Though landlord insurance is not required in the state of Texas, a regular homeowner's policy for a rental property exposes the owner. A standard homeowner policy will not cover a rental property, no matter what claims are made.
The risk of potential property claims is not the same when an owner does not occupy, therefore requires a different policy. At Insurance For Texans, we advise landlord insurance for all property owners who manage property with the intent to collect rent.
What does this coverage do for you?
With ownership of a rental property, you take on more risk by owning a home where you don't dwell. The same risks of property damage from fire, wind, water, hail and other perils still apply, but now you've added another potential risk . . . people.
Let's face it, sometimes renters do dumb stuff. Though you vet your tenants to the best of your ability within the structure of the law, you can't control their behavior, choices and actions, even if your tenants are family members.
You also can't control who tenants allow on the property. With others dwelling at the property, you face an increase in liability in the case of injury to your tenant(s) and/or their guests. Be certain, if a tenant suffers loss while living at a property you own, there's a good chance they'll want recourse from you. That's why we also advise landlords to require renter's insurance for their tenants.
When it comes to insurance policies for your rentals, you have options. You want to understand those options to know the best fit and coverage for you and your investment.
You will want to know what property coverage options you have and in what amount.
While endorsements can be added for items needed to rent the property, the policy you have for your rental property usually covers the structure and the structure only, so this is where the questions of named peril vs. open peril and actual cash value vs. replacement cost value arise.
A named peril policy covers basics like fire, wind and hail. An open peril policy covers everything except excluded perils, meaning, those listed to exclude on the policy.
If your property suffers significant damage, say in the case of a fire, you'll either have a policy with replacement cost or actual cash value as a form of recourse.
Full Replacement Cost will allow you to rebuild in the event of a total loss, but will cost a bit more generally speaking.
Actual Cash Value can be subject to co-insurance penalties if not covered to full value. These penalties will decrease amount paid in the event of a claim.
A Cost-benefit analysis with a risk assessment will determine if an ACV policy makes sense for you.
Knowing about these features will help determine whether you need a DP (Dwelling Policy)-1 or DP-3 policy.
In a DP-1 policy, your house structure is not covered at full replacement cost but at actual cash value. The depreciated value of the home will determine the compensation amount you will receive.
This policy also only covers named perils and is more limited in coverage. While your structure is protected from common perils like fire, wind, hail and vandalism, what about protection from freezing pipes, theft and water damage? Those are not covered in your basic DP-1 policy but are certainly risks related to a rental property.
DP-1 policies are commonly used for vacant property insurance reasons. Once again, adding people in the form of renters to the mix increases the potential for risks.
For residential rental properties, it's hard to beat a DP-3 policy. It is usually an open peril policy, a.k.a. an "all risk" policy, meaning you have full coverage except for perils listed as not covered on the policy documents.
Claims and losses are settled as replacement cost, meaning depreciation of your investment won't enter into the compensation calculation.
This extra coverage and full replacement does come at a cost and is more expense than a DP-1 policy, but with someone living in your rental, you are more exposed as the owner of the property and not having the proper coverage in place in the event of a claim or loss can cost you dearly.
Why Use A Broker?
At Insurance For Texans, we understand the rental game. Usually, an older home is at play in your investment property. Older homes or homes with flaws will not be covered by some companies.
Brokers can always find a market for you. We know options mean that the best kind of policy can be obtained for you at the best price. As with other kinds of insurance, multiple tools can be used to cover you in the best way possible.
We can also advise you on optional coverages related to your investment, such as loss of rents and water backup, items not usually covered in a standard DP-1 or DP-3 but certainly no less risky when it comes to rental properties.
Before you rent out that property, give us a call, text or email and we'll help get you and your property protected.