Owning rental property in Texas is more than just a passive investment – it’s a business endeavor that comes with its fair share of risks and responsibilities. Just like any business, managing risk is crucial for landlords. One of the most powerful tools in risk management for landlords is insurance. In this blog post, we will explore the essential insurance policies that every landlord in Texas should consider to protect their rental properties and investments.
The Importance of Insurance for Landlords
Before we dive into the specific insurance policies, it’s essential to understand why insurance is a fundamental part of being a responsible landlord in Texas. Whether you own a single rental home or a portfolio of properties, insurance provides a safety net that can help protect your investment and financial well-being in the face of unexpected events.
While insurance is essential, it’s equally important to have properly structured entities for holding rental properties, as discussed in a previous post. However, in this article, we will focus solely on the recommended insurance policies for Texas landlords. Landlords should request what is known as a Rental Dwelling Policy from their insurance agent, which will likely include several of the specific coverages discussed below.
Hazard Insurance
If your rental properties are subject to a mortgage, your lender will require hazard insurance to protect their loan. Hazard insurance is designed to safeguard the improvements on your property from losses caused by events like fires and storms. Even if your properties are free of liens, it’s strongly recommended to have hazard insurance, except in rare cases where the improvement value is minimal compared to the lot’s value. It’s important to note that hazard insurance policies typically exclude coverage for flood and mold remediation. Currently, our management company is unaware of any affordable mold insurance being offered in Texas.
Flood Insurance
For rental properties located in high-risk flood zones, it’s crucial to obtain separate flood insurance. While the National Flood Insurance Program (NFIP) caps coverage at $250,000, it’s possible to purchase excess flood policies. In flood-prone areas like Houston, where flooding can be a significant risk, landlords must weigh the cost of flood insurance against the potential damage expenses.
Public Liability Insurance
Public Liability Insurance, often included in a Rental Dwelling Policy, safeguards landlords against legal claims and financial obligations resulting from injuries or deaths that occur on their rental property. It covers incidents involving tenants, visitors, or anyone who might be on your property legally. Our management company recommends a coverage amount of $1,000,000 for public liability.
Personal Umbrella Policy
Even if landlords properly hold their rental properties in a Texas entity like an LLC, it’s still advisable to have a personal umbrella policy. This extra layer of protection is essential because individual landlords may be personally involved in property management, exposing themselves to potential liability claims.
Insurance undoubtedly comes at a cost, reducing the cash flow from your rental properties. However, it is a vital tool in risk management that can save you from substantial financial losses in the long run. It’s crucial not to blindly purchase expensive policies based solely on the advice of insurance agents who profit from selling policies. Instead, take the time to carefully read and understand your insurance policy, paying close attention to the exceptions and exclusions section.
Furthermore, if you use a property management company, be aware that they may request to be named as an additional insured on your policy. While this provides free coverage for the management company, it can reduce the amount of coverage available to you. Many management companies, like ours, prefer to be named as an Interested Party, taking no part in the coverage limits and helping to ensure landlords maintain the desired policies.
If you have any questions or need guidance regarding insurance for your rental properties, don’t hesitate to reach out to a knowledgeable property manager, insurance professional or a lawyer who can provide you with the guidance you need to protect your investments and manage risk effectively.