Property Insurance 101
Overview
If your current policy is a Homeowner's policy, you may need to switch it to a Landlord policy when converting your home into a rental. Also known as "rental property" or "dwelling fire" policies, these may cost more, less, or the same as your current policy, depending on its coverage. Here are some key policy options you should be aware of (note: terminology may vary by carrier):
Basic 'Landlord' Policy Overview
If your current policy is a Homeowner's policy, you may need to switch it to a Landlord policy when converting your home to a rental. Also known as "rental property" or "dwelling fire" policies, these may cost more, less, or the same as your current policy, depending on its coverage. Here are some key policy options you should be aware of (note: terminology may vary by carrier):
Coverage A - Dwelling: Similar to your homeowner's policy, this covers the structure itself. It’s sized to cover the cost of rebuilding your home minus the land value. Unlike a homeowner’s policy, you can often choose between replacement cost or actual cash value. Be aware that your mortgage company may have a minimum requirement. Common exclusions include storms, floods, and sewer/drain backups.
Coverage B - Other Structures: Typically covers 10% of Coverage A. This includes detached structures like garages or sheds.
Coverage C - Personal Property: Covers personal belongings you have in the rental property. Keep in mind, your tenants should have renter's insurance to cover their personal belongings and relocation expenses (Massachusetts requires coverage above $750). Consult with your insurance agent to determine appropriate coverage for your personal items.
Coverage D - Fair Rental Value: This coverage compensates you for lost rental income due to an insured incident. It’s similar to business interruption insurance but does not cover vacancy during tenant turnover or marketing.
Coverage E - Additional Living Expenses (ALE): Typically no less than 20% of Coverage A. This covers the cost of alternative housing if the property becomes uninhabitable due to a covered event.
Coverage L - Personal Liability: Protects you against lawsuits if you cause property damage or bodily injury to another party. Also known as "civil liability."
Coverage M - Medical Payments to Others: Provides good faith coverage for minor injuries on your property, potentially preventing lawsuits.
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Optional Coverages to Consider
Ordinance or Law: Highly Recommended. This covers increased costs to rebuild your home due to updated building codes and rising costs of materials or labor. With new energy codes in Massachusetts potentially increasing construction costs by 5-10%, we recommend 125% coverage or greater.
Tenant Relocation Insurance: Covers costs associated with moving tenants and housing them elsewhere in case of a catastrophe.
Water Backup: If you have old sewer lines, tree roots growing into pipes, or recurring issues, this coverage might be worthwhile.
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Umbrella Policies
In our experience, an umbrella policy is a cost-effective way to increase your liability coverage across all policies. For just a couple of hundred dollars a year, it provides significant additional protection.