I have a number of clients across Dallas / Fort Worth who own rental property. Some are first time landlords while others own multiple rental properties and have done so for many years. It’s exciting for me to be a part of helping someone reach their financial dreams by protecting an asset that should grow in value over time. When working with a person buying their first rental property, I begin that discussion with a brief overview of the three types of rental property insurance policies.
Fire Policy: The most basic of all insurance policies for a rental property is a fire policy. It only covers damage caused two types of claims, fire and lightning strike which can cause a fire. There’s no coverage for damage caused by falling objects, wind, hail, water leaks, or vandalism.
The only advantage to this type of policy is that it’s cheap. These are actual cash value policies that pay claims on a depreciated basis (see http://126.96.36.199/~wiseinsu/home-insurance-replacement-cost-actual-cash-value/). Most standard insurance companies have stopped providing them for two reasons; they tend to be used only on homes that are in poor condition to begin with, and they tend to be purchased by landlords who have no interest in keeping the property in good condition.
Dwelling Policy Form 1: The next step from up from a fire policy is a Dwelling Policy 1 or Form 1. It too is an actual cash value policy, however, it covers more than just a claim for fire or lightning strike. DP-1 policies also cover damage caused by wind, hail, and vandalism. Coverage for falling objects such as trees and or tree limbs may be included or not. Some policies automatically include coverage for water leaks while other policies must be endorsed or have this added as an option.
I’m not a fan of this policy type due to claims being handled on an actual cash value basis. Even though I’ve had people tell me they understand what that means, none are happy with the amount paid on any claim. There’s also the temptation to either not repair the damage or do as little as possible on a repair. This limits the options I can present when their policy renews, and usually leads to a degraded condition of the home.
Dwelling Policy Form 3: The most complete form of rental property insurance is a Form 3 Dwelling Policy or DP-3. There are two large advantages of a DP-3 policy over a DP-1; what they cover and how they cover it.
Form 3 policies cover damage caused by fire, lightning strike, theft (appliances, etc. not your tenant’s contents) vandalism, wind, hail, etc. Water coverage is usually included in the policy, although there are still a few that it has to be added via an endorsement to the policy. In addition, they are replacement cost policies. If there’s a hail claim, the amount of the claim is what it cost to replace the roof less the deductible.
Generally speaking, rental properties with DP-3 policies tend to be better maintained by the landlord. They recognize the value of the property as an asset in their overall investment portfolio and are willing to pay the slightly higher cost for a Form 3 policy. The cost difference between a Form 1 and a Form 3 is usually in the $100 to $200 a year range.
What kind of a policy do you have on your rental property? Share your thoughts, experiences, and questions with me in the comments section of our blog or on our Google + and Facebook pages. I’d love to hear from you!