Fire insurance 101: What landlords & property managers need to know

Fire insurance is critical—but it’s also dangerously easy to neglect.

Residential fires are as costly as they are common. In 2015, a structure fire occurred every 63 seconds. 500,000 structure fires occur every year, and the vast majority—77% as of 2015—occurred in residential structures, according to the National Fire Protection Association. That year, structure fires caused $10.3 billion in damage, and most of that damage—$7.2 trillion—occurred in residential structures. Residential property also accounted for more than 97% of non-firefighter deaths, with 2605 Americans losing their lives in structure fires in 2015.

So what do you need to know to protect yourself against your worst case scenario? Here’s what landlords and property management professionals should look out for when it comes to fire insurance coverage. 

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All Risk vs. Named Peril Landlord Insurance Policies

Owners and operators of larger apartment buildings will want to own an ‘all risk’ landlord insurance policy, rather than a ‘named peril’ policy. This will provide a good deal of protection against common types of fires (with certain exceptions) and minimize the need for separate coverage.

Dwelling Fire Insurance Coverage

One alternative type of coverage that’s popular among smaller landlords is dwelling fire insurance—called DP-1, DP-2, or DP-3 for houses, or DP3-C for condominiums.

These policies may work for smaller properties housing 1 to 4 families, where the owner does not live on-site.

• DP-1 coverage is the most restricted type of coverage, with the narrowest list of covered perils. Generally, you’ll get this type of coverage for vacant buildings.

• DP-2, or broad form, is also a named peril coverage with much more named perils, including ice and snow weight damage, freezing pipes, collapse, and others.

• DP-3, or special form coverage, is an all-risk policy, and can be a good solution for smaller landlords. With this form of insurance, you need to take a look at the exclusions, which may include mold, rust, dry rot and wet rot, water damage, earth movement and governmental action.

For anything larger than a 4-unit, you’ll probably need to get a full landlord’s insurance policy, however.

Generally, these policies are stripped-down, inexpensive ‘named peril’ policies that cover the structure itself, but not the building’s contents—that’s the renters’ concern. These policies generally also provide some protection for other structures not attached to the main building, such as garages and sheds. You would have to add additional coverage for your personal property in the building, such as appliances that you’ve provided to tenants. Some policies offer coverage for fair rental value lost due to a covered peril, in addition to living expenses.

The downside of these types of insurance policies, as opposed to open peril landlord insurance policies, is that they generally lack liability insurance protection for you as the landlord. You may need to get this from a separate policy, such as an umbrella liability policy.

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Full Replacement Cost vs. Fair Value Coverage

Any property owner needs to consider the difference between full replacement cost and fair value coverage.

Full replacement cost pays the cost of replacing the entire building or set of buildings—minus the deductible, of course, and up to the overall limit of coverage.

Fair value coverage pays an almost invariably lower amount based on the estimated sale price, which is often very different from the real cost of replacing the structure. Furthermore, it subtracts depreciation from the payout amount. Has it been a while since you got that new roof? Your policy may well subtract tens of thousands of dollars from your final settlement amount because they’re only required to pay for the remaining life of an aging roof. Meanwhile, however, you’ve got to replace the entire roof with real cash.

Another item of note: Beware of policies that impose separate sub-limits on damage from different kinds of perils, including fires.

Have Building Codes Changed?

If you have an older home, it’s almost inevitable that building codes have changed since the structure was built. This means that you don’t get to just build the same home that you had before the fire—your rebuilding costs will be much higher.

The same is true if building codes change while the policy is in force; you may have to build a much different building than the one you are replacing, and that’s almost invariably much more expensive. Building ordinance coverage protects you against this eventuality. You can add it as a rider to an existing fire or landlord insurance policy, but chances are that you’ll have to ask for it.

Smoke Damage

How is smoke damage defined and covered? Often, the smoke damage from a fire can be as expensive as the fire itself. However, some insurers—seeking to minimize their own payouts—will attempt to categorize smoke as a “pollutant,” and therefore limit or exclude coverage.

Water Damage and Mold

If your sprinkler systems activate, they might put out the fire—but they’ll also cause water damage. If your property develops wet rot or toxic mold coverage, will your landlord or fire insurance cover this damage, or will you have to shunt it off to another carrier—and meet another deductible?

Antique/Artisanal Construction

Is your property a historic building, or built with unique materials or craftsmanship? You may want to get specialized coverage that takes that into account. Otherwise, a fair value policy won’t come close to replacing your building if it’s destroyed, and a replacement cost policy would have to take these special considerations into account when you buy the policy. Do not try to deal with this at claim time! Speak with your agent about special coverage for antiques, historic properties, artisanal construction techniques, or other special circumstances that may apply to your property ahead of time.

Loss of Rental Income

If your property is destroyed in a fire, you’re not just out the cost of the structure. You’ve also lost your stream of rental income—income that you rely on to make your payroll and meet your deductibles. Rental property owners should take care to ensure that there’s a provision in the policy to replace lost rental income—for a long enough period to rebuild a destroyed property, if necessary. You may find this coverage listed under ‘loss of business income.’

Note that standard homeowners’ forms won’t provide this coverage. You need a policy specifically designed for landlords.

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Insure Your Appliances

Some landlords purchase dwelling-only coverage, which covers the building itself, but nothing else. The idea is that it’s the tenants’ responsibility to purchase renters insurance to cover their belongings.

However, this may be a mistake: Building owners have significant investments inside each unit as well—in the form of refrigerators, washers, dryers, dishwashers, stoves, ovens, air conditioners, and other appliances. In older buildings with newer appliances, these can represent a significant portion of a loss. In addition, keep in mind that appliances depreciate faster than residential buildings, so fair market value policies are likely to significantly under-compensate you for the loss.

Coordinate with Renters Insurance

Many times, structure fires are caused by renters who accidentally start cooking fires or leave a space heater too close to the drapes. However, even if you can identify which tenant was responsible, you have only a tiny chance of recovering damages from him or her. However, you will still have substantial expenses to pay in the form of your deductible and co-insurance.

Requiring tenants to carry renters insurance as a condition of the lease is an important part of protecting yourself as the landlord or landlord’s representative. Ideally, your tenants’ renter liability insurance should cover the amount of your fire insurance deductible, or close to it.

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Are Discounts Available?

Different carriers may offer different kinds of discounts based on your situation. You may get a discount for these reasons:

• Having an indoor sprinkler system installed
• Having a central fire alarm installed (no battery-powered alarms)
• Being part of a 55+ community
• Using fire-resistant chemical treatment/construction

HOA & Condominium Insurance Policies

For condos and HOAs, it’s critical to understand where coverage under the board’s master insurance policy ends and where unit owner responsibility begins. You then need to take steps to communicate that to association members, so that they know which insurance policies they need to purchase on their own. Condo boards must consider actual cash value versus replacement value for their own insurance planning as well.

Fire Mitigation & Prevention Issues

Some fire insurance companies have roving emergency response teams that will come to your property ahead of a possible wildfire and treat your home with fire retardant sprays and take other countermeasures. Ask your agent about what assistance is available.

Don’t Get Cheap with Insurance Coverage

It’s not just a matter of coverage. Look for carriers and brokers with a proven track record of delivering promised benefits at claim time. Look at reviews, as well as ratings from organizations like J.D. Power & Associates. In addition, examine how the company is rated for having ample financial reserves and liquidity; as well as their commitment to your industry and state. In a worst case scenario, it will likely be worth it to have paid a bit more to buy a policy with an A+ company.