Read the episode transcript
Aaron (00:00)
Welcome back to Speaking of Insurance, brought to you by Bollinsure Insurance Services. I'm Aaron, and today we're talking about something that affects a huge number of property owners in California. That's landlord insurance. More specifically, we're talking about the insurance gaps that rental property owners often don't discover until something goes wrong. Someone might spend $800,000 buying an investment property.
Aaron (00:20)
They'll spend thousands of dollars renovating it, carefully screening the tenants, negotiating the lease, and calculate their expected return. But when it comes to insurance, sometimes the entire decision comes down to one question What's the cheapest policy that I can get? And I understand why. Insurance is another expense, and property ownership is already expensive as it is. But imagine this you own a rental property in SoCal. Your tenant pays you $4,000 a month. Everything is going well until a fire damages the kitchen and a part of the house. Fortunately, nobody gets hurt. But of course, the property is uninhabitable.
Aaron (00:50)
And repairs take six months. That's $24,000 in rent that you'd expect to collect. You still have a mortgage, you still have property taxes, you still have other expenses. And then you find out that your insurance policy either doesn't include lost rental income coverage or has a much smaller limit than you expected. That's the kind of situation we're discussing today. We're gonna break down the difference between homeowners and landlord insurance.
Aaron (01:10)
What happens when tenants damage your property, how lost rental income coverage works, what happens when your property sits vacant? Uh-oh, and the liability exposures that landlords need to consider. We'll also go through Airbnb rentals and the distinguishment between short-term, long-term properties owned through LLCs and how to review your insurance before you have to file a claim. So whether you own one rental property or a portfolio of investment homes, this episode is 100% for you. Again, I would say even if you don't own any investment properties,
Aaron (01:39)
Maybe if you are renting, maybe if you plan to in the future, this episode is very important to understand. Definitely worth the twenty minutes, I would say. But that's just me being biased. Let's start with one of the biggest misunderstandings. That is that a standard homeowner's insurance policy and landowner insurance are the same. Absolutely not. They're not interchangeable. If you change, maybe you used to live in a house of yours for ten years and then maybe you decided, time to get some passive income and rent out that property that you owned. Maybe it's in LA, you live there for three years, whatever it is. it doesn't matter.
Aaron (02:09)
the fact that that property is now inhabited by somebody other than the first name insurance owner, you have to get a different type of insurance. maybe instead of selling, you rent it to a family member. Now here's the important question: Did your insurance company know that the property is no longer your primary residence? Because that change can be significant. If you're renting it out to a family member, it is likely, potentially.
Aaron (02:31)
Depending on how close you are to that family member. That immediate family members can be added as additional insurance on the property, but you have to talk to your insurance company to determine the eligibility. A traditional homeowner's policy is generally designed, of course, for the owner-occupied home. When you turn that home into a long-term rental, the insurer may require a different policy. That is where a DP three, a dwelling policy three, special form, just meaning that there's increased coverage. You'll also hear terms like dwelling fire insurance or rental dwelling insurance, but
Aaron (03:00)
We use DP three most of the time in insurance for landlords. They're all, of course, related terms, although the specific coverage varies depending on the policy form and the insurance company. For example, a DP1 policy can provide relatively basic name peril protection. So not the best. A DP three policy often provides the broader coverage that I mentioned, the special form for the dwelling, subject, of course, to its own exclusions. But don't assume that every DP3 policy automatically includes everything a landlord needs. Absolutely not.
Aaron (03:28)
Liability coverage, lost rental income, and other protections may need to be added or selected separately, endorsed on. Here's the important takeaway. If the way you use your property changes, your insurance company needs to change theirs in the way that they're handling it. Or at least the awareness that they have needs to change and they need to know. Don't wait until a claim to discover that your policy was written under a different occupancy. Or if it's short-term versus long-term occupancy, make sure that that's distinguished as well. And if you're unsure whether or not you have
Aaron (03:57)
Right policy. You can reach out to our team at Bollinsure, or you can reach out to your broker and make sure you have the correct policy. Get them to review. That's their job. Now let's talk about what you're actually buying when you buy landlord insurance. Generally, it can address three major risk categories. The first is physical damage to the property, the second is liability, and the third is loss of rental income. But I want to emphasize that these coverages are not identical across every insurance company or policy. But let's start with the building coverage.
