Explained: Why Do Landlords Require Renters Insurance

The Picture On Why Do Landlords Require Renters Insurance:

Renters insurance protects both tenants and landlords from various risks and liabilities.
Landlords should require renters insurance as standard practice in lease agreements.
Typical renter insurance coverage includes personal property, liability, and temporary housing for tenants.

Renter’s insurance may not be a top priority for your tenants who don’t want to take on another expense – but it should be for you.

With all of the uncertainty that the pandemic has brought to rental property owners, it’s more important now than ever to screen tenants carefully and build a mutually beneficial relationship. Renter’s insurance helps protect both your tenant and you, and they foot the bill for the annual premium.

And best of all, most coverage plans are very affordable.

 

What Is Renter’s Insurance?

Renter’s insurance is a policy that your tenant carries, providing coverage for their personal property, damage to your property, and liability from accidental injuries to any guests and damage to third-party property. Remember, this doesn’t include injuries due to structural problems – those are your responsibility as the landlord.

Your landlord’s insurance covers the actual building itself, but not the contents of an individual unit, nor someone suing for damages if they have an accident in your rental space.

 

What’s Covered & How Renter’s Insurance Protects Tenants

There are multiple types of coverage for renter’s insurance to protect tenants, including:

Personal property: If your renters’ belongings were stolen, their insurance would cover replacing them. The insurance will also protect personal property under a myriad of conditions, including damage from fire, smoke, explosion, windstorm or hail, vandalism, and/or overflow of water. Common items covered include furniture, clothing, small appliances, computers, and other electronics.
Loss of use: If your renters need to vacate for a period of time because of a natural disaster like a flood, storm, or fire, the insurance will pay for a hotel stay.
Liability: Renters will use this portion of their insurance when they accidentally cause damage to your property. A big reason why it’s so important! A security deposit alone may not fix the damage if your tenant accidentally starts a fire or floods the building. But if the renter is insured, the insurance company will pay the damages if they were accidental. Liability will also cover any injuries sustained at the property, from tripping on a rug to a dog bite.
Medical payments: Tenants should have separate medical insurance, but liability also typically covers medical costs associated with any injuries incurred.
Third-party damage: What if your renter lets the bathtub overflow and causes water damage? Or a stray golf ball crashes through a window? Any of these accidental damages are covered under third-party damage. Renovations gone wrong and backyard debacles that can cause accidental damage will all be handled easily without your tenant needing to come to you.

Your tenant may well thank you for requiring renter’s insurance once they make a claim!

 

More On the Usual Coverage of Renters Insurance

For a better picture, here are more details about renters insurance. The numbers may vary from one insurer to another, however. 

Coverage Type
Typical Limits
Common Exclusions

Personal Property
$15,000 – $50,000
High-value items (e.g., jewelry, art) may require additional riders

Loss of Use
20-30% of personal property coverage
Long-term displacements due to government actions

Liability
$100,000 – $500,000
Intentional acts, business-related incidents

Medical Payments
$1,000 – $5,000 per person
Injuries to the policyholder or their family members

Third-Party Damage
Typically part of liability coverage
Wear and tear, pest damage

 

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How Renter’s Insurance Protects Landlords

While your tenant’s belongings aren’t at the top of your priority list, they can become a problem if your tenant decides to sue you because they can’t pay for something stolen or damaged. Whether or not you’re actually liable, dealing with lawsuits is expensive and time-consuming and should be avoided at all costs.

Another way renter’s insurance protects you is by ensuring your tenant can continue paying their rent on time. If they can’t afford to pay you because of their losses, that bottom line comes down on you.

Or in the case of loss of use, if they have to move out temporarily, if insurance is paying for the interim, there’s a might higher probability of your renter returning and being able to pick back up with rental payments where they left before the damage occurred.

 

Should Landlords Require Tenants to Buy Renter’s Insurance?

Unequivocally yes.

It is industry standard for landlords to require tenants to carry a renter’s insurance policy. If you’re going to be become a savvy real estate investor, include a clause in your lease agreement that details the requirement, your personal homeowner’s policy coverage, and their acknowledgement of their obligation to buy renter’s insurance.

Before signing the lease agreement, demand a copy of their declaration page or other proof of coverage. If they can’t produce it, they won’t be able to sign the lease and move in.

In the worst-case scenario, where they show proof of coverage and then cancel it or fail to renew it, they directly violate the terms of your lease agreement. You can point to this violation if they take you to court or if you have to go through the eviction process — more on this in a minute.

 

Legal and Financial Benefits of Renters Insurance for Landlords

Again, from experience, renters insurance has many legal and financial benefits, even for landlords. Let’s tackle the most significant ones.

Reduced Liability Exposure

What if your tenant’s guest slips on a wet kitchen floor during a dinner party, which results in a serious injury? (I genuinely hope this won’t happen.)

