Renters insurance vs landlord insurance

A rented home has two people with money at stake in it and two different sets of things that can go wrong. The owner can lose the building, the rent it produces and a lawsuit from someone hurt on the property. The tenant can lose everything inside the walls, a place to live for the months it takes to repair, and a lawsuit from a guest or a neighbour. Insurance follows those interests, and the two policies are drawn so that each covers its own party's exposure and almost none of the other's.

The commonest misunderstanding runs in both directions: tenants who assume the landlord's policy would replace their furniture after a fire, and landlords who assume their policy responds if a tenant's guest is injured in the unit. Neither is true. The two policies are complements, and a well-drafted lease requires the tenant's one precisely because the landlord's does not reach.

What a landlord policy covers

A landlord policy, written on a dwelling fire form or a commercial property form for larger buildings, insures the structure and anything the owner keeps there for the tenant's use: appliances, window coverings, a lawnmower in the shed. It covers the owner's liability for injuries arising from the condition of the premises, a rotten step, a loose railing, a dog the landlord knew about, and for the owner's own negligence in maintaining the property. It usually includes fair rental value or loss of rents coverage, which pays the rent the owner loses while a covered loss makes the unit unlivable.

It covers none of the tenant's property, not even if the landlord's negligence caused the loss; the tenant's remedy in that case is a claim against the landlord, which the landlord's liability coverage may then pay. It does not cover the tenant's liability to others. And many landlord forms are written on named perils and at actual cash value unless upgraded, which is a decision the owner makes about the building and which has no bearing on the tenant's position.

What a renters policy covers

A renters policy, the HO-4 form in most of the market, insures the tenant's personal property against a list of named perils, at actual cash value unless replacement cost is endorsed, wherever that property happens to be, including in a car or on holiday. It provides personal liability coverage for injury or damage the tenant causes to others, at home or elsewhere, including damage to the landlord's building caused by the tenant's negligence, a kitchen fire, an overflowing bath, a candle. It includes medical payments for guests hurt in the unit regardless of fault, and loss of use coverage, which pays the additional cost of living elsewhere while a covered loss makes the rental uninhabitable.

It covers no part of the building except, on some forms, improvements the tenant has paid for. It does not cover the landlord's appliances. It does not cover a roommate's property unless the roommate is a named insured. And like every homeowners form it excludes flood and earthquake, which for a renter means the contents are uninsured against both unless a separate policy is bought.

The mechanism that actually differs: whose interest, whose negligence

Each policy pays for its own insured's property and its own insured's liability. The interesting cases are where one party's negligence damages the other party's property. When a tenant's cooking fire damages the building, the landlord's property policy pays for the building, and the landlord's carrier may then pursue the tenant for reimbursement through subrogation; the tenant's renters liability coverage is what answers that pursuit. When a landlord's neglected water heater floods the tenant's belongings, the tenant's renters policy pays for the contents, and the tenant's carrier may subrogate against the landlord, whose liability coverage responds.

Without a renters policy, the tenant in the first case faces the landlord's carrier personally, and in the second case has no one to pay for the contents while the argument about the water heater plays out. Without a landlord policy, the owner faces the building loss alone. The lease clause requiring renters insurance exists because the landlord's carrier would otherwise be pursuing an uninsured tenant for a building repair neither can afford, and some landlord carriers now require it as a condition of the policy.

A worked example

Suppose a tenant in Tempe leaves a pan on the stove, and the resulting fire does $40,000 of damage to the unit and destroys $15,000 of the tenant's furniture, clothing and electronics. The unit is unlivable for three months. The landlord's dwelling policy pays the $40,000 repair less the owner's $2,500 deductible and pays three months of lost rent at, say, $1,800 a month, or $5,400. The landlord's carrier then looks to the tenant for the $37,500 it paid, because the tenant's negligence caused it.

If the tenant holds a renters policy with $20,000 of contents coverage at replacement cost, $100,000 of personal liability and loss of use, the outcome is orderly: contents paid at $15,000 less a $500 deductible, the liability coverage negotiates and pays the landlord's carrier's subrogation demand, and loss of use pays the difference between the tenant's rent and the cost of a short-term rental for three months, say $900 a month above the usual rent, or $2,700. Say the policy costs $18 a month. Without it, the tenant owns a $37,500 debt, replaces the contents out of pocket and funds the temporary housing alone. The figures are invented; the shape of the claim is what happens.

Who needs which

The question is not one or the other. It is whether each party holds the policy that covers its own interest.

• Every owner of a rented dwelling needs a landlord policy, not a homeowners policy. A homeowners form on a property the owner does not live in can be voided for misrepresentation of occupancy, and it does not include loss of rents.
• Every tenant needs a renters policy, whatever the value of the contents, because the liability coverage is the part that answers the landlord's carrier after a fire or a flood the tenant caused.
• An owner who rents out part of an owner-occupied home, a basement suite or a room, usually needs an endorsement to the homeowners policy rather than a separate landlord policy, and the tenant still needs a renters policy of their own.
• A short-term rental host needs a different product again; neither a standard landlord form nor a homeowners policy is written for transient guests.
• Roommates each need their own renters policy or must be named on one, since an unnamed roommate's property and liability are not covered.
• A tenant with valuables above the special limits, jewelry, instruments, a bicycle collection, needs a scheduled personal property endorsement on the renters policy, exactly as a homeowner would.

Regional notes

Landlord-tenant statutes in each of the four states set the rules for security deposits, habitability and who bears repair costs, but none of them makes one party's insurance cover the other's property, and a lease requiring renters insurance is enforceable in the ordinary way as a contract term. Flood is the exposure most often missed by tenants in the Phoenix and Las Vegas valleys, where monsoon and flash flooding reach ground-floor units and no renters form responds; a contents-only flood policy is available and modest. Earthquake is the equivalent gap along the Wasatch Front and in the Boise and Pocatello areas, where a renters earthquake endorsement or separate policy covers contents for a peril the standard form excludes. Landlords in wildfire-exposed foothill areas across the region face the same tightening market as homeowners there, and a tenant's renters policy is unaffected by it.

When to keep what you have

A landlord holding a dwelling fire policy with loss of rents and adequate liability is correctly insured, and the improvements to consider are open perils and replacement cost on the building, not a change of product. A tenant holding a renters policy with replacement cost on contents and liability limits above the minimum offered is correctly insured, and the improvements are scheduling valuables and adding flood or earthquake where the address warrants. Neither party should drop their policy because the other has one; the two never covered the same things.

How to use this

Landlords can send us the current policy and the lease, and we check the form, the loss of rents provision and the liability limit against the property. Tenants can send the lease's insurance clause and a rough contents total, and we quote a renters policy that satisfies the lease and covers the belongings. We work across the carriers we represent in Arizona, Nevada, Utah and Idaho, and where the policy in place already fits its party's interest, that is what we will say.