Aaron (04:26)
Imagine your rental property experiences a covered fire, damages kitchen walls, cabinetry, electrical system. Depending on the policy, your dwelling coverage may pay for eligible repairs or reconstruction. Of course, you might have to pay your deductible. There might be some limits, some sublim there and policy conditions. But the way the loss is valued matters. Some policies provide replacement costs, others provide actual cash value. If you guys have listened to this podcast before, I am the biggest advocate for replacement cost valuation on dwelling. If you're unable to get it on your roof for some reason, maybe it's because you
Aaron (04:56)
hadn't had an updated, get it updated and then get roof replacement cost coverage. Of course, it's better than actual cash value and roof exclusion, but the dwelling coverage replacement cost is 100% necessary, I would say, for 99.999% of landlords. So rental replacement cost generally provides the eligible cost to repair or replace the damaged property without a deduction for depreciation. Of course, this depends on the policy terms. Actual cash value is just it takes into account depreciation.
Aaron (05:25)
So imagine a roof has been damaged. If your policy pays on actual cash value, the age and condition may significantly affect the claim payment. That's one reason you shouldn't compare landlord insurance policies based on the price. A policy that's cheaper by $500 a year could have very different terms. If you're saving thousands and thousands, different financial decisions even be made, of course, You need to also consider things like detached structures, garages, fences, sheds, other things as well. Are they included? Are they subject to separate limits?
Aaron (05:52)
Some of the insurance companies require all of those to be explicitly stated and added on before you buy MAP policy. So please do that. And what about appliances or furniture? Some landlord policies cover certain landlord-owned personal property, but the amount and scope vary. Usually I've seen it really low traditionally on most insurance policies or quotes that we're that we're going through. Because if you think about it, if you're renting out a house to somebody else, odds are, either the furniture is owned by them or you have little interest in it.
Aaron (06:19)
Of course, you can get that scheduled on and add personal property coverage as a landlord, but it's just less frequent. So if you're personally renting a furnished property, that's important for you as the renter to go get renter's insurance for if you're actively renting that. The idea is simple. Make sure that your policy reflects the actual property, its contents, and how it's being used. Let's return to the example from the beginning. You own a property that rents for $4,000 a month. Decent chunk of change.
Aaron (06:47)
A covered fire makes it uninhabitable for six months. Your expected rental income, of course, is $24,000. Now, some land insurance policies include commonly known fair rental value or loss of rental income coverage. Depending on the form, it can compensate you for qualifying rental income loss because of a covered property loss that makes the home unfit to be rented, if that makes sense. But there are some important limitations to this coverage. The loss generally needs to result from an insured cause of damage. If you guys are listening to the other
Aaron (07:16)
Podcast about uninhabitability and things like that. This is very applicable here as well. So if your tenant stops paying rent, that's not the same thing. Landlord insurance generally isn't designed to cover ordinary rent delinquency. Second, the coverage may have a dollar limit or time limitation. We talked about that as well. With the builder's risk coverage, delays and operations, maybe business interruption coverage.
Aaron (07:37)
The third thing that I would mention is that the amount payable may account for expenses that don't continue while the property is uninhabitable. Now, what does that mean? The amount payable may account for expenses that don't continue while the property is uninhabitable. So if you're paying for things like utilities and the utilities stop needing to be paid for because the property is no longer being inhabited, then because the property is uninhabitable, they're not going to be covering you for the expenses that
Aaron (08:07)
You would have otherwise had to have paid out by yourself. But you don't have to. So you shouldn't assume that every dollar of expected rent will automatically be reimbursed. Another example, let's say you got three rental properties. We work with a lot of rental property owners on their risk mitigation, risk management, and insurance. So this is common. Let's say that one generates $3,000 a month, other one $4,000, other one $5,000. You add all those up, that's $12,000 a month. That's almost $150,000 a year in gross scheduled rent.
