If you’re a landlord, you need to protect your investment through rental property insurance.  This is especially true if your rental is an in-law suite or part of a multifamily dwelling in which you live.

Many landlords who live in a property they also rent out sometimes forego landlord insurance.  After all, doesn’t the home insurance cover all that?

In this article, we go over what rental property insurance is, how it’s different than home insurance, what it covers and when, and useful tips when shopping for policies.

1. What Is Landlord Insurance?

Landlord insurance is sometimes referred to as rental property insurance.

It’s a special type of insurance that protects the asset as well as the income stream it generates.

Here’s an example.  Let’s say a flood or fire renders the property unlivable and your tenants have to move out.  Rental property insurance will cover the rent as well as damages to the rental.

For landlords that also live in the property (ie living in one of the units of a triplex), the premiums can be tailored to cover the portion of the property and rental stream that is rented out to tenants.

2. Why Get This Type of Insurance?

Most Canadian landlords have a mortgage on their income property.  They may also not have a large contingency fund to deal with unexpected emergencies.

When a disaster strikes and renders the unit unlivable, not receiving income places most Canadian landlords in a stressful financial position.   Those mortgage payments have to be made on time, regardless of whether you’re responsible for the situation or not.

Insurance companies offer the possibility of covering that rental stream.  It reduces financial liability for the landlord due to loss of rental income.  It also covers part of the damages to the structure.

3. What Does Landlord Insurance Cover?

For starters, all rental income insurance policies offer basic coverage which are:

  • Structural: Covers damages to the part of the structure that is being rented out.
  • Rental income: A fair portion of your income stream will be covered if your rental becomes uninhabitable due to fire, water or natural disasters.  The insurance company will cover the lost income for the shortest reasonable period of time it takes to repair the property.

But landlords that want more coverage can also ask for extra coverage for:

  • Liability: Covers damages or injuries to property or people in your rental.  For example, this would protect you if you got sued from a tenant who slipped on icy front steps.
  • Vandalism: Covers damages intentionally made by a tenant.  Landlords dealing with demographics susceptible to frequent evictions rely on this extra coverage.
  • Unpaid rent: You can get covered for unpaid rent due to a tenant injury or death.  You can also get coverage for general tenant default.
  • Theft: This is for landlords renting out furnished properties.  The policy would cover the assets inside the unit.

4. How Is Rental Property Insurance Different Than Home Insurance?

Home insurance traditionally covers damages to the property as well as a portion of the belongings.  On top of the coverage detailed in the previous section, rental insurance covers the property and the income it generates, but does not cover the tenants’ belongings.

5. Rental Insurance Doesn’t Cover Some Liabilities

Most landlord insurance policies come with some limitations to liabilities.  Similar to your personal home insurance, rental income insurance generally doesn’t cover the following:

  • General wear and tear (to the furnishings or structure itself
  • Losses due to pests (termites or insects, rodents)
  • Losses due to earthquakes and landslides
  • Water damage caused by hurricanes or flooding in specific areas
  • Losses due to criminal acts

However, if you live in an area that’s prone to one of these situations (other than wear and tear), you may have the option to buy extra coverage.  When shopping for policies, ask if it’s possible.

6. Do I Really Need This Type of Insurance?

If you’re thinking of acquiring a property via a mortgage, the lender may include insurance as a financing condition.  In those cases landlord insurance may not be an option.

However, there’s a grey zone for those renting out a portion of their primary residence (for example, renting a basement apartment).  You may think that your personal home insurance will cover the rental portion as well.

In such cases, you’re exposing yourself to increased liability.  For starters, your personal insurance will not cover loss of rental income.  Then you run the risk that your primary personal home insurance will not cover damages if they were caused by a tenant.  Additionally, you run the risk of being liable for personal injury by the tenant.

So in short, you need landlord insurance whenever you’re generating income from any type of residential real estate.

7. Tips to Reduce Your Premiums

If you’re investing in real estate for cash flow, landlord insurance may seem like another expense that reduces your monthly income.  Luckily, there are a few ways to reduce your insurance premiums.

The biggest factor affecting your premiums is the replacement cost of your property.  However, newer constructions typically cost less to insure because of modern construction methods..

For example, a property that’s still on knob and tube wiring will cost more to insure.  In such cases, it may be worth it to upgrade to reduce the cost of premiums in the long run.

Otherwise, some insurers may reduce your premiums if you have a great credit score.  When negotiating a policy, voluntarily providing your score and later granting them the right to check your file could help you save.

8. Should Tenants Still Get Their Own Insurance?

Remember that rental income insurance covers the unit and the income it generates.  Your policy may cover individual items like the refrigerator, stove and washer/dryer if you rent the unit with those included.

So if their TV, computer, furniture and clothes get damaged in a fire that they, or another tenant caused, your policy will not cover the tenant’s individual belongings.

You should inform your tenants of what your insurance does and doesn’t cover.  This may help them decide if they need renter’s insurance.

Wrapping This Up

Rental income insurance is an important type of coverage landlords need to get.  This is especially true for those renting out a portion of their principal residence.  Landlord insurance also protects you from personal liability and can save you thousands in cases of vandalism or theft.