Whether you are renting a vacation home to travelers or a group of apartments in a building, a rental property insurance policy is essential. This type of insurance protects your business and your property in case of disaster, from floods to hurricanes to theft.
Before you finalize the purchase of a rental property insurance policy, however, it is important to understand exactly what it covers, how you can file a claim, what you will recover from damages and whether there are any restrictions. This will keep you from being surprised should you ever have to file a claim.
Named Peril
If your rental property insurance policy includes a "named peril" clause, this means that you are only covered for the eventualities covered in that section. They might include fire, earthquake, tornado and theft, but not include flood or hurricane, for example. If something not listed happens and causes a loss, your insurance company won't cover it.
In most cases, you have to specifically request a "named peril" policy, which means you'll pay less on the premium but you aren't covered for every eventuality. Consider the likelihood of certain disasters or circumstances to determine whether you've made a good choice.
Comprehensive Coverage
Instead of a "named peril" policy, you might want to purchase a comprehensive rental property insurance policy. Comprehensive coverage will cover any loss or damage that isn't excluded in writing, which means you need to search specifically for exclusions. For example, some companies won't cover flooding unless you purchase additional coverage.
Remember that insurance companies are trying to minimize their risk. This is why it is important to carefully comb through your policy, even with comprehensive coverage, to find out what's covered and what is not.
ACV vs. RC
Actual cash value (ACV) and replacement cost (RC) are two different brands of loss settlement on your rental property insurance policy. AC coverage means that the insurance company will reimburse you for the value of the property at the time it was damaged or stolen. With RC coverage, on the other hand, you will be reimbursed with what it will cost to actually replace the lost or damaged item.
Obviously, you will pay more for RC coverage than ACV coverage because the insurance company will have to pay out more in the event of a claim. However, there can be a substantial difference between ACV and RC in what you get back, so consider this carefully.
Rental Insurance
It is important for rental property owners to look for rental insurance clauses on their rental property insurance policies. Rental insurance covers loss of rental income in the event of a natural disaster, such as a fire. If your tenants must move out, the insurance company pays the rent you lose as a result.
This might add significantly to your rental property insurance premium, so make sure to consider this carefully. If there is a good chance you might suffer loss of rental income, you might want to consider it.
About the Author: Steven Tyler is a real estate agent from Chicago, IL. Writes business articles for Brainfalls journal.
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