Do you have the proper coverage for your rental property?
If you recently bought a new house and have decided to rent out your former home, you might have been confused about what to do with your insurance on the properties. Some people don’t make any changes, just keeping the insurance policy they’ve had on their former – and now rental – property without making any changes. Most likely though, you’ll need to cancel your old policy and start a new one. There are very specific things to keep in mind when making these changes though.
If you’re planning on renting out a home you own to someone, it’s essential to know that you absolutely must get insurance coverage that will be different from standard homeowners insurance. Knowing you need a different type of coverage isn’t all you need to be aware of though — here are when buying rental property insurance, here are some things that are imperative for you to know and understand.
#1: Don’t cancel your current policy until a new policy is in force.
If you’re planning on renting out a property because you’ve bought a new house and will be renting out your old one, or if you’re simply changing insurers, it’s imperative to do this. Your new policy must undergo underwriting approval, which happens right after buying new coverage. However, if underwriters find a reason that deems you ineligible, they can cancel the policy, and you could be uninsured without knowing it, which is dangerous whether it’s for five minutes or five days. Usually they’ll give you enough notice for you to find new coverage, but glitches happen, information gets lost in transit, and quite simply, mistakes happen. Wait for your new policy to undergo the underwriting process, receive approval, and then check in with your agent about 45 days later to ensure all is well. Underwriters have 60 days to review a brand new policy, but usually it’s completed much quicker than that.
Once you’ve confirmed that your new policy is in full-force, you can safely request that your other policy be cancelled retroactively, to your new policy’s start date.
#2: Understand the difference between rental property policies (DP policies) and standard homeowners insurance policies.
Standard homeowners insurance policies are usually written on an HO3 or HO5 form. These provide coverage for the structure, contents, other structures like sheds, and liability coverage.
However, policies for rental properties are written as ‘dwelling-fire policies’ – AKA ‘DP forms.’ The different forms are DP1, DP2, and DP3, each ‘type’ or ‘form’ offering more coverage as the form number increases. Make sure you know precisely what one you want and what the differences are before making any decisions. Here are the basics to know about each:
- DP1 is a Basic Dwelling Property policy and will cover ONLY the structure for eleven specific losses. These perils include smoke, hail, volcanic eruptions, explosion, vandalism, riots, civil commotion, lightning, windstorm, vehicles, aircrafts, and fires.
- DP2 is a Broad Dwelling Property policy and in addition to providing all that DP1 does, it also includes protection for damage from weight of ice, sleet, or snow, glass breakage, accidental discharge of water, freezing, electrical damage, cracking, burning, accidental tearing, falling objects, steam, or bulging due to water or steam
- DP3, a Special Dwelling Property policy, has the same coverage as a DP2, but it can be broadened to include other losses UNLESS specifically excluded. Additionally, it allows coverage for any contents the owner may have in the property, like appliances or furnishings. DP1 and DP2 don’t provide coverage for any contents. It also has a provision for loss of rental income in case your tenants suddenly couldn’t stay in the rental due to any damage they’re not responsible for.
#3: You may need to buy a special policy while the rental property is vacant or unoccupied.
There are likely going to be times when a rental property is vacant or occupied, such as when renters move out, leaving it vacant until new tenants move in. You should always try to keep your rental property occupied, and not just because of the monthly rental income. Additionally, you should definitely try to keep the property from ever being fully vacant (meaning nobody lives there and that there aren’t any contents inside either).
Insurers don’t like unoccupied or vacant properties at all, some even refusing to write any coverage type for the property until occupied. This is due to the fact that the risks of theft or vandalism occurring are much higher when a home looks unoccupied or is absolutely vacant. If it absolutely must be vacant, keep blinds or curtains drawn, lights on throughout the house, utilizing timers if needed to alternate what lights are on in what room so it appears someone is home, and install outdoor lights, install alarms, and maintain a security system.
Some insurers dislike vacant or unoccupied properties so much that if you’re between renters or if your property will be empty for a decent amount of time, you may need to buy a special type of insurance specifically for vacant or unoccupied homes, and be required to carry that until you can prove occupancy again.
If you don’t know what type of form to have coverage written on, consider what’s covered and what’s not, the probability of each covered or excluded peril is, ask your agent for specific details about property policy types and options, and determine what risks you face the most. For example, consider where you live—if you live somewhere that experiences ice and snow frequently, you should probably opt for a DP2 since ice and snow aren’t covered on a DP1. If you’re providing appliances or furnishing a property (both partially and fully,) it would be wise to buy a DP3 so that your appliances or contents are covered. Ask your agent for a few different quotes using different coverage amounts, and remember — sometimes the price difference between broader coverage and limited coverage can be as little as $10 to $20. That’s certainly worth what you could potentially lose should something happen to a property you own and have worked so hard for. Does it feel like a gamble? Perhaps — but that’s just as much of a gamble as having a stranger live in a property you own.
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