Insurance coverage gaps in rental property range from lost of rent insurance to actual cash value and replacement cost differences.
By Darren Nix
A major insurance coverage gap that landlords don’t think about until it’s too late is loss of rent coverage.
Even if your property is fully protected against wind, fire, water damage etc. full-time landlords rely on rental income, and when the property becomes uninhabitable, that rental income disappears for the entire time period while the repairs are being made. Loss of rent coverage pays out that income for the time repairs are going on and provides an extra safety net for landlords.
Loss of rent insurance gap
There are limits: it’s only covered for a “reasonable amount of time” for the damage to be repaired. It’s also only enacted for when the damage that is being repaired is actually covered by the policy; for example, if the property is rendered uninhabitable by a flood (which is almost never covered by a standard landlord insurance policy – you need a separate flood policy), you will not be reimbursed for loss of rent.
“Full-time landlords who rely on steady rental income should never go uninsured for loss of rent. Even with full coverage for property damage, repairs take time, and the lost rent in that time can be just as damaging to your bottom line as paying for repairs out of pocket. This as a key need for landlords,” said C.J. Long, head of claims at Steadily.
Actual cash value insurance gap
Another major insurance coverage gap is actual cash value (ACV) vs replacement cost (RCV). DP1 policies almost always cover a property based on ACV, which is the cost of the repair minus depreciation.
DP1 is a named perils policy that covers about nine specific perils and pays claims at actual cash value (ACV), making it the cheapest dwelling policy and best suited to vacant or budget situations. DP3 is an open perils policy that covers all risks except stated exclusions, pays replacement cost value (RCV), and usually adds liability and loss of rent, making it the more comprehensive choice for occupied long-term rentals. Most landlords with tenants choose DP3, while DP1 fits vacant or short-term cases.
RCV, which is standard on almost every DP3, is the more comprehensive coverage; repairs are paid out on the true cost of what it would take to replace the part on the property, determined by contractors, cost of labor etc.
For something like a broken appliance, the cost can be negligible; for something like a roof, that could be enormous. Going underinsured on ACV on RCV is often a risky proposition. The savings on premium seem appealing, but when it comes to claim time, the out-of-pocket costs can dwarf the savings on premium 10, 20 times over.
“What it might cost to rebuild a property in California and what it might cost to rebuild a property in Indiana are going to be two different things. That’s not because of the market value of the property necessarily; that would be because the cost of labor is different in those areas, or certain materials might be more challenging to acquire based on the area. Replacement cost is generally established on real market data about what it’s going to cost to repair or replace those damaged items,” Long said.
About the author:
Darren Nix is the Co-founder and CEO of Steadily, a leading provider of specialized insurance services for real estate investors and rental property owners. Built by landlords for landlords, Steadily offers property and liability coverage across all 50 US states with a technology-driven platform that delivers fast online quotes and flexible coverage options.
