Real estate investing is in a heated growth market because of the high returns and relatively lower risk. Redfin reports real estate investors acquired a record 18% of the homes sold in the US during the third quarter of 2021. They snatched up more than 90,000 homes in Q3 2021, 10% more than Q2 and 80% over the previous year.
The investment into real estate is substantial, with the average purchase price over $400,000. As a result, investors need a wide array of protection from potential disastrous losses. This guide to Real Estate Investor Insurance Programs details the most common policies.
What is Real Estate Investor Insurance?
Real Estate Investor Insurance is aptly named, although some refer to it as Landlord Insurance or Rental Property Insurance. Regardless of the name, it represents a package of policies that safeguard insurable risks that individual and corporate real estate investors, trusts, family offices, and property managers face while operating their businesses.
Types of Real Estate Investor Insurance
Real estate investors use insurance packages designed to work together to protect property owners and managers from many losses. Consequently, these losses could result from tenant claims and liability lawsuits.
The broad categories are property or hazard insurance and liability coverage. Find details on the range of coverages found in Real Estate Investor Insurance Programs below.
Landlord Insurance
Landlord Insurance combines protection from losses covered by three types of coverage, including property damage, liability, and loss of rental income.
Property Damage aka Hazard & Fire Insurance
Like a homeowners or dwelling insurance policy, landlord insurance protects from losses caused by fire, wind, hail, snow, and other covered perils that damage structures on the rental property. It also covers losses to personal property, including furniture, appliances, electronic equipment, and more. It does not protect renters' personal property. Therefore, it's important to review coverage for exclusions that might require additional coverage or policy endorsements, such as vandalism. Coastal properties have wind and other weather exclusions, so a thorough review of coverages for real estate investor insurance policies is imperative, especially in those affected areas.
Liability Insurance
Sometimes called General Liability, this policy covers accidents involving people on insured rental property. It covers tenants, guests, vendors, maintenance, and other visitors to the site. A typical General Liability policy protects from lawsuits for injuries claiming Bodily Injury caused by individuals not employed by the insured. Coverage includes paying medical bills for in and outpatient treatment and rehabilitation costs associated with the claim. In addition, Property Damage is a coverage feature that pays to replace or repair stolen and damaged property when the landlord is liable for the loss.
Loss of Rental Income
When a rental property during an insurable event suffers damage, the loss of rental income insurance pays for lost rental income. However, losses from natural disasters such as floods or earthquakes are not part of this package. Coverages for floods and earthquakes are available through separate policies. Keep in mind that in the current environment of fast escalating rental costs, loss of rental income pays out on the fair market value of the rental property. It means it will likely be less than what the landlord collects, especially in regions where the rents are escalating.
Sewer/Water Line/Flood Insurance
Many forms of damage from water, such as sewers, water lines, and floods, are excluded from standard Hazard Insurance policies. For example, flood damage and water line damages are distinct losses that require separate coverages specific to the peril.
Flood Insurance
Flood insurance protects property from damages from outside water entering the rental property, including structures and contents. The NFIP is a program run by the federal government. It controls the selling of flood insurance and distributes it through agents. Then, these agents package it into insurance coverages for real estate investors.
Flood insurance helps pay for losses to a physical structure and the foundation of a rental property, including damage to HVAC, mechanical, plumbing, and electrical systems. Detached structures require a policy endorsement or individual coverage. Although payouts for primary residences use replacement cost coverage, rental property losses get settled using the actual cash value method. Coverage can include clothing, furniture, appliances, electronic devices, window coverings, freezers, and spoiled food. Fine art, expensive jewelry, currency, precious metals, stock certificates, and guns are usually excluded and require a policy endorsement.
Exclusions to Flood Insurance include losses from moisture, mold, and mildew damage when owner neglect is the cause. Cars, trucks, motorcycles, and other self-propelled vehicles are exclusions. Likewise, flood insurance does not cover patios, gazebos, decks, fences, and pools. Also, flood insurance policies do not include living expenses.
Water and Sewer Backup Coverage
Standard hazard insurance policies found in Real Estate Investor Insurance Programs omit coverage for damage due to water and sewer backup events. Separate coverage is available to repair damage when water reverses course and backs into the rental unit due to a clogged drainage line.
Tenant Rent Default Insurance
Rent default coverage helps cover lost income when a tenant defaults on rental payments. The tenants' actions cause financial hardships because eviction and other procedures can take months for the property owner to regain control of the unit and more time to find a new tenant. The landlord's bills for the mortgage, maintenance, insurance, taxes, and other operating expenses never stop, making this coverage a must for most rental property owners.
A typical policy will reimburse for up to six months of lost rent when tenants default on payments, get evicted, or skip out of the unit. Standard coverage extends only for three months of reimbursement when a court order, military deployment, or a sole tenant's death is the cause of the loss. Vacation, seasonal and short-term rentals do not qualify for this coverage, and neither do losses due to a tenant temporarily vacating an uninhabitable unit.
Builder's Risk
Builder's risk insurance is property coverage for buildings and structures under construction. It covers builders constructing new properties and commercial property owners who may have routine property appearance updates or elaborate renovation projects. In addition, it pays for monetary losses when unexpected insurable events occur during construction or remodeling.
Workers' Comp Insurance
Real estate investors that hire employees are subject to state laws that require them to carry Workers' Compensation Insurance. The policy helps pay an employee's medical bills and cover wages lost because they suffered a work-related injury or illness. Workers' compensation insurance will typically shield employers from legal actions taken by employees who get injured on the job.
Umbrella Insurance
Umbrella insurance extends the liability coverage that protects landlords and property owners from liability claims. It can range from claims brought by tenants, visitors, guests, and vendors for injuries and libel and slander claims. As the name implies, an umbrella policy extends the limits over the top of the insured's existing liability coverages.
Real Estate Investor Insurance Costs (and what factors affect the price)
Rental properties are at greater risk for damage and other insurance-related incidents, making them more expensive to insure. The variances in real estate values and types of rental operations make it impossible to name a typical cost for Hazard insurance. However, short-term rentals are usually higher because these renters typically have little interest in maintaining the property. In addition, the insured's claims history, creditworthiness, and other factors affect the premium.
Some coverages fall into somewhat standard ranges. For example, the annual premium for Loss of Rental Income is about $300 per rental unit, and the cost of a typical flood insurance policy runs about $700 per year.
Best Real Estate Investor Insurance Programs
It's a complicated and time-consuming process to find the best Real Estate Investor Insurance Programs. That's why we developed the Program Business Market Directory. The goal is to make it easier for agents to connect with insurance carriers, MGAs, wholesalers, and program administrators.
A quick search for "Real Estate Investor Insurance Programs" on the ProgramBusinsess.com market directory leads to top-notch programs like the one provided by RSG National Specialty Programs. Ryan Specialty was founded in 2010 to become the most trusted trading partner for specialty risk solutions and services that retail agents, brokers, and insurance carriers need.