Why is landlord insurance more expensive than homeowners?

Insurance agents frequently get asked this question. And for good reason – it seems counter-intuitive that you’d have to pay more to insure a home you don’t live in, right? But you also wouldn’t want to pour all your time and income into a rental, just to have it suffer damages you would then have to pay for out of pocket, right?

Many property investors don’t think about insurance until the last minute, which usually only compounds the frustration of hearing about the higher insurance premium from their insurance company. However, it’s entirely necessary for landlord insurance policies to be higher, just given the number of risks associated with the property.

To better understand why it’s typically more expensive to insure a rental property rather than a primary residence, you need to consider the basic principles of insurance. While there are key differences between types, there’s an underlying theme that unites all of them.

Insurers are in business to make a profit. Profits are made by selling enough insurance to cover all business expenses and pay for all covered insurance claims. Insurance companies pour over existing claims data from previous years and continually adjust their pricing to find a balance between charging too little and not making a profit, versus charging too much and losing business to competitors.

We’ll spare you the finer details, but as it turns out, rental properties have a higher statistical frequency and severity of claims than primary residences. Therefore, landlord insurance is more expensive.

Don’t let this discourage you if you’re a landlord, however. The additional coverage you receive far outweighs the costs of what could happen if you stop receiving rent payments because something happens to the dwelling you rent out, and you can’t afford to fix it.

Let’s dig into why the cost of landlord insurance vs. homeowners coverage is more expensive. To browse affordable home insurance options near you, start by entering your ZIP code into our free online quote tool today.

Why are there more claims on landlord insurance?

Both the landlord and the tenants may be contributing factors in why there are more claims. The property owner may perform less maintenance on the building than on their own home. After all, it’s an investment. The idea is to spend as little money as possible to make the venture profitable.

A lack of property maintenance accounts for a large portion of claims. Maybe overhanging tree limbs fall on a roof or outdated plumbing cracks and ends up causing some sort of water loss. Perhaps old wiring isn’t updated and an electrical fire burns a portion of the property. The point is that many different things can be the culprit of an insurance claim.

To prevent such damage from happening, this is why building codes exist. They are meant to be adhered to in order to make sure that everything stays up to date. Unfortunately, things end up falling through the cracks, quite literally, which leads us to the necessity of this type of coverage.

Lack of maintenance isn’t necessarily always the landlord’s fault. Claims certainly arise when a particular renter isn’t alerting a landlord to potential maintenance issues. Landlords will be the first to tell you their tenants don’t necessarily take care of apartment buildings or the home they rent the same way they would if they owned it. Sure, long-term rentals may treat it as their own personal house, but that’s not always going to be the case.

Property damage is a lot more likely in a dwelling that is being rented, simply because the renters know they have the option of allowing their landlord to take care of any physical damage, faulty electronics, or other things that could go wrong.

What are some common misconceptions about landlord insurance?

Taking the above information into account, let’s dispel a few common misconceptions about why people think landlord’s insurance should cost less than what they pay to insure their primary residence.

1. “My home is worth much more than my rental property.” Insurers base their pricing mostly on claims history. Would you charge more for a home that statistically shouldn’t have a claim or more for a home that has a much higher chance of having a claim?

Put another way, would you charge a higher premium for a 45-year-old married woman driving a Corvette, or a 16-year-old male driving a Honda? Even though the Corvette is more expensive, your money would be on the 16-year-old filing a claim. The teen is charged more than the adult every time. A rental property is more like the teen driver in that it’s inherently more risky to insure.

2. “I don’t have any belongings in the home.” Homeowners insurance automatically contains coverage for your personal property. Usually at 50% of the insured value of the home. A $200,000 home would likely have $100,000 in contents coverage. Why would a policy with $100,000 less in coverage be more expensive?

Again, the insurer is much less worried about the odds of replacing your home’s contents than they are about a rental property, which history shows are much more likely to cost the insurer from a claims standpoint.

Can you beat the system?

The short answer is yes. There are several insurers who specialize in insuring rental properties.

You may very well find that the insurer who covers your home isn’t interested in insuring rental properties…and as a result, charges an arm and a leg to do so.

If that’s the case, compare insurance quotes online and/or visit a local independent insurance agent who can shop your rental property insurance with several different companies to ensure you get the best coverage at the lowest possible premium.

By beating the system, we mean you can find coverage for the type of property you’re attempting to insure, and if you’re a landlord, this means trying to find the company that doesn’t tack on an additional cost.

Just keep in mind everything that we’ve covered, and try to understand why it’s going to be more expensive. This isn’t to say that affordable insurance isn’t out there – you’re just going to have to put in the effort to find it. And when it comes to rental properties, protecting yourself against financial losses seems to be the best course of action. To start your search for affordable home insurance coverage today, enter your ZIP code into our free online quote tool below.