Here’s a hard truth that you may have uncovered already: property insurance in California has become more difficult and expensive to obtain. Rising costs and claims have created a crisis within the insurance industry, not only in California, but across the country. Companies have stopped writing policies. Premiums have doubled. Claims are taking longer to settle.
Last year, State Farm announced it would no longer issue new insurance policies to California homeowners due to “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure and a challenging reinsurance market.” (Kiplingers, 2023).
Allstate soon followed and since then, four additional insurers have stopped issuing new insurance policies for homes and properties.
With fewer companies willing to insure your property, and extra bureaucracy involved in getting a new policy, a lot of homeowners and rental property owners are feeling frustrated and uncertain.
What does this mean for you, when you’re trying to protect your investment property in southern California?
We’ve put together an essential guide for landlords who are doing their best to insure their properties and protect themselves from catastrophic losses. It’s more difficult to get a policy today, but it’s still absolutely critical to be covered.
Landlord Essentials
What Your Insurance Policy Must Cover
Talk to a good insurance agent before you buy any type of landlord insurance. This is an essential relationship to have in place, and if you don’t currently have a great agent, get in touch with us at Niguel Point Properties. We’d be happy to make a referral. You cannot be too precise when choosing insurance. You’ll need the right coverage for your investment, and you’ll want the peace of mind that comes with adequate insurance.
When we talk about landlord insurance, we’re referring to the policy that covers both your dwelling, which is the actual physical property, and the liability that you take on as a landlord.
Dwelling
With a sound dwelling insurance policy, your rental property as a building or a structure is protected against perils such as fire, wind, hail, or structural collapse. Whether it’s a single-family home or a small apartment building with five or six rental units, your dwelling coverage covers exactly what it says it covers - the dwelling. Any of the property inside the rental home that belongs to you will also be covered, such as appliances. | Liability
There’s always risk in renting out a home, and that’s why liability protection is essential. If you are found 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. No one likes to think about potential lawsuits and claims, but they’re out there…and you want to be protected. | Loss of Rent
If something happens and your tenants need to move out of your property so that it can be repaired or returned to a habitable standard, you’ll find that you don’t have any rent coming in. That’s going to be a problem for your cash flow and profitability. A loss of rent insurance policy will cover the lost income. If your existing policy does not include this, make sure you buy extra coverage so you have it. |
Staying Up to Date with Insurance Needs
We have already mentioned the importance of a good insurance agent, and we’d like to stress that again: having a professional expert guide you through the complicated process of buying insurance for a rental property in southern California is an essential resource. Work with an insurance professional who understands the unique needs of rental properties, because what you buy to cover your investment is different from the insurance you’ll use to cover the home you occupy. This is not a homeowner’s policy.
A good agent should have the best idea about what types of coverage will serve you and your property. You can rely on their experience and recommendations to completely cover your risk without spending too much money on premiums and deductibles.
Pro Tip: Having a higher deductible will save you money on your premium. That’s an attractive benefit to a lot of owners, especially consider what you’ll spend on your insurance policy. However, this may impact whether you decide to file a claim. Will you be able to pay the higher deductible when you need insurance to fix something? We can help with this. At Niguel Point Properties, we become your point person for insurance claims. |
It’s also necessary to review your coverage annually to ensure you’re protected. You’ll want to periodically re-visit what coverage you have and keep the discussion moving with your insurance agent. Your m changes from year to year, and your investment is likely worth more now than it was when you first purchased insurance. That’s going to affect the dollar amount you’ll need to collect if you suffer a loss and need to rebuild or replace systems. This might make your policy more expensive. But, you don’t want to be left with not enough money to rebuild or replace.
As you’re choosing a policy, let’s not forget the impact of age and property condition. Your rental home is also getting older with every passing year. You may need more or less coverage depending on these changes.
Saving money is always important when you’re investing in real estate, but don’t buy the budget policies that barely manage your minimal risk. You don’t want the least amount of coverage or the cheapest policy. When you take that path, you’re risking your investment and your financial future. It’s dangerous.
Let’s Talk about Earthquake Insurance
This is California.
We’re known to have an earthquake from time to time. And, it might surprise you that your normal landlord insurance does not cover earthquake damage. It may further surprise you that earthquake coverage is not required in this state.
Earthquake insurance is a type of property insurance that covers damage caused by earthquakes.
Fun Fact: According to the U.S. Geological Survey (USGS), the state experiences thousands of earthquakes annually, though most are too small to be noticed. |
Just because it isn’t required, doesn’t mean you shouldn’t have it. Here are some of the benefits to buying earthquake insurance:
Protect Your Investment Earthquake insurance ensures that you are financially protected if an earthquake damages your property. This means you won't have to bear the full cost of repairs or rebuilding out of pocket. It protects your valuable investment. | Peace of Mind Knowing that your property is covered in the event of an earthquake can provide immense peace of mind. You can focus on managing your rentals without constantly worrying about potential seismic events and the financial fallout they could cause. | Tenant Retention Having earthquake insurance can also be a selling point for potential tenants. Renters are likely to feel more secure knowing that their home is protected against natural disasters, which can make your property more attractive in a competitive rental market. |
If you’re going to buy earthquake insurance, start by assessing the earthquake risk in your property's location. The California Earthquake Authority (CEA) offers valuable tools and resources to help property owners understand their specific risk levels.
Remember that not all earthquake insurance policies are created equal. It's essential to compare coverage options, deductibles, and premiums from various providers. Look for policies that offer comprehensive coverage for both the structure of your rental property and any personal property you may have inside.
Ensure that the policy you choose has adequate coverage limits to rebuild or repair your property if it's severely damaged. Keep in mind that rebuilding costs can be high, especially in California's competitive construction market.
