Landlords Need Special Property Insurance

Are you an "accidental landlord"? There are more of them these days.

They are the people who never intended to be landlords, but maybe they bought a new house and couldn't sell the old one. So they're renting out the old one.

Some are those who bought a vacation home, but find they must bring in short-term tenants to cover higher-than-expected costs.

Listen up, virgin landlords: You need to revisit your homeowners insurance policy now. In all likelihood, your existing policy probably doesn't cut it anymore. Most cover owner-occupied homes, and yours no longer qualifies.

Your policy review should give you the answer to three questions: One, do you need landlord's insurance? Two, what are your options? Finally, there's the all-important question of cost.

When You Need Landlords Insurance

If you're only taking in renters a few weeks per year, your homeowners policy will typically provide coverage. But when rentals become more than occasional, your homeowners policy won't suffice.

"When you live in the same home as your tenant, you can endorse your homeowners policy with 'unit rented to others' coverage for that landlord-tenant situation," says Jason D. Hoffman, an independent insurance agent at Arbolino Agency in Middletown, N.Y. "But when you don't live in the same home as your tenant or you own a secondary home that you regularly rent out, you need a separate policy."

When does occasional rental of a second home transform to one that requires separate coverage? "It depends on the insurance company," says Bill Mills, vice president of Strategic Insurance Agencies Group of North Carolina, in Jacksonville, N.C. "You have to make sure the company will even allow short-term rentals," Mills says. "If it does, I typically look at the four-week mark."

Why not stick with your original homeowners policy? It's risky because any claims you make may not be covered. "The homeowner's insurance company doesn't consider that the home's being rented out when it issues your policy," says Hoffman. "If it's not aware of the rental, it can deny coverage if something does happen. It's better to let your insurer know you're renting to others, even if it's for a couple of weeks a year."

Know What Type of Landlords Insurance you Need

Policies for rental units have various names depending on the company. But they generally are referred to as dwelling policies, and fall into three categories: DP-1, DP-2 and DP-3.

"A DP-1 policy is basic and covers simple things like fire and vandalism," says Mark Carrasquillo, an account executive with insurance broker E.G. Bowman Co. in New York City. A DP-2 policy is broader. "It covers named perils like damage from a windstorm, hail, fire or vandalism," Carrasquillo says. Most even have a provision for collision -- as in, if a car hits your house.

"A DP-3 policy is a 'special form' or an 'open peril' policy," says Carrasquillo. "Unless a peril is specifically excluded, it's covered."

Most insurance brokers suggest landlords opt for a DP-3 policy. "For example, a DP-1 gives you only actual cash value on the house, where a DP-3 will give you its replacement cost," Mills says. Translation: With cash value, a roof that's 10 years old will be written down because of its age. With replacement value, you get the cost of a new roof. "It's more common for landlords to get a DP-3 policy."

Other insurers offer what are called landlord protective policies. They cover areas like equipment breakdown coverage for things such as boilers and furnaces.

Another area to consider coverage for is loss of rental income, should the building have to be emptied for repairs. Carrasquillo says "a lot of landlords think that if their apartment is unoccupied because a tenant leaves or is evicted, they can make a claim for loss of rental income. That's not true. There has to be a covered loss that causes you to lose income while the property is being fixed."

Also make sure you have sufficient liability coverage. "I encourage landlords to insure at $1 million on a rental," says Hoffman. Liability coverage protects landlords if they're sued for damages, such as from an indoor fall, an animal bite or someone slipping on a wet sidewalk. "It's only an additional $200 to $300 annually to go from $500,000 to $1 million in coverage."

The Cost of Landlords Insurance

There's no question you'll pay more for a landlord policy than for a standard homeowners policy on the same property. But not all that much more, says Hoffman.

"In my area, the typical dwelling fire or landlord's protective policy will run $800 to $1,200 annually," says Hoffman. "A standard homeowners policy is $700 to $1,000 depending on the size of the home."

Hoffman has one more piece of advice: "Always make sure your tenants secure renters insurance" to cover the tenants' personal property.