Aaron (08:36)
Imagine a major wildfire damages to these properties. Your property damage coverage is seriously important here. But the rental income you might lose while the homes are being rebuilt could be just as important. If your investment properties have mortgages, the financial pressure can become significant as a landlord, as a owner. This is why I think rental income coverage should be a crucial, crucial part of every landlord insurance conversation. Don't just ask about how much it would cost to rebuild a property, ask about what happens to your cash flow. Just like if you're running a business.
Aaron (09:06)
Treat it kind like that. Ask what happens, please. Because if you get in writing, hopefully it's good as gold What if your tenant damages the property? Tenant damage is another sneaky thing. A lot of exclusions. And a lot of common questions that landlords ask involve what about my tenant? Because it's always your tenant's fault. I get it. I'm a tenant. Always my fault. So what happens if your tenant destroys the house? That answer, of course, depends on what happened. Major difference between accidental damage, intentional damage, and normal wear and tear.
Aaron (09:37)
Kitchen fire while cooking. If fire is a covered peril under your policy, the resulting building damage may be covered, depending on the policy and the policy terms. But what about a tenant who leaves behind a stained carpet, scratched floors, broken blinds, and damaged paint? Not me, but somebody else maybe. That may be considered ordinary wear and tear, deterioration, or maintenance related damage. So it's not intended to pay for the things that your deposit that you'd collected potentially could pay for. So yeah, not routine turnover expenses either as well.
Aaron (10:08)
Let's look and do intentional damage though. Suppose a tenant deliberately destroys this cabinetry, punches holes in the walls, vandalizes the property before moving out. That's horrible. Sorry if you've ever had to go through that. as a tenant, swear I won't do that. Some landlord policies do include vandalism or malicious mischief coverage. Others have restrictions that can apply to tenant caused damages. So if your tenant's crazy, obviously you wouldn't be able to say that, but make sure you're getting tenant coverage pretty much.
Aaron (10:37)
Certain policies treat intentional damage by an occupant differently than vandalism caused by an outsider as well. So actual policy wording is important here. If you got a question about your insurance and you're an insured of bowl insurers, please reach out to me. Happy to answer the question. Or our risk management team. If you're actively looking for somebody who understands the risk side of being a landlord, we have helped dozens over the last couple months, even new landlord owners, existing landlord owners find the right property insurance for them.
Aaron (11:04)
So, but let's go through another example. Let's say that a tenant notices a small plumbing leak underneath the kitchen sink and they don't report it. Always report it, tenants, please, for the good of everybody. But over the several months that that could potentially be going on for cabinetry, the subfloor, and surrounding materials, of course, can get damaged. Very different insurance question from a pipe that suddenly bursts. Many policies distinguish between sudden and accidental water damage and damage resulting from continuous or repeated leakage.
Aaron (11:31)
So the cause duration and policy wording can determine whether a claim is covered here. so when landlords ask whether tenant damage is covered, I would break it down to three questions. What caused the damage? Was it sudden or gradual? And does the policy cover that particular cause of loss? The security deposit is not a substitute for insurance. That's another clarification. A security deposit, of course, can be help to address certain tenant obligations under the lease in California law.
Aaron (11:56)
But a deposit of a few thousand dollars isn't gonna solve a major fire or six-figure property loss. That approach comes from appropriate insurance, property maintenance, documentation, and careful and careful tenant management. Now let's move to liability. Your tenant gets injured, who's responsible? This is one of the most important exposures for a rental property owner. Imagine your tenant has a guest visiting. The guest walks down the exterior staircase and a teorated step breaks, and guest suffers from falling.
Aaron (12:23)
And gets a serious injury. The guest alleges that the landlord failed to maintain the property. You potentially have a liability claim on your hands. Uh-oh. Depending on the facts, you could be facing medical damages, legal defense costs, and a claim for damages as well. This is where landlord liability coverage can become super important. But liability coverage isn't automatically included on every basic dwelling fire policy. Might need to be through an endorsement or a separate policy as well. It's important to confirm that it's actually there because if you get a $300,000 liability loss.
Aaron (12:53)
A serious injury that ultimately exceeds that amount potentially, even now, those higher liability limits or that umbrella policy that you should have added on top come back in haunting you. Always add the umbrella if you're a property owner and investor. Seriously, the liability side of things, hunt a few hundred dollars, maybe a few grand, cover yourself, cover your bases. But let's say that there is somebody who has an umbrella policy on their personal home and auto.
