Landlord insurance helps protect landlords against financial risks that emerge from rented property. The most common reason to purchase landlord insurance is to protect against any incident that would leave the house or agreement in such a condition that no rent payments are made. This can extend to anything from lawsuits to damages to the home.
As all landlords know, houses are a common target for lawsuits, especially in the business of being a landlord. Landlord insurance helps mitigate the risk of lawsuits, legal fees, and lost rent when insurance is purchased against the risk of litigation. During this time, if the home or unit is contracted to be rented for a certain price, the insurance company will also pay out the cost of the monthly rent to the landlord, protecting the stream of income.
Landlord insurance, especially on larger properties can be as extensive and expansive as you need. You may want only payment protection, which will provide for income when the home is contracted to be rented but the tenants don't pay. You may also want protection against damages from upset tenants. Property damages can be expensive, many of which require more than just a layer of paint, so consider getting at least some high deductible coverage if you don't have enough cash on hand to make repairs.
Specific insurance policies are known as peril policies, where each peril that is insured is listed specifically on the contract. Comprehensive insurance policies are those where all situations and damages are insured, except those that are left out of the policy. Comprehensive is inclusive, peril is exclusive.
Actual Cash Value and Replacement Value
Whether you choose a “named peril” insurance contract or a comprehensive contract, you'll still have to choose once more between actual cash value policies or a replacement value policy.
Understanding the difference between actual cash value and replacement value is critically important. In actual cash value policies, the policyholder is protected against the actual cash value of the property damaged, minus depreciation. So, if you owned an air conditioner that was worth $5,000 new, and had depreciated in value to $2,500 before being broken, you would be insured for $2,500 and receive a payout of $2,500 minus your deductible. For some low premium, high deductible policies, $2,500 may fit entirely inside your own deductible, leaving you without a payout.
In a replacement value policy, the same $5,000 air conditioner that depreciated to $2,500 before being broken would be paid out to the tune of $5,000. You can't go buy the exact same air conditioner for $2,500, but you can buy a new one, a replacement, for $5,000.
Actual cash value policies are significantly less expensive since the actual cash value is almost always lower than the replacement value. Each year, you should be sure to contact your insurance agent to make sure that the depreciation in certain items such as appliances and other fixtures is adjusted, and so is your premium.
When Can Landlords Self Insure
Insurance policies serve two purposes. First, they provide for consistency in income, expenses, and repairs to damages caused by renters. Second, it allows to protect a full rental business against the hefty burden of one lawsuit or repair. Some landlords, however, may self insure, or hold limited insurance policies so as to minimize the difference between the cost of damages and the premiums paid out.
Larger rental businesses with hundreds of units can afford one or two bad paying tenants, or a few small damages. However, even larger operations almost always carry liability insurance to protect against lawsuits. For small time operators, comprehensive insurance helps smooth out the costs and risks, especially on paid off homes. Paid off units are, and will continue to be, targets for lawsuits, frivolous or legitimate.