Rental Property Insurance: Who Needs it and What Does it Cover?

Rental property insurance, also called landlord insurance, covers the unique risks taken in renting out your home or condo for long periods of time. Its coverage includes property damage, liability costs and loss of rental income for landlords renting their property. Whether you are renting out your house, a vacation home or an investment property, rental property insurance is an important safeguard against the financial risk associated with tenants living on your property.

What does rental property insurance cover?

Rental property insurance coverage will vary, but policies will generally cover the dwelling or structure of your property, contents of the property belonging to the landlord, liability coverage and loss of rental income. Much of its coverage is similar to that of homeowners insurance, though it has unique features that homeowners insurance lacks and that account for the added risk of having tenants on your property.

Dwelling coverage

Just like homeowners insurance, rental property insurance covers physical damage to your dwelling, meaning damage to the structure of the home or apartment itself. For example, it will cover damage to your walls and your roof but not the personal items of your tenant. Coverage will only extend to damage caused by a covered peril, and you should make sure to understand which perils, such as fire or lightning damage, are covered by your particular policy.

Coverage for the landlord's personal property

Unlike renters insurance, rental property insurance does not cover the personal property of tenants inhabiting the property. However, rental property insurance will often include coverage for items left on-site by the landlord. For example, if you left a lawnmower at your rental house and it is damaged by a fire — and fire is a covered peril in your policy — damage to the machine would be covered by your rental property insurance. On the other hand, if your tenant bought a personal air conditioning unit that is damaged by the same fire, the AC unit and the rest of the tenant's property would not be covered by your rental property insurance.

When shopping for rental property insurance, you should check whether personal property coverage is included in the insurer's standard policy and if it is, to what extent it will cover your property. Sometimes this coverage is only offered as an optional add-on, called an endorsement. In other cases, coverage will function as appliance insurance for your rental property. This means that only damage to property that is used to service the apartment, such as a washing machine, may be covered, whereas damage to a television set will not be covered.

Liability coverage

Liability coverage will protect you from the legal and medical costs associated with someone being injured on your rental property. If your tenant or a visitor is injured on your property and you are responsible for the injury, rental property insurance can cover these costs up to your policy limits. If you're someone for whom the limits of this coverage are not enough to cover potential liabilities and you wish to increase your coverage, you could also buy umbrella insurance for your rental property.

Loss-of-rent coverage

This coverage provides protection against lost rent payments if the property you rent is uninhabitable due to a covered peril. You can think of it as a form of rent guarantee insurance. For example, if fires are covered under your rental property insurance and fire damage makes the apartment uninhabitable, rental income protection covers you for the rental payments your tenants are no longer obligated to pay. Coverage will generally extend up to a defined period of time, such as 12 months. Loss of rental income does not always come standard with rental property insurance, so you should check your policy before buying it if this type of coverage is important to you.

Types of rental property insurance policies

When you're shopping for rental property insurance policies, you may notice that there are different types of policies called "forms." Similar to homeowners insurance, differing rental property insurance forms have different levels of coverage. The descriptions provided below are generalized, but they can give you an idea of what to expect for each type of form.

DP-1: Rental property insurance is categorized as a dwelling policy, or DP, and the DP-1 is the cheapest form with the most basic coverage. DP-1 forms usually only cover named perils, meaning that if a peril, or disaster, is not explicitly named in the form, you will not be reimbursed for the damage. These policies often reimburse you on an actual cash value basis, meaning that your insurer will pay you for covered damage minus wear and tear, called depreciation.

DP-2: This form provides slightly broader coverage than the DP-1. Like the DP-1, DP-2 coverage tends to be on a named peril basis. However, DP-2 coverage will generally extend to a broader range of perils. For example, an insurer might offer coverage for burglary damage in its DP-2 policy but not in its DP-1. The DP-2 form also improves on the DP-1 by typically providing coverage on a replacement cost basis, meaning that damage will be covered at the price it would take to cover the damage at current market prices, without accounting for depreciation.

DP-3: This form, the most expensive, provides the broadest range of coverage of the three. This type of policy will provide extensive peril coverage, protecting against all perils except those explicitly excluded in the policy. Like the DP-2 policy, its coverage will be provided on a replacement cost basis.

Optional additions to your rental property insurance

The coverage provided by rental property insurance will vary by insurer, and coverage that is standard with one insurer may be optional or unavailable with another. Below we've listed a few examples of common endorsements you may be able to add to your rental property insurance. We recommend shopping for quotes to find the best combination of price and coverage that fits your needs.

Do you need rental property insurance if you have homeowners insurance?

It depends on how long you intend to lease the property, but in most cases, homeowners insurance coverage won't be an appropriate substitute for rental property insurance. The presence of tenants in a rental property engenders unique risks that won't be covered by homeowners insurance, particularly if you plan to lease a property for an extended period of time.

The type of insurance you need will depend on how often you rent out your home and the duration of your tenants' stays. These distinctions can be divided into three categories: Long-term renting, infrequent short-term renting and frequent short-term renting.

Long-term renting: If you have an investment property, vacation home or second home that you intend to rent to a single person, couple or family for a long period of time, you will need rental property insurance. A long period of time generally means six months or longer. The same is true if you are renting your primary residence for a large chunk of the year. Compared to being a live-in homeowner, having a rental house increases your exposure to certain risks, such as liability issues relating to tenants and their guests. Your insurer won't cover these risks under a homeowners policy unless you are actually residing in your home.

Infrequent short-term renting: If you only intend to rent out your property for a short period of time, such as a week or a few weekends, your homeowners insurance may indeed cover you. This coverage may come standard in your policy if you give appropriate notice to your insurer, extending the usual benefits of homeowners insurance to periods in which you are temporarily renting your property. If it doesn't come standard, you may be able to buy an endorsement from your insurer that extends your coverage to temporary rentals. Before you commit to short-term renting, you should contact your insurer to make sure it is notified and that you understand your coverage.

Frequent short-term renting: If you're planning to rent out a property regularly to a variety of people for short periods of time, your property may be considered a business, and neither homeowners insurance nor rental property insurance will cover you. Instead, you will need to get some form of commercial property insurance to cover the associated risks. For example, Progressive provides "homeshare insurance," also called vacation rental insurance, for people who rent out their homes or rooms through a service provider such as Airbnb or VRBO. These policies include unique features such as bed bug and identity theft coverage.

You should be aware that although service providers themselves may offer a limited form of protection, it usually won't be as comprehensive as the homeshare insurance offered by an independent insurer. For instance, Airbnb has a host guarantee policy covering property damage to your home up to $1 million for every listing, but the policy includes limitations that traditional insurance won't. One limitation is that the request for coverage must be submitted within 14 days or before the next guest checks in, giving you limited time to take action and assure reimbursement.

How much does rental property insurance cost?

Rental property insurance is approximately 25% more expensive than an equivalent homeowners insurance policy. Given that the nationwide average cost of homeowners insurance is $1,680, you can expect the nationwide average for rental property insurance to be roughly $2,100. The higher rates reflect risks posed to a landlord over a live-in homeowner, such as the potential loss of rental income and the injury liability posed by tenants and their guests.

If you're interested in rental property insurance, policies are offered by major homeowners insurance companies such as Allstate and State Farm, so you can easily shop for and compare rental property insurance quotes online.