What’s your tolerance for risk?
As a rental property owner in San Francisco, San Mateo, or any of the surrounding areas, there’s a lot of liability that comes with owning investment property and inviting tenants to live in that property. Minimizing that risk is important if you want to have a successful and profitable investment experience.
Insurance is an important starting point when we’re talking about risk management. You can minimize a good deal of risk and liability by choosing the right insurance for your property. You also want to require insurance from your renters in order to further protect you and them.
When you’re renting out a San Francisco rental property, you’ll have to protect it. If you’re not adequately insured, you could find yourself suffering from serious financial losses.
This is California, which means the insurance you carry has to be comprehensive and include protection against things like fires, floods, and earthquakes.
Let’s take a look at all the insurance coverage you’ll need for your rental property.
What’s in your Landlord Insurance Policy and How does it Protect You?
Landlord insurance covers your physical investment property, and the liability that you take on as a landlord.
If you’ve been living in the property that you’re now renting out, you may need to make some adjustments to the policy type that’s in place. Landlord insurance seems like the same as your homeowner insurance policy, but it’s actually a bit nuanced.
The homeowner policy you have on a home you occupy will cover the dwelling, your liability, and also the personal possessions that belong to you and are kept inside the house. If a fire destroys your furniture, your homeowner insurance will cover that loss. If a fire destroys your tenant’s furniture, replacing or repairing those items will not be covered under your landlord policy.
Here are the three main things that nearly every San Francisco landlord insurance policy will cover:
1. The Dwelling.
Your rental property is protected against any perils such as fire, wind, hail, or structural collapse. Any of the property inside the rental home that belongs to you will also be covered. Appliances, for example, would be repaired or replaced during a covered loss.
2. Loss of Rent.
You’ll need a landlord policy that includes coverage for loss of rent. If there’s a catastrophe that your insurance will pay for, the loss of rental income will also be reimbursed. This is protection in case your property becomes temporarily inhabitable. You may need to move your tenants elsewhere temporarily. This will be expensive if you cannot protect your rental income.
Liability protection generally increases in a landlord policy, especially when compared to a homeowner policy. If you are liable for property damage or bodily injury to your tenants, your insurance policy will cover those costs. Medical bills will be covered as well as any lost wages in some circumstances, depending on the policy you buy.
You’ll need to understand what a landlord policy doesn’t cover.
We’ve already talked about tenant possessions – those things will require a separate renter’s insurance policy that you should require your tenants to purchase. There are a few other losses specific to California for which you’ll need additional insurance coverage.
In San Francisco and throughout the state, there’s often a risk for floods and earthquakes. Your landlord insurance policy excludes those types of losses. You would need to purchase separate insurance to protect yourself against the damage that a major flood or an earthquake could cause.
Liability and Landlords
How much liability insurance do you need?
Probably a million dollars at least. We know that sounds incredible, but it’s also pretty standard. You buy liability insurance to cover yourself against lawsuits for any bodily injury or property damage claims for which you are found legally responsible. This coverage should include all your legal fees and any court awards up to your policy limits.
You’ll definitely need extra liability insurance if your rental property comes with a pool or a spa. Talk to your agent about whether you’ll allow tenants to have dogs that may fall into the “dangerous breed” category. We always recommend that you carry at least a million dollars in personal liability coverage (half a million at the barest minimum). When tenants become injured and you’re found to be negligent, the lawsuit numbers can get pretty outrageous.
You might also want to think about purchasing an umbrella policy. An umbrella policy protects you and your investment when the liability coverage on your landlord insurance is exhausted from a major claim or a serious lawsuit.
Earthquake Insurance for San Francisco Rental Homes
Let’s talk about earthquakes and how to protect your rental property if the big one hits.
If there’s fire damage to your rental property that’s caused by an earthquake, your landlord policy is required to cover it. However, other damage to your home from an earthquake is not covered by your landlord policy.
It may surprise you that in California, earthquake coverage is not required. It is, however, probably a good idea for rental property owners.
For San Francisco landlords, earthquake insurance coverage can provide some security, especially if you own a building with several units. There’s always potential for earthquake damage, and if it’s major damage, tenants will need to move out while repairs are made. You’ll have to rebuild, and you want to know there’s insurance in place to help you do that.
Flood Insurance for San Francisco Rental Homes
In California, we are often dealing with drought. This recent winter, however, has been extremely wet and very dangerous. The flood risk is real, and a lot of experts predict that, unfortunately, the risk is only likely to grow.
Flood insurance is not legally required in California, but your lender might want you to buy it before they’re willing to give you a mortgage. This includes any loan you’re hoping to procure for rental properties.
You have the option to buy flood insurance through the National Flood Insurance Program (NFIP), but there are also plans available through private insurers. The amount you spend on this type of insurance depends on a number of things, including:
- Your rental home’s location. If you’re in a floodplain, your costs for flood insurance will be higher.
- Your property’s elevation and the risk posed by rising waters.
- The age of your property.
- The building materials used to construct your home.
Most rental property owners can find a flood policy that’s at or under $1,000 per year, but deductibles can be as high as $10,000. The availability and affordability of flood insurance is also likely to change if we continue to have hard rains. Prepare for this as you’re budgeting for your insurance costs.
Water Damage vs. Flooding
There’s flooding, and then there’s water damage. Insurance companies treat each of those events differently.
The water damage that occurs at your home from a leaky pipe or a failing water heater will be covered by your landlord policy. Some types of water damage, however, will not be covered, and you will want to talk with your agent about buying additional endorsements to cover these potential problems.
Any water damage that’s caused by a flood would have to be covered by your flood insurance policy.
There might be a sewer or a drain outside that backs up into your property. Some landlord policies will cover such an event but others will not. You can purchase an extra coverage endorsement for this specific risk. If you don’t purchase it and water comes into your home through an outside sewer or a drain, your insurance policy won’t cover the repairs required to remediate that damage. That’s an expensive fix.
Gradual water damage is also not included in landlord policies or flood policies. A pipe that bursts suddenly and causes damage will be covered. A water pipe that leaks over a long period of time is not going to be covered because it’s not a sudden or accidental loss. It’s an undetected problem instead, and California law does not require your insurance policy to cover it.
Requirement for Renter’s Insurance
Always require your tenants to provide proof of renter’s insurance before they move into your property. We have briefly touched on this topic earlier in our blog, and we believe it’s an important extra layer of protection for you, your tenants, and your property.
These policies are always inexpensive, and they ensure your tenant does not have to worry about paying out of pocket to replace their belongings or cover the costs of damage they cause in your home. Not only does the insurance cover their personal possessions in case of loss, it also covers your tenant’s own liability should anything go wrong at the property.
Insurance is an important topic, and there’s a lot more we can tell you. If you’d like some advice that’s specific to your own investment portfolio and financial exposure, please don’t hesitate to contact us at Sharevest Property Management.