When You Shouldn't Buy Homeowners Insurance For A Home You Own

Homeowners Insurance

I can imagine what you might be thinking. How can an insurance broker write an article with a title obtuse enough to suggest not purchasing homeowners insurance for a home that you own?

Perhaps my title represents a humble attempt to earn your eyes for a few minutes, but it is with good reason as I feel obligated to address a situation we see often; one that represents an important element of insurance to discuss.

If you own a home that is not your primary residence, but rent it out as an income property, homeowners insurance is not the correct insurance to procure.

**Allow me to present the bad news, first (good news is forthcoming):

Your insurance company could potentially deny claims made against a homeowners policy written on your income property, declaring the policy contractually null and void, shouldering you with 100% of the cost.

Why?

In the context of a written policy, the insurance industry (as well as most people) defines you as a landlord in this situation, not a homeowner, because you are not the primary resident of the property. This may seem obvious, however it's important to know how this definition affects insurance policies:

Homeowners policies are reserved and written for properties in which the insured is also the primary resident, and they provide more comprehensive personal property and liability coverage. Most of your "stuff" is located at your primary residence, and accidents are more apt to happen simply because, well, you are there more often.

As landlord of your income property, you likely own little to no personal property at the address, and because you are not a primary resident, you have less liability exposure.

So if the insurance industry defines you as a landlord of the income property you own, what is the correct policy to purchase?

The contractually valid, correct insurance policy to purchase is a dwelling fire policy, designed to accommodate the semantics of being a landlord.

Dwelling fire policies are not as robust as homeowners policies, and they are primarily designed to insure your structure while providing a small amount of personal property and liability coverage.

**Allow me to present the good news regarding dwelling fire policies (besides that, contractually, they are the correct policy for your income property) by citing a recent client example:

A few months ago a family asked our firm to review their homeowners insurance policy renewal, written for their income property. Unfortunately, their agent mistakenly identified them (as they did the previous year) as primary residents of the property and offered a homeowners insurance policy renewal at $1,905.94/year.

As the property is not the family's primary residence, but an income property, this homeowners policy is not contractually enforceable. Should a claim be filed against this policy, the insurance company has the contractual right to deny it on the basis that the family members are not primary residents of the property, shouldering them with 100% of the claim cost.

After describing this situation to the family, we placed them in an appropriate dwelling fire policy - and please note the price difference below:

Not only does the family now have a contractually enforceable policy, but they saved about $1,200 in the process.

Dwelling fire policies are more cost effective than homeowners policies because their primary goal is to insure the structure itself, with only a small amount of personal property/liability coverage included. They are contractually enforceable policies for your income property, and as you've seen, easier on the wallet.

Of course, there are exceptions to this and additional minutia to consider when properties are seasonal or are vacation properties, etc....but I will have to leave those for future articles ;)

Stay safe, stay healthy,

Mike

California License #0D94511