Homeowners’ insurance can be a touchy subject. With so many variations and discrepancies between companies and even individual plans, it can be difficult to ensure what’s covered and what’s not. This issue is complicated even further when considering any third-party renters that may be involved. In this case, landlords’ insurance might be your best option.
Assessing Actual Cash Value vs. Replacement Cost
First, determine whether your policy provides coverage via replacement cost or actual cash value. Although plans that offer actual cash value are typically cheaper, policies that provide replacement cost reimbursement will likely be better in the long run. Once you factor in the cost of depreciation on any damaged or lost property, a plan that offers actual cash value might not come close to a full replacement.
Looking at the Similarities
Although we are really talking about two totally different forms of insurance, there are some notable similarities in coverage. Both plans cover damage to the home, including total loss of property. For many, however, that’s where the similarities end.
Generally speaking, landlords’ insurance is more comprehensive then homeowners’ insurance, especially when covering damage caused by third-party renters. Some homeowner policies don’t extend coverage to additional parties at all, while others have a limit on the amount of time your property can be rented out per year.
Realizing the Differences
There are three distinct types of landlord policies available: DP-1, DP-2 and DP-3. As expected, the options provide progressively greater coverage as the number increases. The amount of coverage you choose is ultimately up to you, and most plans can be expanded or strengthened through the use of additional clauses, provisions and extensions.
DP-1 plans provide coverage that is on par with the average homeowner policy. The key difference here is in the fact that landlords’ insurance is meant specifically for property owners and third-party inhabitants. Typical homeowner policies do not provide this benefit.
In contrast, a DP-3 landlord plan provides the maximum amount of coverage available. A plan like this would apply not only to the house itself, but also to the replacement costs of any valuables or belongings that were lost.
One of the biggest drawbacks of landlords’ insurance is the cost. With premiums costing up to 20 percent higher than comparable homeowner plans, the difference can be quite significant. It might even be enough to cause some to reconsider their options.
Considering Additional Clauses and Provisions
Homeowners’ and landlords’ insurance share another similarity. Depending on your provider, there may be any number of additional clauses that could round out your policy and add to the amount of protection offered.
Some landlords carry a rental default or loss of income insurance. This is useful if you’re unable to collect monthly rent due to existing property damage. Liability coverage, which is typically included in policies meant for landlords, requires an additional charge in most homeowner programs.
Moreover, water damage caused by flooding is typically not covered with a landlord’s policy. As with most homeowner plans, separate insurance is required to safeguard your property against water damage. In addition, specific acts of nature, such as tornadoes or earthquakes, usually require individual provisions.
Other common provisions to consider include legal, medical and personal property protection. Apart from helping protect your monetary investment, such policies can go a long way in giving you extra peace of mind when renting out your property.
If you own multiple rental properties, you may be able to benefit from an umbrella policy. This form of extended coverage offers protection against personal injury, property damage, liability and lawyer fees. Some umbrella policies even provide some benefits that can be used to complement your current automobile insurance.
Picking the Right Plan
Now that you have a better understanding of homeowners’ and landlords’ insurance, as well as some of the key differences and notable similarities, you’ll be able to put your knowledge to good use. Not only will this information help protect you and your property, but it can also cover injuries that occur to renters or guests on your property. In either case, carrying the appropriate insurance can save you a lot of out-of-pocket expense in the long run.
Anum Yoon is a personal finance blogger and writer. She created and maintains her personal finance blog Current on Currency. You can subscribe to her blog newsletter right here for her weekly updates.