Without renters insurance, an injured guest can sue both the tenant and the landlord, which will most likely lead to costly legal conflict and damages. However, if the tenant has renter’s insurance with liability coverage, their policy would typically handle the claim — protects you and your tenant from stressful legal tussles.

This protection also typically extends to various situations, such as dog bites on the property or accidental fires caused by tenant negligence.

Lower Insurance Premiums for Landlords

Over time, you’ll notice that rental homes where tenants have renters insurance tend to file fewer claims on the landlord’s property insurance.

That is because when a tenant accidentally starts a small kitchen fire, their renter’s insurance covers the damage, and the landlord does not have to file a claim.

Now, after a few years of reduced claims, your insurance company—from your landlord insurance—may recognize this pattern and potentially offer you a lower premium rate.

However, this may not be immediately apparent to you. Still, the savings can be substantial in the long run, especially if you have multiple properties amounting to thousands of dollars in annual insurance costs.

Mitigation of Loss-of-Rent Risks

Let’s go back to the situation where a tenant accidentally causes a kitchen fire, rendering their apartment uninhabitable for two months during repairs.

Without renters insurance, the tenant might struggle to pay rent while also covering temporary housing costs. And guess what? It can lead to missed payments or lease termination.

However, renters insurance often covers the tenant’s alternative living arrangements, which means your tenant can continue paying rent even while displaced. 

Streamlined Eviction Processes

In a worst-case scenario, imagine a tenant who has caused significant damage to a rental unit through negligence, such as repeatedly allowing a bathtub to overflow, causing costly water damage.

If eviction becomes necessary, documentation of the tenant’s renter’s insurance policy can be quite helpful in court. It provides clear evidence of the tenant’s responsibilities and the extent of the damage covered by their policy.

This documentation can reduce the time and cost of the eviction process as it can help expedite legal proceedings. And, of course, if the damage exceeds the security deposit, the landlord may have a better chance of recovering costs through the tenant’s insurance rather than chasing the tenant directly.

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Common Misconceptions About Renters Insurance

In my experience dealing with tenants, I’ve heard MANY misconceptions about renters insurance. I’m not surprised, though, given that only more than half of rental homes across the US have renters insurance.

Below are some of the most common misconceptions you might also encounter.

“The landlord’s insurance covers the tenant’s belongings.” Many tenants mistakenly believe that the landlord’s property insurance extends to their personal possessions. Nope, the landlord’s policy typically only covers the building structure and any landlord-owned appliances or fixtures. Nothing else.

“Renters insurance is too expensive.” Tenants often overestimate the cost of renters insurance. In fact, it’s generally quite affordable, often less than $20 per month for basic coverage. But hey, it won’t hurt you, as the landlord, to clarify this to your potential tenant.

“It’s only necessary for expensive items.” In my experience, some tenants think they don’t need insurance if they don’t own high-value items. As mentioned earlier, however, renters insurance also covers liability and other living expenses, which can be useful in certain situations.

“All renters insurance policies are the same.” In reality, every insurance policy, including renters insurance, can vary significantly in terms of coverage, limits, additional features, and so on. So, the landlord and tenant must understand the specific policy.

“It only covers theft.” Many tenants don’t realize, and some might argue with this, that renters insurance typically covers a range of misfortunes, including fire, water damage, and even certain natural disasters.

“Renters insurance isn’t necessary in a safe neighborhood.” Well, again, it doesn’t only cover theft. It also covers accidents and other unfortunate events, which can happen anywhere — no matter how safe the neighborhood is.

 

Where Can Tenants Buy Renter’s Insurance?

We’ve had good experiences with Sure Insurance, as a provider of low-cost but comprehensive renter’s insurance.

But most major insurance brands offer renter’s insurance, from Geico to State Farm to Farmer’s to other insurance corporations that don’t include the word “farm.” Check out this list of the best renters insurance policies to compare options.

Don’t require your tenants to buy a specific brand, but do require them to include liability coverage for property damage or injuries caused to neighbors or guests.

Again, require a copy of your tenants’ proof of coverage before signing a lease agreement with them!

 

Final Thoughts

Renter’s insurance protects both your tenant and you as a landlord. Policies cost as little as a few dollars a month, which won’t exactly strain your tenant’s budget. But in the event of property damage or a neighbor getting attacked by your tenant’s dog, your tenant’s renter’s insurance can foot the bill and liability, not you.

Do yourself and your tenants a favor by reviewing all of the benefits of renter’s insurance together and helping them understand the very real value it brings to your relationship as tenant and landlord. Requiring insurance in your lease agreement is an industry best practice that many landlords abide by, and if they refuse to buy a policy, consider it a red flag in the tenant screening process.

 

Do you require renter’s insurance in your rental units? Why or why not?

 

 

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