Aaron (13:19)
And they do purchase and invest a property, you've got to add that on. If you're changing your exposure, your umbrella insurance has to be identified on the new underlying risk. The rental property, of course, it would have to be scheduled. The umbrella insurer would have to go through the specific requirements, determine the underlying liability insurance on it, and the current insurance carrier and confirm that it is acceptable to them. So if you own several properties, the umbrella insurance appetite.
Aaron (13:48)
Becomes really important as well to understand. Those broken stairs, missing handrails, dangerous electoral conditions, and other known hazards should be addressed before, of course, you go get that umbrella insurance. And insurance doesn't replace your responsibility to maintain a reasonably safe property. Preventing the injury in the first place is always preferable to filing an insurance claim afterward, but there are some things that are unavoidable, in which case insurance is there. So here's something that is really tricky.
Aaron (14:17)
We've talked about the liability side to people who are in the house or in the property, talked about the property side and the risk of the valuation methods. What happens if your tenant moves out? Great news, right? Maybe it was me and you didn't like me. But you plan to renovate the property and find another tenant, of course. But the renovations take longer than expected, and the property sits empty for several months. Somebody breaks in, causes significant damage. You file an insurance claim. Your insurance company didn't know that it was a vacant property, though.
Aaron (14:46)
They thought that it was inhabited by somebody. Of course, these property insurance policies are going to contain the provisions to change or limit coverage when a building has been vacant for a specific period of time or past a specific period of time. So, of course, the exact definition of vacancy here matters. And it also depends on how long it's vacant for. Some insurance policies have specific restrictions that apply after 60 days of consistent consecutive vacancy.
Aaron (15:13)
Other forms use different definitions, periods, or conditions. Vandalism as well can be seriously affected. if you're leaving a property uninhabited, you can understand as an insurance company, you don't want somebody who is not actively looking after their property and you don't want to cover them for things that go wrong. So I don't want everybody here to assume, of course, that if you leave your property uninhabited for 60 days, your property becomes automatically uninsured. That's not how every policy works. The actual language controls this.
Aaron (15:43)
But here is the practical takeaway that I've got written down. If your rental property is going to sit empty for an extended period, please notify your insurance broker and do it before the vacancy becomes a problem. You may need a vacancy endorsement, a specialized vacant property policy, or another specialty underwriting arrangement, depending on how big, how nice, how potentially catastrophic the claim could be in the event that the insurance company does have to pay that out. And so that's why.
Aaron (16:12)
Having an insurance company that is tailored to you is important. Because renovations can introduce construction exposures that a normal landlord policy also cannot address. So if you're renovating that property, replacing a roof, removing walls, undertaking major structural work, you also have to talk about that with your insurance company. A property that's rented out, a property that's vacant, and the property that's undergoing major renovation are three completely different insurance arrangements, as are the things that are in between, when you're no tenants at a specific
Aaron (16:40)
Place and it's in between the specific time period. There's little gray zones of insurance that you also have to look into. It's just a little bit of advice. But big thing right now, my partner loves it. It's called Airbnb. It's one of the coolest creations, I think, in human history, being able to stay at other people's houses. So, does your landlord policy cover Airbnb? Because that's another area that people think, Airbnb, same thing as rental. Maybe it's in Palm Springs. Love Palm Springs. Go out to Palm Springs if you haven't been.
Aaron (17:10)
Super nice. Go to the Seki spa. My mom decided it'd be nice to spoil me for a day on a celebration. And it was one of the coolest experiences I've ever had. But let's say that you're in Palm Springs and maybe, maybe the person that rented me the property and realized I'm really weird and talking about insurance all day and you're regretting it. You blocked me on the Airbnb. But let's say that my partner has Airbnb and she rents, she's renting it for a few weekends, your property in Palm Springs. And you're like, you know what?
Aaron (17:35)
it's my first time renting the property out. And it's a rental property, so my landlord insurance is totally gonna cover us, right? Maybe you had people living at it for a year and then you, you know, maybe their lease ended or something, and then you're starting to Airbnb it out. Short-term rental activity is completely different exposure than a traditional annual lease. Long-term rental, you have one tenant occupying the property for a year, so it's more consistent. With a short-term rental, you have dozens of different guests over that period.
