Securing a sufficient level of rental property insurance, or taking other protective measures, is a critical element of responsibly using real estate to augment one’s income. Individuals who fail to take this step, often believing that is unnecessary or too expensive, will, in many cases, find themselves in an easily avoidable and expensive situation – one in which their property is threatened by an unhappy tenant. Purchasing various types of liability insurance to cover one’s rental property should be viewed as one of the many costs of being in the landlord business.
In many states, carrying certain minimum levels of insurance may be a matter of law, and, in other cases, when the building is not fully paid for, the bank that holds the mortgage may require certain coverage levels. Compliance with the law and the regulations of one’s lender are but the most basic of reasons to carry a sufficient level of insurance on one’s rental property. Even if one uses the utmost care in screening one’s tenants, the most amicable of renters may become litigious if their property is damaged or they are injured while in a rented space. In addition to ensuring that out of pocket expenses are limited, when one carries proper rental insurance, the insurance company itself may offer or insist on defending any claims made against the property or its owner.
The first type of insurance one needs to secure for a rental property is similar to a regular homeowner’s policy. This type of policy will protect the property’s owner against fire, theft, and other regularly occurring issues; flood insurance is almost always treated as a separate rider and should be purchased, as should earthquake insurance if applicable to the geographic area in question. This type of insurance will differ from a homeowner’s policy, however, because it will protect the property’s owner against damage done by renters. Insurance companies assume, with a fair degree of evidence, that a renter will not take care of a property as an owner would. Since a property owner is asking for protection against occupants of the property, the insurance company will demand additional premiums.
The cost of this first type of insurance can differ significantly based on the type of rental property and the level of rental property insurance coverage requested. The cost of insuring a single apartment within a larger complex will be considerably different than the cost of insuring a large apartment building or apartment complex. Part of the reason for this is that if one is attempting to insure a single apartment, many of the potential issues will be covered by the larger policy that applies to the building. For example, this type of policy will need to cover the possibility of a fire that starts in the apartment, but not need to protect against a fire caused by the building’s furnace. This difference is reflected in a significant price differential.
The premium an owner will pay for insurance for rental property that covers a single apartment will usually run about 10 to 15% above a regular homeowner’s policy. If, on the other hand, the policy needs to cover a multi-unit building, the range will be directly proportional to many factors: the number of units, the age of the building, the level of coverage needed, the condition of the major components in the building (such as the furnace, the air conditioning unit, trash chutes, etc.), the perceived quality of a neighborhood (insurance companies assume higher end neighborhoods have fewer incidents of crime and vandalism, but these properties cost more to repair), and financial strength of property owner. Trying to estimate the exact premium level is very difficult; it is better to get a rental property insurance quote from several different sources and select a competitive one.
The second type of insurance that one needs to carry on a rental property is liability insurance that protects the property owner against injuries sustained by a tenant due to defects in the property. While a certain level of wear and tear will be expected, a litigious tenant may try to claim that the landlord knew, or should have known, about any “defects” in the property. The next element of proving negligence on the part of the property owner is to show that he or she failed to warn the renter of the danger and did not take necessary and responsible steps to correct the problem. The issue, of course, is that even the most vigilant landlord cannot catch every problem before it occurs. While he or she may take reasonable steps to protect the tenant from everyday problems, an injured tenant (particularly one with an ambitious lawyer) may suggest that the property owner was negligent regardless of the level of care taken. The only way to ensure that these inevitable claims, including the nuisance claims, do not jeopardize the financial well-being of the property owner is to carry sufficient liability protection on the rental property.
The costs associated with this type of insurance will heavily rely on many of the factors discussed above. In some cases, a policy on a rental property may cover both types of insurance, while in other cases, the two types may be separated. It is usually advisable from a cost perspective to use the same insurance company for both policies. In unusual cases, the two policy types may be split between two insurers.
Another level of protection that a rental property may wish to consider is to create a company that will own the property and assume all of the liability. The most advantageous corporate structure for this is a Limited Liability Company (an LLC). The purpose of this structure is to separate one’s personal assets from one’s business assets. If the LLC comes under attack, the loss is limited to the company’s assets – in this case, the rental property; one’s personal assets cannot be attacked of the company is properly formed. This adds both a level of expense and additional protection. It is not necessary if one carries a sufficient level of liability coverage, but it can add to the peace of mind of property owner.
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