Landlord insurance: coverage, requirements and costs

A landlord's homeowners policy stops working the day a tenant moves in, and that is where most mistakes begin. Renting out a house, duplex or small apartment building is a business: the property policy has to respond to a building the tenant occupies, the liability policy has to answer for a tenant's visitors, and rent itself is an asset that stops when the building is damaged. Residential lessors fall under NAICS 531110, and landlords of commercial buildings under 531120.

Why landlords need business insurance

The property is the obvious exposure. A fire started by a tenant's cooking, a water heater that fails while the unit is vacant for two weeks, or a roof that takes hail all land on the owner. But the less obvious exposures drive the larger claims.

Liability comes first. A tenant's guest falls on a broken step, a child is hurt at an unfenced pool, or an assault occurs in a poorly lit lot, and the owner is named. This is premises liability, covered in more detail in premises liability: how slip-and-fall claims are handled.

Then comes the tenant relationship itself. Most states imply a warranty of habitability in residential leases. New York's version, Real Property Law 235-b, treats the landlord as promising that the unit is fit for human habitation and free of conditions dangerous to health or safety, and provides that a tenant's waiver is void. Claims arising from mold, heat outages or pest infestations can mix property damage, bodily injury and breach-of-lease allegations, and a standard liability policy may respond to the injury part only.

Finally, the Fair Housing Act prohibits discrimination based on race, color, religion, sex, national origin, familial status and disability. The Justice Department describes conduct such as steering, refusing to rent to families with children, and demanding sexual favors. Individuals may file with HUD or sue in court. Whether any policy defends a discrimination claim depends on the wording; a general liability policy often excludes it, and coverage typically comes, if at all, from a specific endorsement or a management liability or landlord-specific form. Ask for it by name.

Core coverages

• Dwelling-fire or commercial property. Small residential rentals (one to four units) are often placed on an ISO Dwelling Property form. The DP-3 (DP 00 03, special form) insures the dwelling and other structures on an open-perils basis and personal property on a named-perils basis, according to summaries of the form. Larger buildings, mixed-use and commercial rentals move to a commercial property form such as ISO CP 00 10. The practical difference: commercial forms accept more units and tenants, carry business income, and are written with a coinsurance clause; see commercial property insurance: what it covers and what it doesn't and replacement cost.
• Loss of rents. On the DP form this is Coverage D, fair rental value, which pays lost rent when a covered peril makes the rented portion unfit to use. On a commercial form it is business income or rental value coverage; see business income. It typically responds to physical damage, not to a tenant who stops paying.
• Landlord liability. The DP 00 03 does not carry personal liability on its own, and liability is added by endorsement or a separate policy. A landlord policy or a general liability policy fills that gap; see general liability insurance: what it covers and what it does not.
• Ordinance or law. An older building rebuilt after a fire must meet today's code; see ordinance or law coverage: paying for code upgrades after a loss.
• Umbrella. Worth considering for any owner with several units; see commercial umbrella insurance.
• Flood. Excluded on the standard forms; see Commercial flood insurance: NFIP limits and private options.

Nationwide's landlord insurance page lists property damage, liability and lost rent as the typical components and states that landlord insurance does not cover a tenant's belongings, which is why many landlords require a renters policy.

Coverage you may be required to carry

• Lenders. A mortgage on a rental property requires property insurance, usually with the lender named as mortgagee, and often liability at a stated limit. Commercial loans add rent loss.
• Leases. Commercial leases often make the landlord carry building cause-of-loss coverage and require the tenant to name the landlord as additional insured.
• Workers' compensation. If you employ a maintenance person or resident manager, state law applies; see workers' comp requirements by state: who must carry it.
• Lead-based paint. Lessors of housing built before 1978 must give tenants the EPA lead hazard pamphlet and disclose known lead-based paint or hazards, and a knowing violator can be liable for three times the damages under 42 U.S.C. 4852d. This is a compliance duty, and many policies carry a lead exclusion.

Common claims and how to prevent them

• Fires. Working alarms, annual electrical checks for older wiring, and a clear policy on space heaters.
• Water damage. The most frequent property claim. Shut-off valves, a winterization checklist for vacant units, and replacing water heaters at the end of their life. Most policies suspend or limit coverage for freezing if heat is off.
• Slips and falls. Handrails, lighting and snow-and-ice policies in writing.
• Habitability disputes. Keep a dated log of every repair request and response. It is the first thing a defense attorney asks for.
• Fair housing complaints. Written screening criteria applied uniformly; train anyone who answers a rental inquiry.
• Vacancy losses. Many forms limit vandalism, glass breakage and water damage after a stated period of vacancy, such as 60 consecutive days, so read the clause and see vacant building insurance and the vacancy clause and vacancy clause.

What drives the cost

• Property: replacement cost of the building (not market value), age and condition of roof, wiring, plumbing and heating, construction type, protection class, location and the cause-of-loss form. Wind, hail, wildfire and flood exposure matter most in catastrophe-prone areas.
• Liability: number of units is the usual exposure base, with pools, trampolines, dog policies and prior claims weighed.
• Loss of rents: the limit and the number of months of rent insured.
• Occupancy: long-term tenants, student rentals, short-term rentals and vacant units are rated differently. A unit rented by the night is not an ordinary rental; see Short-term rental insurance.
• Underwriting questions: years owning rentals, number of units, tenant turnover, vacancy history, screening process, and loss runs.

Specialized coverages to consider

• Equipment breakdown for boilers, HVAC and elevators; see equipment breakdown insurance: what it covers that property insurance does not.
• Rental-specific liability endorsements that address personal injury, such as wrongful eviction or invasion of privacy.
• Sewer and water backup.
• Employment practices liability if you have employees.
• Crime if a manager handles deposits.

How to buy

Individual owners with a handful of units can compare landlord programs online; Nationwide is one carrier that publishes a landlord page. Owners with larger buildings, mixed-use property or a portfolio usually do better with an agent who can place a blanket commercial property and liability package. Have ready: addresses, year built and updates to roof, plumbing, wiring and heating, construction type, number of units and annual rent, rental history, any pool or other hazards, lease template and loss runs. See how to prepare an insurance submission underwriters will read.

Key takeaways

• A homeowners policy does not insure a rental; use a dwelling-fire (DP-3) or commercial property form with liability added.
• Loss of rents responds to physical damage by a covered peril, not to a tenant who stops paying.
• Ask whether habitability and fair housing allegations are defended; the standard liability policy may not respond.
• Vacancy, water and freezing clauses cause many denials. Read them before you leave a unit empty.