A building’s structure, its furnishings, and systems, like heating, ventilation, and air conditioning (HVAC), can add up to a staggering dollar amount. But rental property insurance — often called landlord insurance — is useful only when purchased before disaster strikes. Otherwise, a flood in a building located by an ocean, for example, can spell enormous loss, as can tornadoes that touch down, or fires caused by faulty or outdated electrical wiring.
Having insurance for rental property from the moment of purchase is essential to safeguarding the property owner’s investment, no matter the structure’s square footage, number of tenants, or amenities.
Greg Raab, director of operations for Adjusters International, public insurance adjusters and disaster recovery consultants based in Utica, New York, shared the best property insurance coverage options a property manager or building owner should choose to provide the greatest financial and emotional peace of mind.
Greg, how does a property manager or landlord calculate the right amount of property insurance coverage — by number of tenants or owners, square footage, replacement value of the building and furnishings? And do most carriers check the building in person or base quotes on the owner’s or manager’s numbers?
The standard practice is that most carriers use the industry’s acceptable calculation — what’s called Marshall & Swift/Boeckh, and is based on square footage and unique features such as elevators and boilers. The majority of carriers see the building in person or hire a firm that does, and then an amount is suggested. The amount is usually negotiable, but does serve as a general guideline.
Exactly what does “good” landlord insurance for a rental property cover — bricks and mortar, systems within such as the HVAC, trees on the site? What else?
Yes to all, though some items like furnishings owned by the building’s owner may be listed separately. Trees usually are covered, but only minimally. Loss of rent is typically covered and important to lessen the dollar damage when a building is not fully usable or not usable at all.
Does rental property insurance cover only the building and common areas and nothing the tenants own?
Typically, yes, which is why tenants need their own insurance.
What about extra coverage for natural disasters such as floods and earthquakes, plus burglaries and vandalism? Are these add-ons that increase costs?
Lightning, burglaries, vandalism are all included in basic coverage and don’t cost extra. Flood insurance, however, is a separate policy that’s not included in a building policy. It’s underwritten by the National Flood Insurance Program. It’s not difficult to obtain it, but it can be very pricey and there are strict guidelines about what it covers. Earthquake coverage is an endorsement, what used to be called a rider, and thereby an add-on that costs additional.
What about personal liability — how much is advisable, and again should the size of the building or its valuation determine the amount?
It’s based on valuation, with a minimum of $1 million suggested, but with a business and multiple tenants, I’d recommend a business umbrella policy worth at least $5 million to $10 million since so much is at stake if problems arise.
What precautions should be taken regarding the premises that might decrease cost?
State laws require CO2 monitors, so you don’t get coverage unless you have them in place and working. There’s no discount. Local building department codes or other state laws may require other features so an owner needs to find out what those are. Again, no discounts. An alarm system, however, may result in a slight discount so it’s worth asking.
What factor does location play in landlord insurance — if it’s a high-end area will that make a difference?
Replacement cost is calculated on a regional basis by zip code, and each insurance company may divide regions differently.
Are there insurance carriers better suited for small vs. larger buildings? And how do property managers and owners find the best match?
The bigger the risk the smaller the field of competitors. If it’s a small building, there usually are many carriers to choose among. Go with one an independent broker recommends since the broker can shop multiple carriers versus a captive agent. With larger buildings, there are also choices but often fewer. Check the company’s reputation by looking at the A.M. Best’s rating system.
How do you find a competent broker?
The best way is by a referral or look online searching for “insurance broker.” Then, secure recommendations.
What about the deductible? Is it better to go with a higher or lower one, and then pay less or more for the premium each month?
I always suggest planning on a bad loss happening at the worst possible time in your business cycle, sort of Murphy’s Law. Decide what you or the owner can handle. If a $5,000 deductible is fine, maybe stretch to $10,000, but if that seems too pricey, go with the $5,000. The best idea is to get multiple quotes from multiple companies with multiple deductibles, compare, and then decide on your risk tolerance and pocketbook.
What about liability insurance for the property manager, as well as for other staff?
Any meaningful employees should be covered so they can’t be sued individually. But any independent contractors won’t be covered and are responsible for their own insurance.
What else should a property manager or landlord do to cover a building adequately?
Do all the proper homework. Know if the building is in a flood plain, if there have been regular tornadoes, earthquakes, wild fires or even frequent blackouts and power losses.
How often is insurance updated?
Every three years, though sometimes rates jump before. Do a brief annual review, checking for any code changes that you need to cover. Always keep systems up to date such as CO2 monitors and smoke detectors. Think of protecting the building as you would want someone else to do so if you were the tenant. There’s no excuse for not removing all possible dangers in advance.
Want to learn how to keep rental property insurance costs down? Check out these tips for saving money on landlord insurance.
This blog submission is only for purposes of disseminating information. It does not constitute legal advice. No attorney-client relationship is formed by virtue of reading this blog entry or submitting a comment thereto. If you need legal advice, please hire a licensed attorney in your state.
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