Landlord insurance can make a difference for portfolios small and large
With the rental housing industry’s growth in recent years, many landlords have been busy acquiring properties and meeting resident demands. Too often, insurance professionals say, the property owner or management company doesn’t fully cover its bases with the right types of coverage.
Recent reports show that as most U.S. homeowners don’t carry enough insurance, and one and three try to save money by purchasing less insurance.
In the rental housing industry, one common misconception is that a basic homeowner’s policy will fully cover the landlord from property damage and other liabilities. Typically, says Jeff King of Ramey King Insurance in Denton, Texas, a new landlord will scrimp on insurance when starting to build a portfolio.
“You will see someone who owns two or three houses, and at that point owning real estate may be great for the long term,” said the 30-year real estate investor and insurance agent. “In the first years, it’s a tight business, and a lot of times landlords are trying to get by as little as they can. They end up winging it quite a bit.”
But, a liability or damage issue can be devastating if the landlord and property isn’t adequately covered. Also, the investment can get upside down when a property isn’t earning income because of a loss.
In addition to establishing robust insurance coverage, landlords should also protect themselves. A good rule of business is placing properties into an entity – such as a limited liability corporation – rather than in their name in an effort to minimize personal liability.
“That’s the first thing they don’t do,” King said. “I’ll see people who have 20, 30 or 40 houses, all in their name. Strange things can happen. I think it’s good to have a division between business and personal operations.”
King recommends that property owners and management companies build a protection plan through a landlord insurance policy. The policy should include coverage for the property and liability, replacement cost, broad perils, worker’s comp and business interruption with a reasonable deductible.
Property coverage and general/personal liability
The asset and property should be fully insured. Many mortgage holders require a general liability policy, but it’s also important to have personal liability protection. A landlord may be held responsible in the event a tenant, visitor or roommate is injured at the house or someone else’s property is damaged. A commercial policy can help protect the landlord against the financial devastation of a lawsuit.
General liability policies typically cover a range of damages, including fire, and limits should be set to protect the landlord.
Construction costs have skyrocketed in recent years, and, instead of insuring their property for the amount they pair for it, landlords should insure their property for the cost to replace it.
Marshall & Swift, who tracks replacement costs for insurers, has released data in recent years suggesting that two-thirds of American homeowners are underinsured. Simply, the policy limit is below what the actual cost is to replace the home in the event of a claim.
King recommends that landlords determine replacement cost value and insure the property accordingly.
Broad perils coverage and reasonable deductible
Landlords should consider a wide range of coverage for losses resulting from fire, hail, flooding, tornados, wildfires and others. King says types of losses indigenous to the area typically drive coverages, but anything can happen.
The U.S. has experienced shifts in frequency and location of natural disasters in recent years, some attributed to changing weather patterns. Flood insurance coverage has been a hot topic given hurricane damage and excessive rainfall throughout the country. Flooding and damaging wind were the most destructive natural hazards at a cost of $17 billion 2016 – six times greater than overall flood damage from the previous year.
Other natural disasters had significant impact last year. In Texas, hail and wind damage exceeded $5.5 billion in estimated losses, the highest for the Lone Star State since 2008. Also, more than 60 percent of earthquakes of a magnitude 3.0 or greater across the country occurred in Oklahoma.
King said landlords should consider getting a quote for the broadest coverage possible and making a business decision on what to include or cut. Also, arrive at a manageable deductible.
Loss of income/rent due to business interruption
When a property is inhabitable, the revenue clock is ticking. For every week or month of repairs to return the home to livable conditions, the landlord is losing money. A loss of income endorsement is intended to cover lost rent.
“Loss of rents is like a disability on the building,” King said. “It’s a very valuable coverage for a business interruption. If there is fire, the house may sit there a month of two before work begins. You might see some properties that don’t reopen. That’s usually because they didn’t have loss of rent or business interruption coverage.”
Worker’s compensation is intended to protect the landlord in the event that a contractor working on the property or staff maintaining it is injured performing work related to the property. Often, small contractors like a handyman won’t have adequate insurance, and the landlord could be responsible if they are injured.
“It can be pretty tricky in residential, but landlords need to look at this,” King said.
King cautions that landlords prepare for the unexpected when purchasing a landlord policy. The cost for adequate insurance often is pennies compared to losses resulting from being uninsured.
“We never know what tomorrow may hold,” he said. “If you have a $100,000 rental house with no insurance and it burns to the ground, you’ve lost $100,000.”
Worse yet, if a tenant is injured and sues, the loss can be greater.
**Please note that this blog article, and its contents, is being provided for informational purposes only. It does not constitute legal or other professional advice and should not be used or relied upon as a substitute for such advice. You should consult with a qualified professional for any legal or insurance-related questions you have relating to the subject matter.**