Becoming a landlord of an investment property is rewarding in that it is an asset with the potential for appreciation and can provide a steady stream of additional income.
Whether you own one or several landlord/rental properties, here at Envision Insurance (located in Sterling Heights, Michigan) we have a team of highly trained, licensed insurance professionals ready to help with determining what coverage is most appropriate for your investment residence.
Listed below is a brief explanation of Michigan landlord insurance coverages to help you gain a better understanding of what your Michigan rental property insurance policy may cover. This list is not comprehensive and determining what coverage is right for your unique situation should be left to the experts, call us today with your questions on which coverage is most appropriate for you and ask us for a free quote!
Types of Landlord Policies
There are three types of rental property insurance policies available to landlords:
Dwelling Fire Form 1 (also known as DP-1): basic coverage
Dwelling Fire Form 2 (also known as DP-2): average coverage
Dwelling Fire Form 3 (also known as DP-3): most comprehensive (best) coverage
Dwelling Fire Form 1 (DP-1) is a named peril rental property policy, meaning that it covers only those losses that are specifically listed or outlined on the policy. DP-1 policies typically cover only losses as a result of specific perils, such as: fire, smoke, lightening, explosion, wind/hail and vandalism, amongst others. These policies cover the property on an actual cash value (ACV) basis, meaning the amount of coverage afforded for the property is based on its depreciated value.
Dwelling Fire Form 2 (DP-2) is the most common form of landlord insurance. Like DP-1 policies, DP-2 policies are named peril policies which cover only specific perils, however, they do offer broader coverage over a greater amount of specific perils than a DP-1 policy, in other words, DP-2 policies cover more perils than DP-1 policies but are not open peril (comprehensive) like DP-3 policies. Unlike the DP-1 landlord policy, which insure the property on an ACV basis, the DP-2 landlord policy insures the property on a replacement cost (RC) basis.
Dwelling Fire Form 3 (DP-3) is an open-peril form of a landlord policy that offers the most comprehensive coverage of the three forms. Because, a DP3 policy is the best insurance coverage you can purchase for your investment property they are the most expensive. DP-3 policies include the same coverages that DP-1 and DP-2 but because it is an open-peril policy, they cover any cause of loss, regardless of the peril, so long as it is not specifically excluded on the policy. DP-3 policies also provide replacement cost coverage for the rental property.
Most landlord policies will include coverage for the dwelling (the property), other structures, personal property, liability and medical payments.
Dwelling covers the rental property itself. Depending on the landlord policy form, it can be covered on an actual cash value (ACV) basis or a replacement cost (RC) basis. ACV covers the property value less depreciation. RC covers the property for the full amount to rebuild the property, this takes into consideration the inflated costs of material and labor.
Other Structures defines the coverage amount allotted to structures that are not attached to the dwelling (house) such as detached garages, sheds, gazebos, swimming pools, pole barns, fences, etc.
Personal property provides coverage for landlord-owned content such as appliances, washers and dryers, etc.
Liability provides coverage to protect your assets if you are sued for an accident that occurred at your rental property involving a not-at-fault party. Liability coverage amounts typically range from $100,000 to $2,000,000; if excess coverage is required in order to account for and protect assets valued at a greater amount then what is offered by your insurance carrier’s DP-1, DP-2 or DP-3 policy limits then an umbrella (excess liability) policy should be considered.
Medical Payments extends coverage to cover medical expenses accrued as a direct result of an accident that occurred at your rental property that resulted in the injury. Coverage amounts typically range from $0 – $10,000.
Some optional coverages to consider are:
Loss of rent
Loss of rent coverage replaces missed income from being unable to rent the property to tenants as a direct result of a covered loss. Typically, coverage periods range from 6 to 24 months while the rental property is being repaired or rebuilt, depending on the severity of the damage from the loss.
Sump-pump/water backup coverage covers damage as a result of a sump-pump failure or damage from a backflow of sewage from drain pipes.
Landlords of vacant residences should seek a vacant rental property policy. These policies take into account the greater risk of the home being unoccupied. Because, there isn’t a permanent resident the home is more likely to be vandalized and is more susceptible to theft. Vacant rental property policies tend to be more expensive than traditional rental property policies for this reason.
Traditional landlord/rental property policies (DP-1, DP-2 and DP-3) typically allow for very short-period vacancies in between tenant occupancies ranging from 30 to 60 days. However, it is important that you speak with your insurance professional to assist you in determining exactly what this timeframe is so as to not exceed the limit which may cause gaps in coverage.
Landlord policies differ from secondary homeowners policies in that they are intended to cover investment properties that have an intended use to be rented out to tenants, whereas secondary homeowners policies cover secondary homes, typically vacation homes, in which are also vacant for a large part of the year. Although both policy types account for the property to be vacant for a foreseeable timeframe, the property’s intended use determines which policy type is most appropriate. Landlords should not have their property insured with a secondary home policy, if so, the property is improperly insured and losses will not be covered.
Landlord vs Homeowners Policies
A landlord policy differs from a homeowners policy, in that, it is specifically designed to cover the landlord’s interest in the insured property and its specific risks. That is, it takes into consideration that the owner of the property does not reside in the home, a tenant does. Granted the landlord’s interest in the property is strictly that of an investment, a landlord policy will typically only cover the property structure itself and liability, the tenant’s contents would be covered under a renter’s policy.
A homeowners policy is designed to cover the homeowner who also lives in the home. As such, it covers the property structure itself, as well as the homeowners contents (personal property).
If you are the landlord of a property and have the property insured under a homeowners policy, the policy is insured improperly and coverage will most likely not be awarded in the event of a loss. It is extremely important to express to your insurance agent / carrier that you do not live in the investment property and its intended use is
Landlord Policies Do Not Cover Tenants
In the same fashion that a homeowners policy does not properly cover a rental property, a landlord policy does not cover the tenants’ interests. The tenant’s personal property (contents) should be covered under a renters policy. Also, your tenants should consider purchasing a renters insurance policy for the liability component that it provides in the event the tenant is sued for a loss that occurred on the premises. Landlords can mandate tenants obtain coverage.