"Landlord Building Insurance: Recommended Coverages & Riders"
Whenever people ask me what type of landlord building insurance they should get, my typical response is, "buy the most coverage you can afford." But as you might expect, your specific coverage levels will somewhat depend on your target area.
For example, if you operate near a large body of water you will probably be required to get flood insurance. If you are near the San Andreas Fault then you will most likely need earthquake insurance. Yes, these are extreme cases but hopefully you get my point.
That said, the "standard" property insurance recommendations almost always apply, so I'll share with you a general blueprint. Just keep in mind that it may need to be tweaked depending on your state's requirements.
ACTUAL CASH VALUE VS FULL REPLACEMENT COST
Ok, let's say one of your investment properties burns down. The good news is that you have landlord building insurance. The bad news is that the amount awarded from your insurance company is less than what it will cost to rebuild. Why? Because you had the misfortune of signing up for "actual cash value" instead of "full replacement cost" coverage.
Full replacement cost coverage would have paid you 100% of the costs required to rebuild your destroyed rental property. Conversely, actual cash value coverage only pays rebuilding costs up to a specific pre-defined limit, and if the total cost exceeds this limit, you pay the difference.
You see where I'm going with this, right? Rule #1 is that your landlord building insurance should always be of the full replacement cost variety. This is what all the experts recommend and it absolutely makes logical sense.
You could even go with "extended replacement cost coverage," which provides even more assurance that your policy will cover all costs necessary to rebuild your destroyed property (although many insurers don't offer this for rental properties). But regular replacement cost coverage should suffice in most situations.
Your landlord property insurance policy should have a deductible of $1,000-$2,000, depending on the cost impact. Typically, the higher the deductible, the lower the cost of your insurance premium.
In addition to basic landlord building insurance, you should also consider adding coverage to your property policy by purchasing the following types of "riders" (provisions allowing for amendments to an insurance policy's terms and/or coverage).
- Building ordinance / ordinance of law coverage: If the property is very old and is destroyed, this covers any additional costs that would be required during the rebuilding process to get the property up to current code regulations.
- Loss of income / business interruption coverage: Covers your lost
investment property income
if the property is out of commission while being rebuilt.
- Sewer / drain backup coverage: This type of coverage is usually not included as part of standard landlord property insurance policies, so you will have to specifically request it.
To sum up, your landlord building insurance policy should reflect full replacement cost for the property, and have riders covering new building-code ordinances, loss of income, and sewer/drain backup issues.
In general it's always better to be over-insured instead of the other way around. Also, leverage your insurance agent's experience to determine the best combination of coverage for your specific situation.
Finally, keep in mind that some things will make getting coverage expensive or difficult – for example, allowing
pets in apartments,
having a fireplace, or having a buried underground oil tank. Keep this in mind when looking at
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