Does Your Insurance Policy Cover Rental Income?
In general, insurance policies cover the property against potential damage such as fire, wind and hail, vandalism, and more. In addition to property coverage, real estate investors should also review whether there is enough coverage for rental income or loss of rents in the event the property is uninhabitable due to a covered loss when the tenant must move out while repairs take place. Most landlord policies include Fair Rental Value coverage to reimburse the property owner for the loss of rental income.
Rental income or Fair Rental Value coverage pays up to twelve months of loss of income, but some insurance carriers have the option to extend it for a longer period for an additional premium. Due to the delay in material supplies and building permits, it is highly recommended to increase your loss of income time limit to a minimum of 18 or 24 months. The amount that the property owner receives from the insurance carrier for loss of rents or income is determined based on the lease agreement with the tenant.
After a catastrophic event such as the Marshall Fire in Boulder County, which started on December 30th, 2021 and destroyed over 1,000 structures, building materials and contractors are difficult to be found, causing delays in reconstruction and extending the need for loss of income. Unfortunately, most of these homes are still under construction. An insurance policy that includes enough rental income protection can keep money coming in while the repairs are made, allowing property investors to make mortgage payments, cover unforeseen costs, and avoid foreclosure to the total loss of the property.
Insurance policies protect you, your investments and your future income. The amount included for Loss of Rents coverage can keep you afloat in the event your rental property becomes uninhabitable for an extended period. The insurance you carry on your rental property could make all the difference in your success as a landlord when the unexpected occurs. After the Marshall Fire, some property owners have found they were underinsured, not just on dwelling limits, but also on the loss of income coverage.
In my experience as an insurance agent for over a decade, I have seen policies from the competition with only $5,000 in Loss of Rents coverage or none. It is recommended that the client, real estate investor or property manager calculate the total annual rent to avoid any gaps in coverage. It is your responsibility to talk to your agent to review the limit amount for loss of income included in your rental policy. If you would like a second opinion about this topic or other endorsements, please contact me.