Aaron (18:00)
The guest turnover, use of amenities, cleaning operations, and other factors change the risk, increase the risk, increase the liability for that insurance company. The time in between when the property is uninhabited as well. Some insurance companies do offer endorsements for certain short-term rental activities, but others do require those specialized insurance policies. And some don't even want to insure Airbnbs. I know a lot, I've worked with a lot of insurance companies that don't like Airbnbs or insuring them. You can't blame them.
Aaron (18:25)
And so another thing to understand is that protection offered through a booking platform is not equivalent to an insurance policy. Platform programs have their terms, exclusions, claim procedures, and eligibility requirements. So just like how if you're an Uber driver and you purchase Uber insurance, you want to look at that, make sure that all the other driving that you're doing is covered. Same thing with if you're purchasing a specific type of insurance as a property owner from an Airbnb, possibly the host protection that they offer. Every property damage or liability situation is not going to be automatically covered.
Aaron (18:54)
Need to evaluate your underlying insurance. That's where the brokers come in. I bet Airbnb has some insurance brokers looking at their, program. Maybe they're advising you on it. I don't know. But all I know is that I don't know. There are a lot of insurance companies out there and brokers out there that can help you on that side as well. But here's a related issue. If you own a property that you sometimes occupy personally and sometimes run out to guess, you've got to make sure that that's also disclosed.
Aaron (19:19)
The distinction can affect which insurance companies and policy forms are appropriate, needed, or eligible for in terms of your eligibility for them. So the same principle, of course, applies to the vacation rentals, furnished monthly rentals, and properties used for corporate housing. All of these different types of housing that we can talk about in future podcasts. If you guys are super interested in, my God, how are furnished monthly rentals insured? We could talk about that together, of course. Maybe just me tying myself, whatever.
Aaron (19:47)
The more accurately you described your exposure, of course, though, the better the insurance company understands and the better that your insurance will be, assuming that your insurance company likes you and will insure you. If your insurance company or broker is non-responsive, please reach out to me. Reach out to the quotes of bollinsure.com, in the description. Our specialty risk management team will 100% help you out. So let's talk about renters insurance. Why your tenant needs renters insurance, needs, needs, needs. Landlords sometimes believe their insurance protects their tenants' belongings. Not how it works. Your landlord policy is
Aaron (20:16)
Designed to protect your insured interests. It does not normally ensure tenants' furniture, clothing, electronics, personal possessions, or liability that they carry as well. So a covered fire destroys parts of the property. The landlord insurance, of course, could come in and potentially help with that property damage if it's covered, but the renter's insurance would be needed to protect the belongings of the person. So kitchen fire again, maybe you've got a really bad chef on your hands. Somebody really clumsy, maybe some college students, depending on the circumstances, they could face a liability claim as well.
Aaron (20:44)
Renters insurance can provide protection against those certain cover claims. So requiring tenants to carry renters insurance does not eliminate the landlord's need for their own liability insurance, though. But I would say that if you can require renters insurance as a party for lease arrangement, please do that. Subject to the appropriate law, of course. You should understand what your policy covers rather than just assuming that the tenant's insurance is gonna cover you. that makes sense. Last little thing I'll talk about is ownership.
Aaron (21:10)
Let's talk about ownership structures. A lot of real estate investors purchase properties through LLCs or other legal entities to try and cover themselves and their personal exposures. There are, of course, legal tax or operational reasons for doing that. But from an insurance perspective, you need to make sure that your name, insured, and ownership interests are reflected properly. Somebody who owns a rental property on an LLC, the insurance company lists your individual name. The exact consequences, of course, will depend on the policy circumstances and law, but there is a huge issue there and it's entirely avoidable.
Aaron (21:39)
Your broker should know who legally owns a property, have them as an additional insured, or have them as the first name insured on the policy. So an LLC is also not a replacement for liability insurance. The entity structure may provide certain legal protections, but it doesn't pay legal defense bills or covered claims settlements. Again, your LLC does not protect you if you were to get and have legal defense bills or settlements to pay out. That is where insurance would, of course, come in and try and help.
