How Much Renters Insurance Should a Landlord Require?

How Much Renters Insurance Should a Landlord Require?

Although property management is an excellent way to earn passive income, it comes with significant risks. So, landlords need to protect their investment through various means.

Just as landlords can buy landlord insurance, tenants should purchase renters insurance. However, how much renters insurance is enough? This guide will outline how much coverage landlords should require from their tenants.

As a Landlord, Should I Require Renters Insurance?
Yes, you should. Otherwise, any damages to the rental property or liability claims will come out of your insurance policy. Since your tenants are the ones living in the property, they should have their own coverage.

The primary benefit of renters insurance is peace of mind for both you and your tenants. You do not have to worry about covering liability claims, plus renters insurance can protect tenants' belongings.

You should add language to your rental agreement requiring your tenants to purchase and maintain renters insurance.

Is Renters Insurance Required?
Currently, no state requires renters insurance from tenants. However, in most states, the landlord can require tenants to carry renters insurance. As a landlord, you have a right to include this requirement in a lease agreement.

Renters Insurance Coverage Amounts Landlords Should Require
First, you should understand what coverage renters insurance provides your tenant. There are three primary elements of renters insurance:

  • Personal Property Insurance. This coverage pays for the tenant's personal belongings.

    It often pays actual cost value (ACV), which may not cover the cost of a new item for the tenant as it deducts depreciation. Renters can upgrade to replacement cost value (RCV) though for higher insurance premiums.

    Personal Property Sub-Limits

    Insurers also include a coverage sub-limit for specific items like jewelry and electronics. If the tenant needs more insurance, they must get an endorsement or a floater.
     
  • Personal Liability Insurance. If someone gets injured on the property (through no fault of the landlord), they can sue the tenant. Liability coverage helps pay for legal expenses. These policies also include medical expenses coverage for personal injuries, and it pays to repair or replace damaged property.

    Most plans come with a $100,000 liability coverage limit, but renters can buy more.
     
  • Additional Living Expenses (ALE). If the tenant must move out because of repairs, ALE pays for those costs.

Renters Insurance Covered Perils HO4

Renters insurance policies come with named perils coverage for 16 perils. See the image above.

As a landlord, you should worry about coverage amounts for the first two types of insurance. Let's break down how much coverage you should require from tenants.

How Much Personal Liability Renters Insurance Should a Landlord Require?
We recommend requiring your tenants to buy at least $500,000 of liability coverage and more if they are high-risk tenants. Consider these things:

  • What you should pay attention to is the risk level of your tenant.

    First, you need to figure out how often they have visitors over. Since the tenant's liability insurance does not protect the policyholder, it only applies to guests. So, if your tenant lives alone and does not have visitors, they are at lower risk.

    If tenants are low-risk, a basic $100,000 policy should work well enough. However, you may need much more coverage for high-risk individuals — for example, young college-age kids who have parties regularly. Consider requiring $300,000 to $500,000 of liability coverage for high risk tenants.

    One point to consider is that guests may sue you for damages, even if you are not at fault.

    For example, let's say that your tenant had a party and several people got injured. If the tenant does not have enough liability protection, you might get sued.
     
  • Other issues to consider are accidental damages, like a fire.

    For example, if a tenant burns your entire rental home down, you must file a claim against their insurance liability policy. Their liability protection should have enough coverage to pay to rebuild your rental home, including materials and labor.

    It is hard to gauge a specific number, but $500,000 or the replacement cost value of your rental home should suffice. Consider a $1 million policy for high-risk tenants who could lead you to an expensive lawsuit. If you want them to have a $1M policy, a personal umbrella policy is the best option for your tenants to buy.

    Otherwise, you can outline specific guest restrictions in the lease agreement to avoid such headaches.
     
  • Also, how risky is your property?

    Do you have stairs with no handrails? Do you have a trampoline or pool on the property? Is your property in the tornado alley, or are your tenants renting a basement apartment that could flood?

