Some landowners believe that getting a homeowner’s insurance policy will afford adequate coverage for their multifamily rental property. This is a huge misconception and can prove to be a liability for owners. That’s because most conventional homeowners’ insurance policies only provide coverage in circumstances where the property is owner-occupied. Instead, rental properties should be covered by a business owners’ policy (sometimes referred to as a “BOP”). A BOP is a class of landlord insurance that renders greater coverage to rental property owners.

Knowing the Contrast Between Homeowners vs. Landlord Insurance

There are a few fundamental distinctions between homeowners and landlord insurance. A homeowner’s insurance policy will typically cover the home plus personal property damage, liability coverage, and other specific protections depending on the features of a home (e.g., a swimming pool or particular breeds of pets). However, a homeowner’s insurance can only be used to safeguard a person’s primary residence. In other words, if you’re an investor, you must owner-occupy the property being insured.

Landlord insurance is designed for rental properties. It includes characteristics unique to rental properties, such as loss-of-income coverage, if there’s damage to the property that results in residents having to move out for some time. Anyone who owns a multifamily property will want to be sure a landlord insurance policy covers them well.

Types of Landlord Insurance

There are three standard types of landlord insurance policies, all of which are referred to as “dwelling policies,” or DP policies.

DP-1: This is the most basic tier of dwelling policy. It renders coverage for ordinary occurrences such as renter vandalism and fires. DP-1s are “actual cash value” policies, which implies that if the home is damaged, the owner will only be reimbursed for the depreciable rebuild value of the property. Most landlords are advised to upgrade from a DP-1 policy to something more substantial to better insure their rental properties. 

DP-2: These policies provide more comprehensive coverage than the forerunner. DP-2 policies typically cover 15+ perils and afford replacement cost value, signifying that payments are not based on the property’s depreciated value but instead, the property’s actual replacement cost (this is an important distinction to make). Each DP-2 policy varies, so owners will want to meticulously review the policy documents to see which perils are named as part of the coverage. Coverage not explicitly styled and identified will not qualify. For example, if a resident suddenly loses his or her job due to a global pandemic, this likely would not be a cause of loss-of-income coverage.

DP-3: These are the most far-reaching forms of landlord insurance policies. DP-3s are often called “open peril” policies because they cover all perils, including those not explicitly stated in the coverage declaration form. That said, most DP-3 policies carve out some coverage exceptions, such as damage from neglect, acts of war or terrorism, or intentional loss. DP-3s are the most common landlord insurance policy on the market today, and like DP-2s, provide replacement cost coverage.

Liability Insurance is Key

Even the most responsive and proactive lessors will infrequently find themselves with a prickly resident who elects to sue the owner for one reason or another. This is where liability insurance comes into play. Landlord insurance customarily comes with higher limits on liability coverage than you’d expect to find in a homeowner’s policy. Landlord liability insurance will typically satisfy the number of judgments and settlements up to the policy’s liability limit.

Pro tip: be sure your landlord insurance policy obligates the insurance company to assist you with the cost of your defense when a resident sues you. This is a massive benefit to owners, principally if the insurance company will reimburse you for out-of-pocket attorney’s fees. 

The Cost of Landlord Insurance

The cost of landlord insurance policies can vary widely depending on several factors, including the number of units, location of the property, condition of the property, and level of coverage. As a rule of thumb, expect to allocate at least 25% more for a landlord insurance policy than a homeowner’s insurance policy in that same market.

Renter’s Insurance

In addition to carrying sufficient landlord insurance, most multifamily property owners will also want to require their residents to carry renter’s insurance. Renter’s insurance is extremely inexpensive (policies start for as little as $5/week) and will protect the renter and their belongings (less their deductible). For example, if a unit is broken into and a resident’s laptop and jewelry are stolen, their renter’s insurance policy would cover these losses. These items might not be covered under the landlord’s insurance policy. Most renter’s insurance claims don’t require the owner at all.

There are instances where a combination of landlord insurance and renter’s insurance is necessary to make the owner whole.

Let’s say a renter inadvertently leaves a candle burning, and that causes significant fire damage. A simple candle fire could undoubtedly create upwards of $50,000 worth of damage. It may even require the evacuation of neighboring units. Your landlord insurance might have a steep deductible, from $10,000 to $50,000 or more (the higher price is not uncommon for larger apartment communities). That deductible could be covered by the resident’s renter’s insurance policy—assuming they have one. Otherwise, the landlord might have to eat the deductible cost since few renters have that amount of cash on hand to make their lessor whole.

In other sectors, mainly retail, hospitality, and industrial, Commercial renter's insurance reimburses the lessee in the event office equipment or stock is stolen or damaged. Business renter's insurance also includes liability coverage in case the lessee inadvertently damages the property they rent.

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When it comes to owning a rental property, an ounce of prevention is worth a pound of cure. Lessors are best served by getting comprehensive insurance coverage to protect against expensive expenses down the road. There are so many unknowns, particularly when renting to multiple residents. It’s better to pay a premium for coverage for the enhanced assurance that your investment is sufficiently protected.