Ensuring Appropriate Insurance Coverage for Real Estate Investments

Posted in Legal Alerts on August 16, 2021

Investing in real estate can be an exciting, yet risky, venture that will require hard work on your part to protect your new assets. There are specific factors and liabilities to consider when choosing insurance coverage for your properties. Getting the right insurance policies ensures you and your investments are protected even when the unexpected occurs. The best way to ensure you have the appropriate insurance coverage is to cover all of your bases with basic protections like standard landlord insurance and more specific policies that cover personal liability and property damage. Even vacant properties must have the proper insurance coverage. Sometimes disaster strikes when no one is in the property, such as having a fire break out or a burst pipe that floods the area. These disasters could lead to serious, unmitigated damage. If renovating or improving a property, there are even more insurance policies to consider to cover your investment, including builder’s risk insurance and installation insurance. While your real estate investments may provide significant benefits, they can only do so safely when covered by the appropriate insurance policies.

Types of Insurance Coverage to Consider for a Real Estate Investment

  1. Rental Property Insurance (Landlord Insurance)

This insurance coverage bundles together multiple policies that most real estate investors will need. This may include insurance coverage for liability, hazard, loss of income, and more. A vital category of items that is not covered by this type of insurance policy is a renter’s belongings. It is wise to require tenants renting your property to obtain and pay for their own renter’s insurance.

  1. Liability Insurance

This will cover any accidents that take place at the property of the type that fall under that policy. This can include accidents involving tenants, guests, or workers coming in to repair the property. Liability coverage typically protects you when someone is hurt or an item is stolen from the property. If an accident occurs that causes injuries, liability insurance can help cover medical costs and other related expenses due to the loss.

  1. Hazard Insurance

Hazard coverage is often included within a basic rental property insurance policy and covers damage to the property from storms, fire, or theft. When reviewing your rental property insurance, make sure there is a section for hazard and fire coverage. The amount of coverage should be for the full replacement cost of the property just in case the worst should happen and the entire property is destroyed. 

  1. Flood Insurance

It is essential to have flood insurance for your property if you are in a designated flood zone or are concerned about hurricane or other storm damage. Storms can be devastating to properties and can often require separate, special flood insurance on top of a basic insurance policy that only covers water damage from pipes. Flood insurance is critical as it covers hurricane flooding as well as “100-year flood” catastrophes.

  1. Builder’s Risk Insurance

If you have purchased a property but have not started renovating it or it is currently unoccupied, builder’s risk insurance may be a good idea. This type of insurance covers your property against vandalism, theft, and property damage. When you start building, this insurance coverage could protect you from the costs of significant delays in completing the project.

There are many more types of insurance coverage that are beneficial to real estate investors, including loss of income coverage, partnership insurance, pet insurance, tenant rent default insurance, and umbrella policies, among other policies and endorsements.

Choosing the right type of insurance coverage for a real estate investment can prevent a property owner from bearing expensive losses. By selecting the wrong coverage or having insufficient coverage, an investor may be left with expensive bills after a natural disaster strikes or their property is damaged by a tenant. When purchasing insurance policies for an investment property, make sure to consider the actual cash value of the property and the full replacement cost. If the policy you choose only covers the actual cash value of the property, the value of the land is not included and therefore your coverage may not cover the cost of having to fully replace the property if it is destroyed. As you progress through owning, updating, and renting out a property, make sure to update your insurance policies as you go. You may end up paying for more coverage than you need. For example, if significant renovations are completed on a property and it is now occupied, a builder’s risk insurance policy is likely no longer necessary.

While it may seem tedious and expensive to have appropriate coverage for an investment property, the flip side of the coin is being left paying out of pocket for any damages that occur. If a renter files a lawsuit against you and you are not protected by appropriate insurance coverage, you may be at risk of serious financial loss. In addition, if your real estate suffers significant damage from a natural disaster and you do not have the appropriate insurance coverage, all repairs may have to be completed at your own expense instead of being covered by an insurance company. Having appropriate insurance coverage for real estate investments will protect property owners against significant, unexpected losses while maintaining a healthy cash flow.