Rental Property Insurance: Tips and Advice

Rental Property Insurance: Tips and Advice

Whether you’ve got a tiny rental next door to your home or a portfolio of 200 properties, understanding insurance and how it does and doesn’t protect your assets is key.

Here’s an overview:

As a property owner, there are three primary things your insurance policy should protect:

The most obvious coverage is for the structure itself. If something bad happens to your investment property it’s value is diminished. That could be a total loss like a fire or tornado leveling the structure. It could also be a partial loss like a burst pipe causing water damage to your wood floors.

This is listed as DWELLING coverage on your insurance policy.

There is very limited PERSONAL PROPERTY coverage on a Dwelling owner’s policy. This is because you don’t usually have belongings in the house. The personal property of your renter is NOT covered under your insurance policy. This is one reason for renters to have their own RENTER’S INSURANCE POLICY.

The is coverage for bad things that happen to other people because of you or your property. Common examples are a person falling down the stairs, tripping on your sidewalk, or being injured by faulty construction.

The renters in your property are the most likely to experience these things. That’s why most rental contracts have “Hold Harmless” clauses. This is something you should talk to a lawyer about when creating your rental contract.

The second group of people to potentially experience injuries on your property are the friends and family of your renters. This is the most important reason to REQUIRE TENANTS TO HAVE A RENTER’S POLICY. Liability on a renter’s policy would be first to respond and make you less likely to experience a liability claim.

The last of the three major coverages protects the income that you receive from a property. If there is damage that requires a renter to move out for a period of time, you likely won’t receive rent payments. Business Income coverage replaces that lost income.

The DWELLING COVERAGE is the maximum limit an insurance company would pay out for damage to your property. Many investors think this has something to do will how much your property is worth. That is incorrect. The Dwelling coverage is figured based on REPLACEMENT COST. Replacement Cost is the estimated amount it would actually cost to rebuild the structure. The figure includes contractors, wood, drywall, roofing, etc.

Sometimes Market Value and Replacement Cost are close. Other times they are significantly different. For example, let’s say you buy a 2000 square foot house for $100,000. The insurance company will likely want to insure it for around $250,000 ($125/square foot). You may feel like the insurance company is insuring it for way too much but the reality is you bought the house for much less than it would cost to rebuild. Market Value & Replacement Cost are not the same thing.

You might say, “I don’t care. I bought the house for $100,000, let’s insure it for $100,000.” You wouldn’t be the first person to think that. Maybe you don’t even care if $100,000 is all you’d get in a claim. But actually, you wouldn’t even get that.
Insurance companies have a rule to combat underinsuring a house and it’s called the COINSURANCE CLAUSE.

In a claim, EVEN A SMALL ONE, the company will assess whether you’re dwelling coverage properly insures the house. If it doesn’t, a formula is used that diminishes the claim payout in direct relation to how much you underinsured.

In the above example, if the house totally burned down you’d get about $40,000.

Insurance coverage is based on the bad thing that happened (occurrence). Different policies list different events that are (or aren’t covered). Here’s the 3 primary options:
o BASIC (DP1) – Covers 11 “Named Perils” including lighting, fire, smoke, wind, hail, and more.

o BROAD (DP2) – Covers 16 “Named Perils” including everything from Basic plus burst pipes, weight of ice and snow, and more

o SPECIAL (DP3) – The best kind. Shifts from what is covered to what ISN’T covered. If a bad thing that happens isn’t specifically excluded it’s covered.

That’s it! What are your questions? Please ask them in the comments section below!!

