You can protect against virtually any risk through insurance. Every industry has its own specialized types of coverage—and the multifamily insurance industry is no exception.
Worried about property damage from fires, floods, or storms? Inability to collect rent due to that damage? Legal liability and lawsuits? Tenants defaulting on rent?
There are real estate insurance types for each of those risks and more. You can insure individual buildings separately within an apartment complex, or insure the entire apartment community.
As you explore types of multifamily insurance, keep the following coverage options in mind.
Multifamily property insurance
When most people think of multifamily insurance or landlord insurance, they think of property coverage.
Multifamily property insurance covers the rental buildings themselves. These building insurance policies typically cover damage from disasters like storms, fires, and accidents.
Apartment building insurance plans come in two varieties.
Per-building coverage for individual buildings: Each property in a residential complex has its own deductible, coverage, and limits in this case. This type of coverage is only available for properties with more than one structure.
Whole-property policy that covers entire apartment complexes: This provides less granular control over your coverage, but could potentially save you money on multifamily insurance.
What does property insurance cover for multifamily properties?
Multifamily property insurance policies cover damage to the structure of the building from common threats. Most apartment building insurance coverage includes damage from fires, storm damage, and vandalism.
Storm damage often includes hail, wind, and water damage from leaks caused by the storm. However, storm damage often excludes damage from flooding. Discuss the exact property coverage with your insurance agent so you don’t get blindsided with a six-figure repair bill not covered by your policy. Drill down into details such as water backup and sump overflow coverage, equipment breakdown coverage, and more.
Many multifamily insurance policies also exclude earthquake damage, so double-check that coverage as well.
Building coverage plans don’t cover renters’ belongings such as furniture and valuables. Your tenants need their own renters insurance policies to cover their possessions. However, building policies do typically cover the furniture and fixtures in communal spaces, depending on the inclusions and coverage.
General liability coverage
The many types of real estate insurance go beyond covering the building, fixtures, and appliances. Your multifamily insurance plan should also include general liability coverage to help protect you from lawsuits.
General liability insurance covers your legal fees and damages in the event that the court rules against you. It protects you in cases such as slip-and-fall lawsuits, where the plaintiff sues for medical bills, lost wages, and other damages.
How does it differ from tenant legal liability insurance?
Landlord liability coverage protects the property owner in the event of a lawsuit from a renter or third party. Tenant legal liability insurance, also known as renters liability insurance, protects the renter.
If the tenant causes property damage or is found liable for medical costs, renters legal liability insurance can cover their legal bills and damages.
For example, say a renter’s kitchen fire causes tens of thousands in damage to their apartment building. Rather than coming out of pocket themselves, their liability coverage foots the bill for repairs.
Most renters insurance policies come with some degree of liability protection. As a property owner, you can also explore zero-gap renters insurance policies.
Flood insurance for multifamily properties
If your property sits in a flood plain, lenders will likely require you to buy a separate flood insurance policy.
Lenders determine flood plains based on Flood Insurance Rate Maps created by the Federal Emergency Management Agency (FEMA). As a general rule, plan on needing flood coverage if your multifamily property sits in a flood zone.
You can opt not to buy flood insurance coverage if your lender doesn’t require it, but could find yourself saddled with a monstrous repair bill in the event of a flood.
Umbrella coverage
Liability coverage in multifamily insurance doesn’t create bulletproof legal liability protection. Many multifamily operators and owners take out a separate umbrella insurance policy to protect against liability not covered by their general liability coverage.
Umbrella insurance might also cover some causes of property damage excluded by your main property insurance policy. For example, umbrella coverage might include damage caused by terrorism, while your main property policy might exclude it.
Think of umbrella insurance coverage as a backstop to protect against risks not covered by your other policies. But that doesn’t mean these policies cover every risk. They come with their exclusions and coverage limits, so again, speak with your insurance provider about pros, cons, and limitations of umbrella real estate insurance.
Loss of rental income insurance
Some multifamily insurance policies come with loss of income coverage, also known as business interruption insurance. Alternatively, multifamily owners may need to purchase a separate policy for loss of income insurance.
Say a fire leaves a dozen of your units uninhabitable for four months while you make repairs. Not only would your loss of income insurance policy cover the cost of repairs, but it would also pay for lost rent during that period. It may also cover the cost of re-housing your renters in a hotel or short-term rental property.
Loss of income protection usually comes with a waiting period: the gap between when a covered event occurs and when the insurance kicks in to start paying.
Some policies cover “actual business income,” the rent that was being collected. Others cover “actual loss sustained”—the amount that you come out of pocket. Speak with an insurance agent about policy costs and coverage to find the right balance for your multifamily property.
Rent default insurance
Most loss of income insurance policies don’t cover tenants defaulting on their rent. For that, you need rent default insurance, also called rent coverage.
If your tenants stop paying the rent for any reason, rent coverage kicks in and starts paying until you’ve evicted them and replaced them with a paying renter. It removes one of the greatest unknowns from your business model as a multifamily operator.
Companies like TheGuarantors bundle rent default insurance with security deposit coverage in a single policy, paid by your renters. The renter avoids having to put down a security deposit, and you get protection against property damage and rent defaults.
Rent coverage can keep your economic vacancy and physical vacancy more closely aligned, as you keep collecting rents even if your tenants stop paying and trigger an eviction.
It also enables you to approve more applications, as you screen tenants. That means filling vacant units faster, reducing your vacancy rate, and improving your net operating income.
Final thoughts
Apartment building insurance coverage comes in many shapes and sizes, protecting against different threats. Your risk management strategy should incorporate — or at least consider — each of the real estate insurance policies outlined above.
Each multifamily property comes with its own unique risk profile. Your property might sit in an area where flooding poses virtually no risk, or an area at high risk for floods.
It helps to find the right insurance partner, who you can trust not to upsell you. When you find a trustworthy, expert insurance provider, you can strategize your multifamily insurance coverage together as partners. You can find the right balance between cost and coverage.
If you don’t love your current insurance provider, start asking around for referrals. Find someone you can trust, and build a close relationship with them as a partner in your multifamily business.