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Rental Property – What Insurance Do I Really Need?

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Owning rental property can be a great way to create passive income but like all investments it’s not risk-free. There is one way to mitigate against damage to the property and loss of rental income and that is with insurance but what types of insurance are needed? More than one type of insurance is required to adequately insurance your rental property so it’s wise to partner with an experienced independent insurance agent whom can help you determine how much risk you actually face with your specific property and how much of it should be covered with insurance.

Know the Law in your State

When it comes to the law there’s no ‘one size fits all’, for example each state and municipality have their own laws for governing negligence.  In some states the occupier of the property (Tenant) does not have to show negligence or malicious intent, but simply prove that you (Landlord) knew about the damage to the property or that you should have known.    A lawsuit does not have to legitimate to rack up enormous amounts of legal costs.  This is why it is important for rental property owners to also consider partnering with an attorney as well as an experienced independent insurance agent when working through your risks and required insurance cover. There are options for Landlords whom are not insurance experts to get quotes online however most need help determining which insurance products are required for their specific needs when requesting a general liability insurance quote. A lack of knowledge can end up costing the property owner a lot more in insurance premiums when they take coverage they don’t need so what types of insurance are recommended for Landlords?

Three types of insurance very rental property owner should have.

General Liability Coverage

General Liability Insurance is usually the first type of insurance any investor or business owner purchases. General Liability and Workers’ Compensation Coverage are required by law in most states. For this reason, most business owners start with these two coverages and then determine if they need additional coverages throughout the purchasing process.  General Liability Insurance covers a property owner for any liability they might face to thirds parties on the property you own.  There are many types of liability you may not know you face as a property owner.

A few examples of liability a property owner faces include:

  • When a tenant or visitor are injured due to the landlord’s negligence.
  • When a property maintenance issue results in a tenants’ injury or personal property loss.
  • When a tenant is injured as a result of the landlord’s failure to keep the premises safe and in good working order.

These are just a few of the types of liability you may face as a rental property owner.  Additional risks you face may include losses due to fire, storm, tenant or employee injuries, tenant or employee theft and even discrimination lawsuits filed by tenants or employees. A lawsuit does not have to be legitimate to cause you or your business to incur enormous legal costs.

Commercial Property Coverage

Commercial Property Insurance is the second coverage that every property owner should secure.  Commercial property insurance is very different from a home owners’ policy.  One of the first steps a property owner should take is to get an accurate valuation of the property.  What many rental property owners fail to understand, is the level of importance the value of the property is on an insurance policy.  The property can be insured one of two ways, on a replacement cost valuation or on an agreed upon value.  In almost all cases, replacement cost is better for the landlord. Replacement cost value is better because it covers the total cost to tear down the property, removal all the debris from the property and construction costs to replace the building.  When you purchase a policy that has an agreed upon value, the policy will pay up to that much and no more.  This is why it is crucially important to get an accurate valuation.  This amount is usually what the sale price of the building would be and comes with a lower premium. Be careful with the urge to save on premium because in most places the owner of the property is financially responsible for all demolition costs.

Business Loss of Income

Business Loss of Income Coverage is the third type of insurance property owners should purchase. A business loss of income insurance policy will cover to compensate you or your business for the income lost during the period of time when a rental property is uninhabitable due to a covered loss.  For example, if your building is damaged by a tornado and has to be repaired or rebuilt; this coverage kicks in to cover missed rent payments you or your business would have collected while the property is being repaired or rebuilt. Frequently this coverage is paid based upon documented actual revenue. This is good for property owners because you have a binding lease stating how much revenue the property generates each month.  Depending upon the policy you can collect payments for lost rent for up to 12 months after a loss.

This information has come from Mitchell Sharp of General Liability Shop. Mitchell has expertise in workers’ compensation and cyber liability insurance. He has a passion for using his knowledge of commercial insurance and digital marketing to benefit the small business community.