  • Hey, this is Jeremy, the owner of Shine Insurance Agency
    and your host for the YouTube channel
    that you’re on right now, Shine Insurance.
    Today we’re gonna talk about investment properties,
    and we’re gonna dig in.
    So if you don’t own any investment properties
    and you’re just thinking about buying one,
    you have a couple, or you have 200,
    if you wanna understand insurance,
    we’re gonna break it down for you,
    real simply, real easy, right now.
    (mellow music)
    Property insurance basically has three types.
    The first is homeowners insurance.
    Simply put, that means that you are going to be living
    in the house that you own.
    The second type is tenant-occupied houses,
    probably what most of your investment properties will be.
    This is when someone’s living
    in the property that is not you.
    And the third is vacant properties,
    properties that don’t have anyone living in them at all.
    The first type, homeowners insurance,
    is not what we’re gonna talk about in this video.
    There’s other videos on our channel,
    if you wanna check out homeowners insurance,
    you should go check those out.
    Let’s talk first about the second type,
    which is tenant-occupied.
    First of all, you really need to have a lease
    with your tenants.
    You need to have a lease set up,
    probably have an attorney put that together for you
    so that your tenants have signed something
    and agreed to how they’re gonna take care of the space,
    what they’re gonna pay for, what they’re not gonna pay for,
    all those kinds of things.
    Why that’s important when it comes to insurance
    is that insurance claims are based
    on those lease agreements.
    It’s super important that you have those in place
    when a claim happens, because the claims adjuster,
    the people that are working on the claim itself,
    is gonna look at that lease agreement
    as a way of deciding who’s responsible for
    whatever it is that happened,
    especially if it’s a liability claim.
    So having a lease agreement is super important.
    Let’s talk about the actual coverages.
    So there’s basically two types of insurance coverage
    on your investment properties.
    One is going to be property coverage,
    that is simply coverage for the structure itself.
    If a fire happens, if a tornado happens,
    if something happens to the structure of the home,
    we’re going to take it back to the way it was before,
    we’re gonna rebuild it or fix the damage
    based on the insurance policy that you purchase.
    So the first kind of coverage you have is property.
    The second kind of coverage you have is liability.
    This is coverage for bad things that happen to other people
    because of your property.
    So if someone tripped on the front steps,
    or if there was something that happened on the property,
    someone was hurt, and they either needed medical attention
    or they hired a personal injury attorney,
    and either way, your insurance policy has
    liability coverage there to help deal with that situation.
    In my opinion, you wanna have at least $500,000
    of liability coverage on your policy.
    If you have more properties,
    which means more exposure to bad things that happen,
    I would increase that to a million,
    and maybe even have a one, two, or three million dollar
    liability umbrella on top of that.
    Really depends on how much exposure you have,
    how many properties you have,
    and what your comfort level is with your liability coverage,
    how much coverage you wanna have.
    You can never really go too high on liability coverage,
    because if something bad happens, you wanna make sure
    that you have enough liability coverage on your policy
    to deal with even the worst-case scenario.
    So you have property coverage, coverage for the structure,
    and liability coverage, coverage for bad things
    that happen to other people because of your property.
    Those are the two types of coverage we’ll talk about.
    Let’s start with property.
    We want to insure our building for the amount of money
    it would actually cost to replace it.
    Now, this may have nothing to do with the amount of money
    you bought it for, in fact, if you got a great deal,
    it’s probably going to be higher
    than the amount that you bought it for.
    In general, properties are insured from between
    $125 a square foot to even up to $200 a square foot
    for super, super nice properties.
    So that’s the ballpark that you wanna be in,
    but you definitely wanna talk to your insurance agent
    and talk through the property coverage limit,
    the building coverage limits for your property,
    and make sure that they’re properly insured.
    This is a great place to talk about the coinsurance clause.
    A coinsurance clause is really kinda insurance-geeky,
    and I won’t dig too deep into it, but basically,
    if you under-insure your property,
    if you don’t insure it for the actual amount
    that it would need to be replaced, in a claim,
    even a small claim, they’re going to penalize you
    in that claim situation and actually give you
    even less money than they should
    if you haven’t properly insured the property.
    So a coinsurance clause is generally a percentage
    of what the house should be insured for.
    So if you see a 100% coinsurance clause,
    that’s kinda concerning.
    That means that you’re gonna be penalized if you
    under-insured at all, if you under-insured at all,
    that coinsurance clause is gonna come into place
    and penalize you.
    Most of the time, when I put policies in place
    for investment properties,
    I wanna see a coinsurance clause of 80%.
    Which means there’s some wiggle room there.
    We’re gonna insure for at least 80%
    of the replacement cost, and properly,