Aaron (22:08)
Assuming it's covered. So if you have multiple properties, especially under different entities, worth reviewing how they are insured as a group, making sure that they are covered all individually. Ownership structures, public records, third party reporting, confirming that the ownership aligns with the insurance policy. We do that as well for a lot of people, complimentary. The goal is to avoid those gaps. I know I said last thing. I lied. There are two more things. Wildfire earthquake problems, because California is serious.
Aaron (22:38)
Wildfire exposure is a main concern of a lot of people. Others other people are starting to evaluate the fair plan because it's cheaper some of the time. And they, of course, have to or should add the supplemental coverage. I won't go too deeply into the fair plan, but I do want to emphasize that the fair plan coverage is not automatically equivalent to a landlord insurance policy. Review the property coverage, the liability arrangements, which there are none usually for landlord insurance for California Fair Plan, and your rental income coverage. The California Department of Insurance.
Aaron (23:07)
Describes a fair plan as a limited comprehensive homeowners policy. More limited, actually, than a comprehensive homeowners policy. So not even a comprehensive homeowner's policy, just a policy. So earthquake insurance as well. California has that significant exposure. Depending on the property's location, flood insurance should also be a consideration. Go purchase that separately, please. Great decision to make. Can the cheapest insurance policy be the best? Maybe. But
Aaron (23:36)
Can it be the most expensive? 100 million percent. One policy costs $1,800, other costs $2,500. Policy A is high deductible, actual cash value on certain losses and no rental coverage and potential limitation on liability protection. Policy B, brought broader protection and appropriate rental income limit and landowner liability coverage. You get the idea. I don't have to get much into that. But here are the five things that I would take away from this podcast.
Aaron (24:04)
If I was maybe talking to an insurance broker, I know I talk to myself all the time, so just talking to me. Is my policy written for a tenant-occupied rental property? What happens if the property becomes uninhabitable after a covered loss? That's where the rental income coverage come in. How does my policy handle damage caused by tenants? What happens if the property is vacant? Do I have adequate liability protection?
Aaron (24:28)
I'd add one more. If you own multiple properties, make sure that all of them are accounted for in your insurance program. You don't want to have 15 properties and have 14 policies, unless maybe there's a duplex and they're on one policy covered. But even then, you to confirm that. Especially when you have an umbrella schedule. So let's say you're listening to this and you think that.
Aaron (24:49)
My advice has been really helpful. And you want to review your rental property insurance. What information should you have ready? First, your current insurance policies. The declaration pages is what they usually call them. If you have a full policy, even better, it's 100 pages. Send it over. I'll have to spend three hours downloading it. Just joking. Maybe on spectrum though. Second, the property address and basic construction information. Your bill, we can get square footage, we can get. You don't have to give us that. Roof type, we can see that, but just major renovations usually, if there have been any.
Aaron (25:18)
Maybe your date of birth, and then how the property is occupied long-term, rental, short-term, seasonal, vacant, and then potentially the monthly rent if you want that loss of income coverage properly set up. And fifth, who owns the policy or who owns the property, who should be the owner of the policy as well. And if you own multiple, of course, we can look into that together. Here is what I want you to remember from this episode: rental properties are investments.
Aaron (25:42)
They generate income, build equity, and become a significant part of someone's long-term financial plan and successes. But they also come with risks. A fire can damage the building, a tenant can cause a loss, someone can get injured, the property can sit vacant, And your rental income can disappear while repairs are underway.
Aaron (25:58)
The purpose of landlord insurance is to help manage certain financial risks associated with owning or renting property. Not every landlord policy provides the same protection. Don't assume because you have insurance, every exposure is automatically covered. Review the policy, understand its exclusions, check your liability limits, and visit bollinsure.com, to request a review if you have any questions.
Aaron (26:16)
If you own a rental property in California and would help reviewing your insurance, you can reach out to us at Bollinsure Insurance Services. We help property owners evaluate their coverage, understand potential gaps, and explore insurance options appropriate for their properties. Thanks again for listening to another episode of Speaking of Insurance. I'm Aaron. See you all the next one. Thank you. Go, Lakers.
