What Most Landlord Insurance Policies Don't Cover

By Bobbye Joe McMillan

Bobbye Joe McMillan is the driving force behind Cornerstone Property Management, bringing over 30 years of expertise in real estate to help clients achieve their property goals.

If you own rental property and you have landlord insurance, you probably assume you’re covered. Most landlords do. But an estimated two-thirds of residential properties in the U.S. are underinsured right now, and the gap between what landlords think their policy covers and what it actually covers is where the most expensive surprises live.

I’m not an insurance agent, and I’m not here to tell you which policy to buy. But I’ve managed hundreds of properties, and I’ve seen what happens when a landlord files a claim and finds out too late that their coverage doesn’t work the way they expected.

Here are the three biggest gaps I see.

1. Your policy probably doesn’t cover what your tenant does on purpose. This one catches most landlords off guard. Standard landlord insurance typically excludes intentional damage caused by tenants. If a tenant trashes the unit on the way out, rips out fixtures, or destroys flooring, most policies won’t pay for it unless you have a specific vandalism or malicious mischief endorsement. A lot of landlords don’t.

On top of that, your policy does not cover your tenant’s personal belongings. That’s what renters’ insurance handles. If your tenant doesn’t have it and something happens, they’re looking to you for answers you can’t give. Requiring renters’ insurance in your lease is one of the simplest protections you can put in place for both parties.

2. Floods, earthquakes, sewer backups, and mold are almost never included by default. Standard landlord insurance excludes flood damage, earthquake damage, sewer backups, and most mold situations. These aren’t rare events. Water damage is one of the most common claims landlords file, and a sewer backup can cost $2,000 to $10,000 in cleanup alone, and potentially much more if the sewer line itself needs to be repaired or replaced.

If your property is in a flood zone or a storm-prone area, you need a separate flood policy. If you have older plumbing, a sewer backup rider could save you from a bill that wipes out a year of rental income. The point isn’t that you need every endorsement available. What you need to know is what your policy excludes so you can make an informed decision about which gaps to fill based on your property and your risk exposure.

3. Your replacement cost is probably outdated. Construction costs and material prices have risen significantly over the past several years, and a lot of landlords haven’t updated their dwelling coverage to reflect that. If your replacement cost estimate is based on numbers from three or four years ago, it might not be enough to actually rebuild or repair your property after a major loss.

That gap between what you’re insured for and what it would actually cost today is money that comes out of your pocket. Reviewing your replacement cost estimate at every renewal, not just glancing at your premium, is one of the most important things you can do to protect your investment.

Most landlords don’t find out about their coverage gaps until after something goes wrong, and by then, it’s too late to fix it. If it’s been a while since you’ve reviewed your policy, or if you’re not sure what’s actually covered, it’s worth having that conversation with your insurer or your property manager.

If you want help figuring out what to look for, I’m happy to walk you through what I’ve seen. Call me at 210-440-1223 or email me at bmcmillan@cornerstonepmtx.com. You can also visit blog.cornerstonepmtx.com to learn more.