Insurance on your rental property is an absolute requirement. Please keep in mind that insurance covers both property damage plus liability resulting from injuries that occur on the property. You must have a “Landlord” policy; otherwise your insurance company will either cancel your policy or deny you coverage in case of a claim.
Here are some issues extremely important for you to look for in a landlord policy:
- “All Risk” provision:
Basic landlord policies cover natural disasters (fire, wind, tornados etc.). This will not be sufficient coverage. An “all risk” provision expands coverage to include theft, vandalism, malicious mischief, etc. This will cover costs like an ex-spouse spray painting vulgarities throughout the house, or the cost of a refrigerator that a departing tenant takes with them. Make sure your policy has an All Risks provision!
- Learn what the “vacancy” requirements are:
Many landlord policies reduce or even cancel coverage if the property is vacant for more than 30 days. Make sure you are fully aware of what the premium changes are or what coverage may be dropped during a vacancy.
- “Loss of Rents” provision:
This provision will continue paying you the rental in the case of total loss during the re-build period necessary to get the property back into rent-ready condition. Fires are an obvious cause, but we also have incidents of tornados in Oklahoma.
- Consider increasing your liability coverage:
Basic Landlord policy coverage is typically $300,000. In today’s world you need more coverage and most companies offer $500,000 or $1,000,000 for very low premium increases. It may only cost $20-$30 per year to raise your coverage to $500,000.
- Consider a Personal or Commercial Umbrella policy:
Umbrella policies cover your home, car, boat, big screen TV and your iPod. Policies are inexpensive; $1,000,000 in coverage may only cost you approximately $300 per year and the day may come when you wish you had it. An important issue to know is how your insurance company determines when your coverage should switch from personal to commercial.
There have been situations when after an investor has purchased their 4th or 5th rental property, the personal umbrella becomes void (every company has their own formula). A Commercial Umbrella policy covers everything you need without limits and has a reasonable premium.
- Make sure to add your Property Manager as an “Additional Insured”:
Yes, this is a requirement of your Lease Management Agreement. It is a standard practice in the industry and costs you nothing!
- Why should you add your property manager to your Landlord Policy as an “Additional Insured”?
- Your Property Manager is representing you as an agent and needs to be protected just as you would protect yourself.
- Being named on the policy will allow your Property Manager to deal with your insurance company directly in case of loss. Obviously, this will save you considerable headache if you are an “out of state” owner.
- Lease Management Agreements indemnify brokers in the case of a lawsuit, requiring owners to compensate for litigation charges. If your Property Manager is an additional insured on your policy, your insurance company will include them as part of your claim and potentially save you thousands of dollars in legal fees if they had to protect themselves separately.
- Lastly, although it pains to explain this, you want your manager on your side of the table in case of a lawsuit.
- As a manager without title to your property, we can not acquire liability insurance covering your property, there is no potential gain for a manager that would cost the policy-holder and this addition does not cost any additional premium.
- This can get confusing, as many policies automatically cover a third party manager without an additional endorsement. Some agents aren’t familiar with Landlord policies and don’t realize that their companies allow this coverage, so you may have to go to the company directly. Some insurance companies have been refusing to add this endorsement, so you may have to change insurance companies to protect your rights. We are happy to refer you to agents/companies that understand the investor business, so please feel free to inquire.
- Watch the terminology!! You want your manager to be endorsed as an “Additional Insured”, not listed as an “Additional Interest”. Additional interest will simply insure that we get notification in case of a policy change or cancellation.