Why Homeowners Policies Are Insufficient for Investment Properties
Why Homeowners Policies Are Insufficient for Investment Properties
Insuring an investment property under your homeowner’s policy is a common mistake for many new investors. After purchasing a new location, you may think it’s easiest to contact the same local agent who manages your home and auto, and request to add your newest acquisition, but it can be detrimental to you and your business.
Personal Liability Policies Leave You Exposed
One major example is Pollution coverage. Personal liability lines, like your homeowners policy, contain a Total Pollution exclusion, which provides coverage for carbon monoxide. Let's say you have a tenant living in your investment property who gets sick or worse, dies, from carbon monoxide poisoning. If this property is insured on your personal liability policy, you would be defending this claim on your own, which, as you can imagine, can get quite expensive.
Commercial liability policies are often more expensive than personal lines, but you shouldn’t jeopardize your business to save a few bucks. A liability policy designed for investment properties will provide you with the proper limits—typically starting at $1,000,000 per occurrence, $2,000,000 million aggregate.
Combining Personal and Commercial Lines Jeopardizes Everything You Own
Investors must treat their investment properties like the businesses they are. Assume you have your investment properties included on your personal liability line, and that policy has a (common) $300,000 limit of coverage. Because your liability policy collectively insures everything you own, both person and business assets, the injured party could go after both your personal and business assets. Whereas if you structured your assets the right way and held the proper insurance (a Landlord Liability policy), you would typically only be exposed up to the amount of coverage your liability policy provides per occurrence.
Let's look at it from the other side. Say your teenage son gets into a car accident, killing another driver. The driver’s family sues you for wrongful death, which would exceed your $300,000 limit. They can then come after your rental assets because they are collectively insured along with your personal assets.
Never Give an Insurance Carrier a Reason to Deny a Claim
If you are reviewing the declaration pages of your policy and are unsure if you have the correct type of policy to cover your non-owner-occupied dwelling, as your agent for clarification.
Let’s look at another example of how maintaining the incorrect policy type could affect your business:
Say you decided to convert the home you had been living in for years into an investment property. You list the property for rent, find a great tenant, and they move in, but you did not inform your insurance agent of any of this because you didn’t feel the need to. Ten months into the lease, a fire occurs at the property. The assigned claims adjuster visits the property to investigate the loss. During this visit, they uncover that the home is not owner-occupied, yet the policy purchased is for an owner-occupied dwelling. The insurance carrier would decline the claim due to Material Misrepresentation and now you have to repair or rebuild the home out of pocket.
The Bottom Line
Treating your investment properties like the businesses they are means more than just managing tenants and collecting rent. It’s crucial that you secure the proper protection for your assets. Homeowners insurance may seem more familiar, convenient, or even cost-effective, but it’s simply not designed to handle the unique risks associated with rental properties. With the right coverage from a landlord insurance policy, you can avoid unexpected events turning into significant financial setbacks. As a real estate investor, making informed insurance decisions is crucial for maintaining a strong and profitable portfolio. Don’t take chances, ensure your properties are covered correctly.