    we should insure all the way to 100%
    of the replacement cost.
    But because that coinsurance clause is set at a lower level,
    we’ve got a little bit of leeway there,
    so that we don’t get penalized in a claim situation,
    even if it turns out we were a little bit under-insured.
    So if you have a coinsurance clause on your policy,
    80% is what you wanna see, and if you have 100%,
    you’d better make sure that you actually are insured
    to the replacement cost of the property,
    or you’re gonna end up in trouble in a claim situation.
    So we’ve got building coverage,
    the coverage that it’s gonna,
    coverage for actually replacing your house,
    and then we wanna beware of that coinsurance clause
    as a part of making sure that our building is covered
    properly, and our claims are paid in the best way possible.
    Okay, couple more types of coverages we wanna talk about.
    One is called business income coverage.
    You’re making money off of these properties, right?
    You’re getting a certain amount of rent
    from the renters each month, probably.
    If that house were to burn down,
    and it was gonna take a whole year to replace that house,
    then you wouldn’t be getting income anymore.
    The renter doesn’t have to pay rent
    if that property isn’t there for them to live in anymore.
    And so you lose income because of that.
    So not only are you having to rebuild this space,
    but you’re losing income that you would have had
    if the bad thing hadn’t happened, if the fire
    or the tornado or whatever happened hadn’t happened.
    And so I suggest that you have building income coverage
    on your policy, or, excuse me, business income coverage
    on your policy, and you have that for the amount of money
    you would make off of that structure.
    So if you’re getting rents of $10,000 per month
    from a given structure, then you wanna make sure
    your business income coverage is set at $10,000 per month.
    Now, there’s lots of little details on business income
    coverage, not gonna go too deep into it right now,
    but definitely make sure you have
    business income coverage on your policy.
    There’s lots of other types of coverage on the policy.
    There’s cyber liability, there’s equipment breakdown,
    there’s all different kinds of little things
    that I’m not gonna dig too deep into,
    because this video is just generally about
    investment properties.
    So you definitely wanna talk with your insurance agent
    and ask, what do I have?
    What don’t I have?
    And make those decisions.
    If your insurance agent included something
    that, ultimately, you don’t wanna have, that’s okay.
    You talk it through with them,
    you decide to remove it, no big deal.
    So talk through the property coverage,
    talk through the liability coverage,
    make sure the coinsurance clause is at about 80%,
    if not lower, make sure you have business income coverage
    on your policy, and you should be all set.
    Last thing I’ll talk about before
    kinda going to the next step is,
    you’re gonna have a deductible.
    My suggestion for properties, if you have
    multiple properties, is at least $2,500.
    You don’t wanna make a bunch of small claims.
    It’s gonna make your insurance premium go up anyway.
    So have at least a $2,500 deductible,
    and if you have lots of properties,
    you might even have a $5,000 or $10,000 deductible
    on your insurance policy, making sure you don’t make
    those small claims and get yourself in trouble
    with your insurance premium going up ’cause you had
    two, three, four claims in the last couple of years.
    That’s definitely what you wanna avoid,
    so having a slightly higher deductible, $2,500 at least,
    is a smart idea on investment properties.
    After you put the policy in place, oftentimes,
    the insurance company’s gonna wanna
    come out and take a look at it.
    And there’s a few things that they’re looking for,
    and might suggest you make changes about,
    so I thought I’d just point it out.
    If you have any stairs in your house,
    either outside or inside,
    they’re gonna wanna have a hand railing on those stairs.
    If you have a sidewalk that has cracks or different levels,
    they may want you to level it
    or figure something out about that.
    If you have older roofs, they may decide to either
    change the coverage on the roof
    to what’s called ACV coverage, a lesser coverage,
    or they may even say, you know, the roof’s too old,
    there’s probably gonna be a claim soon,
    and we don’t wanna insure the property.
    So you would have to replace the roof
    or find another insurance company
    who’s willing to insure a house with an older roof.
    So roofs, furnaces, hand rails,
    the fact that there’s fire extinguishers in the house
    or smoke alarms, if you have a sprinkler system
    in your apartment complex or something like that,
    that’ll be a positive as well.
    Just all those kinds of things are parts of
    how the insurance company’s gonna take a look
    at the property after the policy’s been put in place
    to make sure that it’s up to the standards
    that that insurance company expects
    when they’re insuring a home.
    So that’s pretty much it.
    If you are looking to invest in properties,
    it’s a great investment, they’re a wonderful way
    to invest your money and make money on top of that
    over the course of time.
    Lots and lots of people invest in properties.
    I hope you learned a little bit about
    property insurance in this video, and please,
    go ahead and make comments below.
    Ask me the things I didn’t talk about,
    and I’m more than happy to describe those to you.
    So until the next time, have a wonderful day.
    (mellow music)

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