How to insure a multi-family rental property

Owning a multi-family property means insuring a building other people live in, and a policy for a single owner-occupied house does not fit. The tenants' belongings are theirs to insure. The rent is the owner's income, and it stops the day a fire makes units uninhabitable. Shared stairways, parking lots, laundry rooms and pools create liability the owner controls and the tenants use. Older buildings, common in central Phoenix, downtown Salt Lake City, Ogden, Reno and Boise's North End, bring building code upgrades after a loss. And the ownership is often held in an LLC, which has to match the named insured.

Carriers write these properties in two main ways, depending on size and how the property is run. This guide covers how to choose between them and build the coverage, for landlords with anything from a duplex to a small apartment building in Arizona, Nevada, Utah or Idaho.

What to gather

Collect these before asking for quotes.

• The number of units, square footage, year built, construction type, roof age and material, and dates of electrical, plumbing and heating updates.
• The deed or title, showing whether the property is owned personally, jointly, in an LLC or in a trust.
• The annual rent roll and current vacancy, and copies of the lease forms.
• A description of common areas and amenities: stairways, balconies, pools, playgrounds, laundry, parking and lighting.
• Any property manager's contract, with its insurance requirements.
• The lender's insurance requirements and your current declarations pages, including any umbrella.

Step one: match the policy to the building

Two to four units are often insurable on a dwelling fire policy, sometimes called a landlord policy, written on a basic, broad or special form. The special form covers the building against all perils not excluded and is generally the better fit for a rental that someone depends on for income. Where the owner lives in one unit of a duplex, some carriers will write a homeowners policy for the owner's unit and the building, with landlord coverage for the rented unit; ask how the carrier handles owner-occupied multi-family.

Five or more units generally move to a commercial property and general liability policy, often packaged together as a commercial package or, for smaller buildings, a business owners policy. Commercial forms offer higher liability limits, blanket coverage across several buildings, and coverages such as equipment breakdown and employee dishonesty that dwelling policies lack. Whichever form applies, the named insured should be the entity on the title, with any individual owners and the property manager added as insureds where appropriate.

Step two: insure the building and the rent

Set the building limit to the cost to rebuild at current construction prices, not the purchase price or the tax assessment, and choose replacement cost rather than actual cash value where available. On an older building, add ordinance or law coverage, which pays for code-required upgrades such as fire sprinklers, accessibility changes and electrical work that a rebuild triggers but the base form excludes. Add equipment breakdown for boilers, central air, elevators and electrical panels, and water or sewer backup coverage, which is excluded unless endorsed.

Loss of rents coverage, called fair rental value on a dwelling policy or business income on a commercial one, replaces the rent lost while units are uninhabitable after a covered loss. Choose a limit that covers the time a real rebuild would take, including permits and contractor scheduling, which in a busy market can run many months. Some forms limit the coverage to a set period; others to a dollar amount. Tenants' belongings and their own living costs are not covered by the landlord's policy.

Step three: set landlord liability

Premises liability claims on multi-family properties tend to arise from common areas: a fall on a poorly lit stairway, a trip in a cracked parking lot, a drowning in a complex pool, an injury on a broken balcony railing. Carry liability limits in line with the property's value and the owner's wider assets, and add an umbrella above it. A personal umbrella may not extend to rental properties held in an LLC or above a certain number of units, in which case a commercial umbrella is needed.

Read the liability exclusions. Claims for discrimination under fair housing laws, wrongful eviction and invasion of privacy are commonly excluded or limited, and some carriers offer an endorsement for them. Assault and battery exclusions, habitability disputes and mould exclusions are worth understanding before a tenant dispute rather than after.

Step four: shift risk to tenants and contractors

A landlord's policy works better when others carry their own share of the risk.

• Require renters insurance in the lease, with liability coverage and the landlord listed as an interested party so lapses are reported. A tenant's liability policy can pay for a kitchen fire the tenant causes.
• Collect certificates of insurance from every contractor, landscaper, pool service and snow removal company, and require additional insured status for larger jobs.
• Confirm the property manager carries professional liability and, if it collects rent, crime or fidelity coverage.
• Keep inspection and maintenance records for common areas, smoke detectors, railings and pool barriers.
• Document the condition of each unit at move-in and move-out, since wear and tear and gradual damage are not covered.

Common mistakes

Multi-family owners run into these gaps most often.

• Insuring a fourplex on a homeowners policy.
• Naming the individual owner when the LLC holds title.
• Carrying a loss of rents limit that runs out months before a rebuild ends.
• Omitting ordinance or law coverage on an older building.
• Assuming a personal umbrella covers LLC-owned rentals.
• Not requiring renters insurance or contractor certificates.

A worked example

Suppose an LLC owns a 1970s fourplex in Ogden with rents of $1,200 a unit, or $4,800 a month. It is insured on a special form dwelling policy with a $900,000 building limit, replacement cost, $100,000 of ordinance or law coverage, and fair rental value of $40,000, with the LLC as named insured. A tenant's space heater starts a fire that guts two units and damages the roof. The rebuild costs $320,000, including $45,000 of code upgrades for fire separation and electrical work, and the building is empty for ten months while permits and repairs proceed. The policy pays the rebuild less the deductible, the code upgrades under ordinance or law, and $40,000 of the $48,000 of lost rent. The tenant's renters policy, required by the lease, pays part of the landlord's deductible through its liability coverage. The figures are hypothetical; a larger loss of rents limit would have closed the last gap.

How to use this

Send us the building details, the title, the rent roll and your current policies, and we will match the building to the right policy form, set building, rent and liability limits against the numbers, and compare options across the carriers we represent in Arizona, Nevada, Utah and Idaho. If your current policy already fits the property, we will confirm that and point out anything worth watching at renewal.