Earthquake insurance typically comes with higher deductibles than standard property insurance. Evaluate your budget and financial situation to determine what deductible you can afford. Additionally, consider the premium costs and weigh them against the level of coverage provided.
Renters Insurance and Southern California Tenants
Your landlord policy will ensure you’re protected against liability, catastrophes, and loss of rent. With the right coverage, you’ll be able to rebuild, no matter what’s happened.
The coverage you buy yourself doesn’t entirely extend to your tenants and their belongings. This is why renters insurance is so important. If you’re wondering whether you should require it, the short answer is a simple yes.
Renters insurance is an affordable and easy way to bring tenants protection and peace of mind. It’s important that tenants buy their own insurance to cover their possessions as well as any risk that can come from accidents or disasters.
With a good renter’s insurance policy in place, everyone gets a little more protection. Your residents can repair or replace their personal possessions if something happens, and there’s more liability coverage for everyone.
Benefits of Renter’s Insurance
Renter’s Insurance Covers Your Resident’s Personal Property and Possessions The best reason to require renter’s insurance is to ensure that there’s coverage for your tenant’s personal property. If a tree crashes through your roof and crushes an expensive computer set-up, the renter’s insurance policy will cover the cost to replace or repair those things. We know that a lot of inexperienced tenants assume their landlords would pay for those replacements if something terrible happened, but you know that’s not true. Make sure your tenants know that it’s not true. A landlord’s insurance policy will not cover those items. Under a landlord policy, liability and the structure of the home is covered; a tenant’s personal property is not. So, your residents need a renter’s policy to make sure they don’t suffer a major loss if something happens in their unit. | Protecting Your Tenants from Their Own Liability A good renter’s policy will also cover liability. Tenants may think that nothing that happens at the property is their fault. Not exactly true. If a tenant accidentally leaves a turkey in the oven or a pan on a hot stove, there’s likely to be smoke, and where there’s smoke, there’s fire. Should the kitchen get damaged, the renter’s insurance will cover the repairs that are necessary. This will save the tenant from a lot of out-of-pocket expenses, protect his or her security deposit, and provide some relief to you as a landlord. What if the entire kitchen burns down in this scenario? This type of coverage will also help with expenses if that fire requires a tenant to move into a hotel for a few days while the damage is repaired. Everyone is afforded some extra peace of mind when a renter’s insurance policy is in place. |
Include the Renter’s Insurance Requirement in Your Lease
Renter’s insurance was once very controversial, and not a lot of property owners bothered with it. Things have changed, though, and now it’s common. Your tenants should not be surprised when you tell them that insurance is required. Most people will agree that tenants’ possessions have grown in value. That, coupled with the dramatic increase in insurance costs across the board make it essential for you and your residents.
As property managers, we recommend that you require renter’s insurance from your residents as a condition of signing the lease and moving in. Ask for proof of insurance before they move into your rental property and when the lease renews. This provides an important extra layer of protection for you, your residents, and your property.
Renter’s insurance is one of the cheapest policies out there. Your tenants should not bristle at the cost. Educate them about the value of this insurance if they push back against the necessity. You want them to understand that your insurance won’t cover them if their clothing is singed in a fire or their collection of baseball cards is damaged in a flood.
Get Listed as an Additional Insured on Your Tenant’s Policy
An additional insured is a person or entity added to an insurance policy who gains certain coverage benefits. Property managers will often want to be additional insureds on the policies of their owners and landlords. This is to ensure everyone is on the same page when it comes to filing and defending against claims.
For landlords, being an additional insured on a tenant's renter's insurance policy means that the insurance company will also provide some level of liability protection to you under the tenant’s policy and keep you informed if it’s changed or canceled.
Why Does This Matter?
There are a few reasons that landlords should care about this.
Enhanced Protection Being an additional insured can offer landlords enhanced protection against potential liabilities. If a tenant’s guest is injured on the property and decides to sue both the tenant and the landlord, the renter's insurance policy can help cover legal fees and potential settlements. This reduces the financial burden on landlords and provides an additional layer of security. | Reduced Risk of Coverage Gaps Even if a landlord has their own liability insurance, there can still be gaps in coverage. By being named as an additional insured, you can ensure that your tenant's renter's insurance covers certain risks that might not be included in your own policy. This can be especially important in cases involving negligence or misconduct by the tenant. | Encouraging Responsibility Among Tenants Requiring tenants to list landlords as additional insureds encourages tenants to take their insurance responsibilities seriously. It makes them more aware of the importance of maintaining a valid renter's insurance policy. This not only protects the tenant but also indirectly safeguards the landlord’s interests. |
The additional insured component will also simplify any claims processes. In the unfortunate event of a claim, being an additional insured can simplify the process. Both the landlord and tenant can coordinate with a single insurance provider, streamlining communication, documentation, and resolution. This can result in faster settlements and reduced administrative hassle for landlords.
Steps to Become an Additional Insured
Include Requirements in the Lease Agreement
To ensure you are added as an additional insured, include this requirement in the lease agreement. Clearly state that the tenant must provide proof of renter's insurance and add the landlord as an additional insured before moving in.
Verify Coverage
Once the tenant has secured renter's insurance, request a copy of the policy certificate to verify that you have been correctly listed as an additional insured. Review the policy details to understand the extent of coverage provided.
Maintain Open Communication
Throughout the tenancy, maintain open communication with your tenant regarding their insurance policy. Periodically request updates and proof of renewed coverage to ensure continuous protection.
Hopefully, this overview of insurance basics has helped you to wrap your head around what is required for you as a landlord and what you should require from your tenants when they rent from you.
Insurance is so important - it’s the first line of defense when it comes to protecting your investment property.
We know that obtaining and paying for insurance has become more challenging and expensive - especially in southern California. Let’s talk about it. Contact us at Niguel Point Properties.
