Things to Think About when Insuring A Rental Property

As if Homeowners Insurance isn't confusing enough, there are different policies depending on if you live in the home, or not. Some folks like the idea of rental property, or you may have suddenly inherited a home, and need to insure it until the estate is settled.

If you own a home or dwelling, and do not use it as your residence, you need a dwelling policy. Dwelling policies are different from homeowners policies in respect to what they cover, and how they pay it out. Homeowner (HMO) policies include liability coverage, which must be purchased separately for a dwelling policy. (Many companies will allow you to include additional locations for liability on your HMO policy, and you will still need a separate policy to cover the dwelling itself.) Each company has its own guidelines, your agent can match the best company to your situation. Vacant property policies are different as well, and are not included here.

The purpose of this article is to discuss the 3 general types of dwelling coverage forms, and what perils ( the event that is causing the damage) are covered under each one. Some general principles are the same under all the forms. These include deductibles (what you pay towards the loss), actual cash value vs. replacement cost, additional living expenses (costs associated with tenant relocation while the home is repaired) loss of rental income, and no coverage for Tenants Contents/Liability.

There are 3 forms of the Dwelling Policy: DP-1 is for Basic Coverage, DP-2 is considered Broad Coverage, and DP-3 is called  Special Coverage.  Each form covers a few more things than the previous one, so we'll start with the DP-1 first.

DP-1 is the least expensive policy because it covers the least amount of things that could possibly go wrong. It only covers damage caused by fire & lightning. For an additional charge, windstorm, hail, explosion, riot, aircraft, vehicles, smoke, volcanic eruption and vandalism can be covered.   Examples of What This Means To You: if the water pipes break or freeze, and the house floods, there is no coverage under this policy. If ice dams melt and soak the walls, there is no coverage under this policy. If a power surge shorts out the electrical system, there is no coverage under this policy. Theft is not covered, either.

DP-2 covers all of the basic perils, plus damage caused by burglars (still no theft) , falling objects (with limitations), accidental discharge, bursting or freezing of plumbing/heating, weight of ice and snow (still no ice dams) and artificial electric current.   Examples of What This Means To You: Now we have some coverage for damage caused by those pipes and wires that we talked about before. The pipes and wires themselves are not covered, just the resulting damage is.

DP-3 works a little differently in that most perils are covered, unless it is specifically excluded, or limited.  Unfortunately, it seems the things that are most likely to happen are generally excluded, because they become maintenance issues.  But, the water, electric and ice claims would now be covered. Theft of building pieces would be covered. Sewer backup and seepage is still not covered. Nor is enforcement of Law, earth movement, power failure, neglect, war, nuclear hazard, intentional loss, damage caused by animals, certain types of water losses, fraud, arson, or vacancy, among other things.

No policy covers everything (no one would be able to afford it).

Another consideration is how losses are paid. DP-1 only allows for actual cash value, which means depreciation is factored into that the home can be re-built for. DP-2 & 3 policies allow for replacement cost, as long as the building is insured for at least 80% of its estimated rebuildable value. Other structures like sheds, fences or garages are handled differently (still ACV vs. RC). On a DP-1, all items fall under the building limit. On DP-2 & DP-3, there is a 10% allowance for such items, in addition to the building limit. Similar guidelines affect Fair Rental Value and Additional Living Expense Coverages.

Your agent or the policy itself can explain  these things in more detail.