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When you rent a property to a tenant, you earn income in the form of rent payments. But if the property becomes uninhabitable — due to a fire or other covered loss — the tenant will need to move out while repairs take place. In the meantime, the tenant won’t be responsible for paying rent — and you lose out on important income.
Fair rental value coverage — also known as fair rental income protection, loss of rent coverage, or loss of use coverage — can reimburse you for that lost income. Your landlord insurance (or dwelling fire insurance) typically includes this type of coverage.
Here’s what you need to know about fair rental value coverage:
- What is fair rental value coverage?
- What fair rental value coverage protects and what it doesn’t
- What determines the fair rental value amount?
- What else does landlord insurance cover?
What is fair rental value coverage?
Fair rental value coverage pays out lost rental income while your property is being repaired or rebuilt as a result of a covered loss. It may be included with your landlord insurance policy or it might be offered as an add-on.
Let’s say you rent out an apartment for $2,0000 a month. A tree falls through the roof of the apartment causing massive damage. Your tenant has to move out for two months as a result. With fair rental value protection, your insurer may grant you up to $4,000 to make up for the lost rental income, as long as the damage to the apartment was from a covered peril.
What fair rental value coverage protects and what it doesn’t
Fair rental value coverage doesn’t protect you from damage to your property. However, most landlord insurance policies include dwelling coverage.
What is or isn’t covered by your landlord insurance policy depends on the type of policy you have. Landlord insurance policies come in three different forms:
- DP-1: This policy provides basic, named perils coverage against specific perils listed in your policy. Losses are settled for the actual cash value (the item cost minus depreciation) rather than the full replacement cost.
- DP-2: This policy covers the same perils listed in a DP-1 policy while also providing coverage for additional perils, such as vandalism, freezing pipes, and electrical damage. Unlike DP-1 policies, losses on a DP-2 policy are settled on a replacement cost basis.
- DP-3: These policies are more comprehensive, offering open perils coverage against any peril not specifically excluded from the policy.
Most landlords opt for a DP-2 or DP-3 policy as they provide more comprehensive coverage than a DP-1 policy.
Your landlord insurance may only cover losses caused by certain perils. Here’s what’s commonly covered under a standard landlord insurance policy.
|Covered perils||Perils not covered|
|Hail/wind||Mold not due to covered loss|
|Falling objects||Intentional acts|
|Vehicles (aircraft, car)||Wear and tear|
|Accidental water discharge (other than flood)|
|Freezing (heated, occupied unit)|
What determines the fair rental value amount?
Insurers calculate the amount of your fair rental value coverage in a few ways:
- Market rates. If you have not rented the unit for long, the carrier may look at rates for similar properties in the area. So, if you’re charging more than other landlords, you might not get as much money.
- Previous rental income. If you’ve rented the property for a long time, the insurer will draw from past rental income.
- Suspended utilities. While you’re making repairs, you may have to suspend utility services (e.g., electricity). Since these bills won’t affect your monthly expenses, insurance companies often deduct them if you — not your renters — were paying the utility bills. So, if you charge $2,000 for rent and pay $200 for utilities, you may only receive $1,800.
- Coverage limits. Fair rental value coverage is often a percentage of your total policy. In most cases, the limit is 10% of dwelling coverage. So, if your policy is for $300,000, you can claim up to $30,000 for fair rental value reimbursements.
- Time frame. This coverage usually pays up to 12 months. If repairs last longer than that, you won’t get any more money. The coverage ends the earliest date on which the property is habitable, which may happen prior to 12 months.
What else does landlord insurance cover?
Landlord insurance provides two types of coverage in addition to coverage for lost rent income: property coverage and personal liability coverage. Both are similar to the coverage provided by standard homeowners insurance policies.
Property coverage protects you against damage or casualty loss of the rental property due to a covered peril — and again, what’s covered depends on the type of policy you have. You might be able to extend coverage to personal property and add optional coverage for perils your standard policy doesn’t cover.
Personal liability coverage can help you with legal expenses if you’re sued by someone who suffered an injury while on your property. It’ll also pay damages in the event you’re found to have been at fault.
Remember that your insurance claims are subject to a deductible that you’ll have to pay out of pocket before your insurance kicks in.