    All these risks increase the chances of injuries and property damage happening to the tenant's guests. Those risks can lead to lawsuits, and if your tenants do not have enough coverage, the guests will sue you. Ensure your renters have enough coverage for expensive lawsuits.

    Your tenants should have at least $300,000 of liability coverage if it has property liability risks.

How Does the Tenant's Liability Coverage Protect Landlords?
There are two ways you can use your tenant's liability coverage.

  1. First, as an additional insured. We have described this in detail below, but it is an endorsement that renters add to their policy. It adds you to the policy and allows you to make liability claims on the tenant's liability coverage instead of yours.
     
  2. Second, your insurer can file a subrogation claim against your tenant's policy to recoup whatever they paid you on a liability or property claim. If this happens, you also get your deductible back!

How Much Personal Property Renters Insurance Should a Landlord Require?
Renters insurance only covers the tenant's belongings, not yours. So, if you have any items in the rental unit, you need landlord insurance to protect your stuff.

Overall, tenants should have enough personal property insurance to cover all their belongings. Remember that it usually pays ACV, so you might want to tell your renters to upgrade to RCV. They should also pay attention to specific sub-limits, like $1,500 max for electronics.

Typical Renters Insurance Cost
On average, renters insurance can cost between $15 and $30 per month. Factors that can affect the price include:

  • Location. Renters in high-risk areas (i.e., those with more crime) will pay more for insurance.
     
  • Belongings. Tenants should upgrade their personal property coverage if they have high-end items.
     
  • Insurance Score. Renters with a poor credit score, a claims history littered with many claims, and other unique risks the renter poses increase their rates.

Does Renters Insurance Cover Accidental Damage?
No, only covered damages that are included in the named perils policy count. Typical perils include fire, wind and hail, and theft. So, if a storm destroys a tenant's stuff, they should be able to file a claim.

However, if a renter trips and falls and knocks a hole in the wall, it will not get covered. Instead, you, the landlord, must use the security deposit to pay for repairs.

Does Renters Insurance Cover Carpet Damage?
Rental insurance does not pay for structural damage, including carpets. Only if a renter brings something like an area rug will it be part of their personal property insurance. Otherwise, carpet damage comes out of the security deposit or landlord insurance.

How Long for Renters Insurance to Take Effect?
Once a tenant gets approved for renters insurance, they can choose the effective date. In some cases, the date may be immediate. In other instances, a renter may start coverage on their move-in date. Once the activation date arrives, the policy is in force.

Renters Insurance Waiting Period
There is no waiting period for renters insurance. Typically, tenants can get coverage activated immediately if they are approved. There is a waiting period for renter's flood insurance, however. It is usually 14 - 30 days depending on the carrier they select.

Proof of Liability Insurance Apartment
As a landlord, you want proof that your tenants have renters insurance. Otherwise, you could be in for a nasty surprise later. So, ask tenants for proof of liability insurance.

This proof is a document provided by the insurance company. The paper should include the activation date, declarations page, and coverage amounts.

Interested Party on Renters Insurance
Even if your tenants provide proof of insurance, they can change their policy. If you require them to include you as an "additional interest" or "interested party," you are notified of any changes.

This term is different from "additional insured." As an additional interest, you are only told about any adjustments. As an additional insured, you are part of the policy.

Additional Insured on Renters Insurance
Landlords should require renters insurance and an amount of liability coverage suitable to the circumstance. They should also require the tenant to add them as an additional insured. That means you, the landlord, can file a claim directly with the tenant's renters insurance company.

Why is this important? Anytime you file a claim on your policy, you risk a rate increase and a lower insurance score. However, if you file a claim against your tenant's policy instead, your insurance score and premiums remain the same.

The only claims you can file on your tenant's policy are liability claims. But do not minimize having to ask your insurance to pay for a massive lawsuit. Being an additional insured is just another way to protect your assets.

Hope that helps!

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Young Alfred