Becoming a landlord: the insurance requirements

A first rental is usually a house the owner used to live in, a condo kept after a move, or a property bought for the purpose. In each case the insurance question is the same: the policy that covers an owner-occupied home stops working the day a tenant moves in, and what replaces it has to cover a building the owner does not live in, income the owner now depends on, and injuries to people the owner has never met. The tenant's belongings and the tenant's own liability are not the landlord's to insure, but the lease is where the landlord makes sure someone does.

This guide sets out what changes in the policy form, what a landlord policy contains and leaves out, what the lease should require of the tenant, how a mortgage, an umbrella or an ownership entity affects the arrangement, and the sequence, which starts before the listing goes up rather than after the lease is signed.

Why the homeowner policy will not do

A homeowner form is priced and written for a house the named insured lives in. Most forms exclude or sharply restrict coverage once the dwelling is rented to others, apart from an occasional short rental or a single room let to a lodger, and a carrier that learns of a tenant at claim time can deny the loss and cancel the policy for a material change in risk. Renewing the old policy and hoping is not a strategy; it is the setup for the worst outcome, which is a fire with a tenant in residence and no valid policy.

The replacement is a dwelling policy, usually on the DP-3 form for a house or a small building of up to a few units, or a condo unit-owner form written for rental use. It is rated on the building, the location, the age of the roof and systems, and the number of units, and it is often less expensive than the homeowner policy it replaces because it covers little of the owner's contents. The switch has to be made before the tenant moves in, not at the next renewal, and the carrier should be told the date the owner moved out, since a house empty between the move and the lease start is a vacancy question in its own right.

What a landlord policy covers, and what it leaves to the tenant

A DP-3 policy is built from a handful of coverages, each a line on the quote worth a decision.

• The dwelling and other structures, on an open-peril basis at replacement cost on the DP-3 form; the cheaper DP-1 form covers named perils only and pays actual cash value, which on an older roof is a large difference.
• The landlord's contents: appliances, window coverings, a furnished unit's furniture, the lawnmower in the shed. This is a small limit on most policies and should be set from what the owner actually left in the building.
• Fair rental value, sometimes called loss of rents, which pays the rent the owner loses while a covered loss makes the unit unfit to live in. It is the coverage most first-time landlords leave off and most often need.
• Premises liability, for injuries to tenants and visitors caused by the condition of the property, and the defence of the claim. A tenant's guest who falls on a broken step sues the owner, not the tenant.
• Medical payments to others, a small no-fault limit for minor injuries that keeps a small incident from becoming a lawsuit.
• Optional endorsements: water backup, ordinance or law, equipment breakdown, and a vacancy permission for the weeks between tenants.

What the policy does not cover, and what the lease should require

The landlord policy insures the building and the owner. It does not cover the tenant's furniture, electronics or clothing, and it does not defend the tenant when the tenant's dog bites a neighbour or the tenant's unattended candle starts the fire. Those are the tenant's losses and the tenant's liability, and a renters policy is how the tenant carries them. It also gives the tenant somewhere to live, under loss of use, while the unit is repaired, which keeps the tenant from asking the owner for a hotel.

The lease should therefore require a renters policy with a stated personal liability limit, name the owner or the management company as an interested party so the carrier notifies them if it cancels, and require proof at signing and at each renewal. A tenant's liability policy is also the first thing the landlord's carrier will look to recover from after a tenant-caused fire, through subrogation, and a landlord who required it is in a better position than one who did not.

Suppose a house in Henderson rents for $2,200 a month. A tenant's cooking fire damages the kitchen and the smoke reaches every room; repairs take four months. The landlord policy pays the $38,000 repair less a $2,500 deductible, and fair rental value pays $8,800 in lost rent. The tenant's renters policy pays for the tenant's ruined furniture and covers the tenant's stay elsewhere, and the landlord's carrier then pursues the tenant's liability coverage for the repair. Without a renters policy, the tenant has nothing, the landlord absorbs the deductible with no recovery, and the tenancy usually ends badly. The figures are invented; the division of who pays for what is not.

