t be fooled – doing nothing can cost you even more in the long run. Beyond the fact that it’s not a great idea to leave such a big asset unprotected, it’s highly likely that your lender has some kind of insurance requirement attached to your mortgage. If that’s the case, they can step in and purchase insurance for you via a force-placed insurance policy, which often costs double your typical policy.

Keep the Landlord Insurance Conversation Going

Head over to TurboTenant’s Better Landlords forum, log in using your TurboTenant account credentials, and chat with your fellow landlords about all things insurance (or any other property management topics that tickle your fancy).