3 Insurance Coverages Rental Property Owners Need

3 Insurance Coverages Rental Property Owners Need

Owning rental property is a great way to create passive income.  One thing many investors frequently take for granted is what type and how much insurance coverage they need to adequately protect their investment.  The two most important insurance coverages for a rental property owner to have are general liability and commercial property coverage.  These two coverages will protect yourself or your business from the liability you face owning rental property.  An additional type of coverage many property owners do not value as much as they should is business loss of income coverage. This is coverage will pay for any lost revenue that occurs while the property has to be repaired because of a covered loss.  Here are three detailed descriptions of the types of insurance you should consider the next time you look for general liability insurance.

General Liability Coverage

General Liability Insurance covers a property owner for any liability they might face.  A few examples of liability a property owner might face 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, or when a tenant is injured as a result of the landlord’s failure to keep the premises safe and in good working order. Where this type of coverage can operate in a grey area is the issue of negligence.  Each state and municipality will have their own laws governing this issue. In some states the occupier of the property does not have to show negligence or malicious intent, but simply prove that you knew about the damage to the property or should have known.  This is really a difficult place to be for a property owner, because there are also laws that prevent you from coming in unannounced to inspect the property.  For that reason, it is important to secure general liability coverage in order to cover the payment of damage awards, as well as attorney fees and costs incurred in defending against lawsuits.  A lawsuit does not have to legitimate to cause you to rack up enormous amounts of legal costs.  This is why it is important for any property owner to also partner with an attorney and an experienced independent insurance agent.  These advisors can help the property owner determine how much exposure your property may face. They can also help determine exactly what type or amount of coverage you need.  This can help you properly protect your investment to the fullest when you are looking for a general liability insurance quote, while not taking on unnecessary costs resulting from coverage you do not need.

Commercial Property Coverage

Commercial Property Insurance is the second coverage that every property owner needs to secure.  This type of coverage is distinctly different from a personal home owners’ policy.  One of the first steps a property owner should take is to get an accurate valuation of the property.  What many landlords do not understand about commercial property insurance, is that the value of the property used on an insurance policy is extremely important.  This is important because the property can be insured on a replacement cost valuation or on an agreed upon value.  In most cases, replacement cost is better for the landlord because it covers the total cost to tear down the property, removal costs and construction costs to replace the building.

If you have a policy that has an agreed upon value, the policy will pay up to that much and no more.  This amount is usually what the sale price of the building would be. If the building is not completely demolished and is ruled unlivable by the city, county or state; it is your financial responsibility to cover the additional costs.

For example: If you own a 30-year old building: It’s quite possible that the building might be only worth $150,000. However, rebuilding that same structure would cost closer to $450,000 in money. If it is insured on a replacement cost policy for only $150,000 and the building is damaged by a fire, the insurance company is only going to pay for 1/3 of the total cost to repair. If it’s insured on agreed upon value and the building is a total loss, the check you receive won’t even get close to the expense you’ll have to rebuild.

Business Loss of Income

Business Income or Loss of Income coverage is another key piece of insurance property owners should strongly consider purchasing.  This coverage provides compensation for the income lost during the period of time a rental property is uninhabitable due to a loss.  For example, if your building experiences a fire or some other natural disaster; this coverage will kick in to cover missed revenue you would have collected while the property is being repaired or rebuilt.

This coverage is commonly paid out based on documented actual revenue loss.  This is a good thing for property owners because you have a lease that states how much revenue the property brings in.  Also, most policies will provide coverage for the actual income loss that has been sustained for up to 12 months after a loss.  Extra expense coverage is an addition many property owners elect to add to their policy.  This additional coverage provides coverage in addition to the lost rental income and adds additional coverage for extra business expenses incurred as a result of the loss.  A prime example of how this coverage can help a business owner is:  A fire makes a rental unit uninhabitable for 3 months. In order to keep the lease agreements in force, the landlord had to provide temporary living arrangements for the tenants by securing rooms at an extended stay hotel for $500 a month. That’s $2,000 a month in additional expenses the landlord had to incur.  This coverage would cover these costs.


Mitchell Sharp is a Marketing Associate for 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.

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