Lenders, entities and the umbrella

A mortgage taken out on an owner-occupied basis usually carries an occupancy condition for an initial period, after which renting the house is allowed; the servicer should be told of the change, and its mortgagee clause carries over to the new landlord policy without a gap. A property bought as an investment is financed as one, with the lender's insurance requirements written into the loan, and the lender will want to see fair rental value coverage as well as the dwelling limit.

Owners who hold a rental through a limited liability company should have the company as the named insured on the landlord policy, with themselves as additional insureds where the carrier allows; a policy in the individual's name on a property the company owns pays the wrong party. That choice also affects the umbrella. A personal umbrella extends over rental properties the owner holds personally and lists, but it will not cover an entity's liability. One or two units held personally sit comfortably under a personal umbrella with the property scheduled; a portfolio held in an entity needs a commercial umbrella or a commercial package.

A property manager, if one is hired, will usually ask to be named as an additional insured on the landlord policy and will carry their own errors and omissions coverage. The management agreement should say who is responsible for keeping the tenant's renters policy current, since that task is easy to lose between two parties.

Short-term and furnished rentals are a different risk

A house listed by the night in Scottsdale, Sedona, St. George or near a Utah ski resort is not a landlord risk in the carrier's eyes; it is a business, with a stream of strangers, higher liability exposure and a furnished contents limit that matters. A DP-3 written for a long-term tenant may exclude short-term rental use, and a homeowner policy certainly will. The options are a short-term rental endorsement on the home policy, where the carrier offers one for occasional use, or a policy written specifically for short-term rentals, which covers guest injuries, guest-caused damage and lost bookings. Several cities in the four states license or restrict short-term rentals, and the city permit is worth having in hand before the policy is quoted, because the carrier will ask.

Regional points that affect the premium

In Arizona, a rental with a pool needs the fence and gate to meet the city's barrier rules before a carrier will write it without a surcharge, and the monsoon makes the age of the roof the main underwriting question. In Nevada, many Las Vegas and Henderson rentals sit inside homeowner associations whose rules on leasing and registration the owner has to follow, and whose master policy covers the common areas but not the unit's interior in a condo. Along the Wasatch Front and in Idaho, a rental empty over winter needs the heat kept on and the water managed, and a lease should say which of the tenant and the landlord does that. Earthquake coverage along the Wasatch fault and flood coverage near a wash or a river are separate policies for a rental just as they are for a home, and fair rental value does not respond to a flood loss unless the flood policy is in place.

The order, and the timing traps

Nothing here is difficult, but two of the steps have to happen before the tenant does.

• Before listing the property: tell the current carrier the house will be rented and get landlord policy quotes, including fair rental value and a vacancy permission for the gap between move-out and lease start.
• When the owner moves out: the landlord policy is bound effective that date, and the homeowner policy is cancelled the same day, not left to expire.
• When the lease is drafted: include the renters policy requirement, the liability limit, the interested-party clause and the winter utilities responsibility.
• Before keys are handed over: collect the tenant's proof of insurance, photograph every room and the roof, and tell the mortgage servicer of the change in occupancy.
• The same week: schedule the property on the personal umbrella, or arrange commercial coverage if an entity owns it.
• At every lease renewal: fresh proof of the tenant's policy and a check that the dwelling limit still reflects rebuild cost.
• Between tenants: tell the carrier the dates. A unit empty past the policy's vacancy period narrows its own coverage, and a quick notice keeps it whole.

How to use this

Send us the address, the date you move out or take possession, the expected rent, whether an entity will own the property, and the lender's details. We quote the landlord policy across the carriers we represent in Arizona, Nevada, Utah and Idaho, size fair rental value from the actual rent, give you the lease language for the tenant's policy, and fit the property under your umbrella. If the house is a condo whose association master policy already covers most of the structure, the right answer may be a modest unit-owner rental form, and we will say so.