Having the proper insurance is essential in any business and the rental business is no exception. Once you move from your house and start renting it, you will want to change the coverage on the home and have your insurance agent replace the homeowner’s policy (HO-3) with a dwelling policy (DP-3).
Your personal possessions are no longer in the home, so a “homeowner’s” policy (HO-3) is not the right policy. The HO-3 policy will not cover the losses should they occur as the homeowner does not occupy the property.
The dwelling policy (DP-3) is an insurance policy on a residential building, usually rented to others and what you need.
Owners that insure their rental property with an HO-3 type policy risk NOT being covered should a loss be incurred.
Having a DP-3 policy is the smart choice because those policies have “Open Peril” coverage that include loss of use or rental coverage and normally personal liability coverage for the property owner and general liability coverage for the professional property manager. Contents (personal property of the tenant, such as furniture, clothing) are not automatically covered in the DP-3 policy the way they are in a HO-3 policy.
Tenants are required to carry their own renter’s insurance or will be covered by our forced placed tenant legal liability coverage.
Please check the following comparison chart or speak to your own insurance agent.
|Homeowners Policy (HO-3)||Dwelling & Fire Policy (DP-3)|
|The HO-3 has been the most common homeowner’s policy for the past 60 years and is adequate for the majority of Owner Occupants.||The DP-3 is for rental properties that are not owner occupied. It covers the basic of the house and does not have automatic coverages.|
|Dwelling – The amount of money your policy will pay to rebuild your home if it is destroyed.||Dwelling – The amount of money your policy will pay to rebuild your home if it is destroyed.|
|Other structures – Typically 10% of your coverage is automatically included to cover detached sheds or garages.||Other structures – Not automatic and must be added as an option, be sure to advise your insurance agent that coverage is needed.|
|Personal Property – The amount you will have to replace all your “stuff” in the event of a loss.||Personal Property – Generally not included. Tenants should have their own insurance on their “stuff”. You can optionally include your personal property such as “furnished appliances”.|
Loss of Use – The funds you will have to rent another home while your damaged home is being repaired/rebuilt.
Replacement Cost – Ensures that you will receive the full price to fix the home or replace any lost personal items in the total loss. Takes care of depreciated values.
Loss of Use or Fair Rental Value – The funds you will receive for the tenants to rent another place or stay in a hotel while your damaged home is fixed or rebuilt.
Replacement Cost – On personal property, generally not covered.
Personal Liability – In the event that you become a defendant in a lawsuit, the amount of coverage up to the policy limit the insurance company will provide. $500,000 is our minimum, but the more the better.
Medical Payments to Others – If someone falls and is injured on your property, the medical payments will be covered up to this amount.
|Personal Liability – In the event you become a defendant in a lawsuit, the protection will provide up to the policy limit in protection. This is essential for rental properties and coverage needs to include the property manager as an additional insured. Not all DP-3 policies offer Personal Liability coverage. Be sure to check with your insurance agent.|
Note: Policy limits can sometimes include defense costs within the policy and this is important to know and be prepared for. Worst case scenario would be the have a policy limit of $500,000 and be sued for that amount and lose. Prevailing party is award $500,000, but insurance company only pays $300,000 because they claimed they spent $200,000 defending the lawsuit. You and your property manager would be on the hook for the amount of the award that remains unpaid by your insurance company. Obviously, you would want a policy that provide defense costs outside of the policy limit.