Rental Properties: Why Tenants and Landlords Should Have Their Own Insurance

New renters who are just striking out on their own may not realize that a landlord’s insurance policy typically will not provide financial protection against the destruction or loss of the renters’ possessions. On the other hand, a homeowner who leases a home may mistakenly think a standard homeowners policy will cover losses while the residence is occupied by renters. In fact, it’s important for both renters and landlords to have appropriate coverage tailored for the specific situation.

Coverage for Renters

Renters insurance provides protection for loss of personal possessions resulting from fire, smoke, windstorm, lightning, vandalism, theft, an explosion, or a water problem. (Damage from flooding, however, is not covered.) A renters policy also provides liability protection in the event someone is injured in the home; and if the home becomes unlivable due to a covered peril, renters coverage may pay for the renters’ living expenses while the property is being repaired.

There are two basic types of renters insurance:

  • Actual Cash Value pays to replace possessions minus depreciation — a reduction in value due to age and use — up to the coverage limits of the policy.
  • Replacement Cost pays the actual cost of replacing possession with no reduction for depreciation, up to the policy limits. Premiums for a Replacement Cost policy are typically about 10% higher than for an Actual Cash Value policy, but the higher level of coverage may be worth the extra cost.1

Some property owners only lease to tenants who show proof of renters insurance. The extra protection might prevent a tenant from suing a landlord in the event of a fire or other mishap on the property.

The good news is that renters insurance is relatively inexpensive. The average annual cost of a policy nationwide is less than $200.2 Some areas are more expensive, and more valuable possessions may require coverage with higher limits. Wherever you live, if you rent, you’d be wise to have appropriate coverage for your belongings.

Home protected from rain by giant umbrella with the words Renters Insurance written on it.

Coverage for Landlords

Dedicated landlord policies differ from standard policies for owner-occupied properties because they are designed for people who own investment or vacation property that is rented to others. However, some homeowners may occasionally rent out their primary homes to out-of-town visitors in need of lodging or “swap” their homes for accommodations in a place they want to visit.

The type of coverage needed depends in part on whether the landlord is renting out the property temporarily or on a long-term basis.

Long-term lease. A landlord or rental dwelling policy is required if the home will be rented for a long period of time. These policies help cover physical damage of the home and other structures for covered perils, any contents that belong to the owner, lost income resulting from damage to the building, and legal fees and liability (up to the policy limits) in the event that a tenant or other individual is injured on the property. Like renters policies, a landlord policy may offer actual cash value or replacement cost protection for possessions.

Short-term lease. A landlord who plans to rent all or part of his or her primary home for a short period of time (such as a week or several weekends) should check with the insurer. Some insurance companies may allow a short-term rental if notified in advance, whereas others require an endorsement to the existing homeowners or renters policy.

Regular short-term rentals. Generally, renting a home on a regular basis qualifies as a business, which is not covered by a standard homeowners policy. For appropriate coverage, a business policy designed to cover a hotel or a bed and breakfast should be purchased.

Whether you are a renter or a landlord, you may want to consult an insurance professional to learn more about the different coverage options available to you.