Just because you know the ins and outs of your homeowners insurance policy doesn’t mean you’re ready to become a landlord. That’s because renting out a home comes with its own set of insurance nuances. And if you don’t know the difference between insuring your actual home and one that you’re renting out, you can wind up with BIG problems!
When this subject comes up, those of us in the insurance industry talk about two different types of insurance — HO3 and DP3.
HO3 is what you picture when you think of “regular” homeowners insurance. It’s the coverage you get when you own a home that you also live in.
A standard HO3 homeowners insurance policy covers:
- The structure of the home itself, in case it’s ever damaged or destroyed. (Each HO3 policy will list certain “perils” that are excluded, so be sure to check that list before you sign on the dotted line.)
- The personal property you have in your home
- Other structures you may have on your property, like a separate garage or a shed.
- Living expenses if you have to stay somewhere else while your home is repaired or rebuilt.
- Personal liability coverage that will kick in if someone is ever injured in your home or files a lawsuit against you.
DP3 insurance, on the other hand, is designed specifically for landlords. If you’re renting out a home instead of living in it, you don’t need all of the coverage that HO3 insurance provides. Instead, you need a few other types of coverage.
Luckily, DP3 insurance is very flexible. All of the features we talked about with HO3 insurance are automatically included on a standard policy, but that’s not the case with DP3 insurance. There’s really no “standard” policy here. Like HO3 insurance, your DP3 insurance will cover the structure itself.
After that, you’ll have to build your own unique DP3 insurance policy.
For example, instead of giving you money for living expenses if you have to move out because of severe damage, your DP3 policy can pay you money if your tenants are forced to move out. You’ll hear this coverage referred to as “Loss of Use” or “Fair Rental Value“. Just remember — you’ll choose the limits of this coverage. It won’t automatically pay you what your tenants would have!
Most DP3 policies will not automatically come with coverage for your personal property. After all, your tenant’s stuff is inside, which means that he’s responsible for insuring it, not you. However, if you want your insurance to cover the few pieces of personal property you do have inside — like the kitchen appliances, for example — you can add personal property coverage to your DP3 policy.
Another option is to add coverage for the other structures on your property. Unlike HO3 insurance, DP3 insurance won’t automatically cover that separate garage or backyard shed, so you’ll have to specifically tell your insurance company that you want it covered.
Something else you need to consider adding to your DP3 policy? Personal liability coverage. Even though you won’t actually be living in the home, as the owner, you can still be on the hook legally if something goes wrong. Unfortunately, most DP3 policies don’t come with this coverage, so if you want it, you’ll have to ask for it.
While you’re customizing your DP3 policy, carefully consider anything else you may want to add to it. We’ve talked about the most common add-ons, but there are a variety of other coverage that can be added onto these policies. Your best bet is to talk to an agent about your specific needs and wants. Then, together, you can build an insurance policy that’s perfect!
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