Landlord insurance explained: what a rental policy must cover

Insurance is the part of landlording people buy once and never look at again, which is unfortunate, because the gap between an adequate policy and a cheap one only shows up on the worst day you will have as an owner. (Coverage terms vary by carrier and state — read your own declarations page.)

A homeowners policy does not cover a rented property

The moment a tenant moves in, the use changes, and most homeowners policies exclude it. Landlords who quietly leave the old policy in place often discover at claim time that the carrier can deny the claim outright. What you need is a dwelling or landlord policy, commonly called DP-1 through DP-3.

The four parts that matter

Dwelling coverage rebuilds the structure. Insure to replacement cost, not market value — they are different numbers, and construction costs have moved a lot.

Liability covers injury claims: the stair rail, the icy walkway, the dog. $300,000 is a common default and often too little; $500,000 to $1,000,000 usually costs surprisingly little more.

Loss of rent pays your rental income while the unit is uninhabitable after a covered loss. After a fire, this is the coverage that keeps you paying the mortgage. Check how many months it covers.

Other structures and contents covers garages, fences and whatever appliances or furnishings you own inside the unit.

Special perils beats named perils

A DP-1 named-perils policy covers only the events listed on it. A DP-3 special-form policy covers everything except what it explicitly excludes — a far wider net for a modest premium difference. If you are comparing quotes and one is notably cheaper, this is usually why.

The gaps that catch people

Flood and earthquake are almost always excluded and need separate policies. Sewer and drain backup is usually an inexpensive rider that people skip and then need. Ordinance-or-law coverage pays the extra cost of rebuilding to current code, which matters enormously on older buildings. And actual-cash-value settlements depreciate what they pay out — replacement cost is worth the difference.

Require renters insurance in the lease

Your policy does not cover your tenant's belongings or their liability. Requiring renters insurance — typically $15 a month — and asking to be named as an additional interest means you get notified if it lapses, and it pushes tenant-caused claims onto their policy instead of your loss history. Write it into the lease; the free lease template includes the clause.

Review it once a year

Rebuild costs, rents and your equity all move. Put an annual insurance review on the same calendar as your renewals: confirm the dwelling limit still reflects replacement cost, the loss-of-rent figure still matches actual rent, and your liability limit still makes sense against what you now own. Premiums are also fully deductible, so keep the declarations page filed with the rest of the year's deductible expenses.