What Does a Homeowners Policy Cover When Part of the Home is Rented?

Question from a prospective homebuyer: I am thinking of buying single family house. This house has an apartment in the basement with a seperate entrance. This apartment is not recognized (or considered legal) by the town/county and therefore the house is considered a one-family dweling. The questions below are soley focused on the insurance implications.

Let's say I were to hypothetically rent out this apartment to offset my home ownership costs. Am I able to insure the tenant, the apartment and my house both for damages and liability? I have several ways to further illustrate my questions:

1. What happens if the apartment tenant leaves the stove on and it burns down the house (accidentally)? am I covered for damages and liability? 
2. What happens if I (homeowner) leave the stove on and it burns down the house (accidentally)? Am I covered for the contents of the apartment tenants belongings and liability? 
3. What happens if the apartment tenant slips in the shower and gets hurt? Am I covered for their medical bills or if they try to sue me? 
4. What happens if a theif breaks into the apartment and steals from the apartment tenant? Am I covered?
5. What happens if the apartment tenant steals from me or causes damages to the home? Am I covered?

Answer: First of all, I want to commend you for focusing on what the insurance will do for you and not just on what it will cost. The vast majority of consumers don’t do that, and it can come back to haunt them. For purposes of answering your questions, I will assume that you will purchase a policy that is the equivalent of the Insurance Services Office’s Homeowners 3—Special Form policy. According to the International Risk Management Institute, this is the most popular and widely used of all homeowners insurance forms. 

A couple of things to keep in mind:

• First, the most the insurance company will pay for losses are the amounts of insurance you purchase. For example, if you buy $300,000 insurance to cover damage to the home, the most the company will pay to repair or replace it is $300,000, even if the actual cost to repair or replace it is greater. Similarly, if you buy $500,000 personal liability insurance, the company will pay the cost of your legal defense, but the most it will pay for a judgment or settlement is $500,000, even if the amount of the judgment is more than that.
• Second, whenever a loss involves loss of or damage to property you own, the insurance company will apply a deductible – an amount that you will be responsible for paying. For example, if you buy a policy with a $1,000 deductible and lightning strikes the house, causing damage that will cost $10,000 to repair, you will pay $1,000 and the insurance company will pay the remainder. In general, policies with higher deductibles cost less than those with lower deductibles.

Now on to your questions:

• What happens if the apartment tenant leaves the stove on and it burns down the house (accidentally)? Am I covered for damages and liability?

In general, yes, your policy will cover you for the cost of repairing or replacing the house. It will also cover the cost of defending you against any resulting lawsuits and the cost of any judgments or settlements resulting from those lawsuits.

• What happens if I (homeowner) leave the stove on and it burns down the house (accidentally)? Am I covered for the contents of the apartment tenant’s belongings and liability?

No. The policy covers you, residents of your household who are your relatives, or other persons who are under age 21 and in your care or the care of a relative who is also a member of your household. It will not insure a tenant for loss of or damage to his belongings, his additional expenses from having to live elsewhere during repair or replacement of your home, or for his legal liability (including defense) for injury or damage to others. He should purchase a renters insurance policy (similar to a homeowners policy) to protect his financial interests.

• What happens if the apartment tenant slips in the shower and gets hurt? Am I covered for their medical bills or if they try to sue me?

If your tenant sues you for this, your insurance will cover the costs of your legal defense and any resulting judgment against you or settlement you agree to, if: You are renting out a one-family unit; and the family renting it intends to use it to lodge no more than two roomers or boarders

• What happens if a thief breaks into the apartment and steals from the apartment tenant? Am I covered?

Your insurance will pay for any damage the thief does to the home or any personal property you own in the tenant’s space (furniture, kitchen appliances, etc.). It will not pay to replace any of the tenant’s belongings that the thief steals.

• What happens if the apartment tenant steals from me or causes damages to the home? Am I covered?

The policy will not cover the cost of replacing your belongings that the tenant steals from that part of the home you rent to him. For example, if the rental unit contains a microwave and the tenant takes it with him when he moves out, your insurance will not pay to replace it. However, if he leaves his rental unit, enters your living space and steals your TV, computer or something else, the policy will pay for that. If he were to damage the home in some way, the policy should cover the cost of repairing the damage.

These answers are of course hypothetical – specific circumstances may change the answers. For example, the policy does not cover losses caused by earthquakes or flood-like conditions, so my answer would change if one of these perils were responsible for the loss. Also, the policy does not provide liability coverage for events caused by certain sources of liability (motor vehicles, watercraft, business operations, communicable diseases, etc.), so the answer would change if any of these were involved. I strongly encourage you to read the policy once you receive it to see what it does and does not cover (courts actually place a duty to read the policy on the insured person whenever there is a coverage dispute.) When you have questions (not if), you should feel free to ask your insurance agent for clarification. That’s what he’s there for.

Best of luck with your new home!

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Comments

[Aixia300]

if he leaves his rental unit, enters your living space and steals your TV, computer or something else, the policy will pay for that. If he were to damage the home in some way, the policy should cover the cost of repairing the damage.http://www.uklouboutinshoesshop.com/christian-louboutin-flats-20

[strata property]

This question answer about the policy in between the land lord or owner and the tenant is very useful. It gave a clear idea about all the terms. Thanks for sharing such an informative post.

[Tim Dodge]

strata property,

Thank you for reading the blog!

[springkussen limburg]

This blog will give tips and ideas for those homeowners who want a part of their home to be rented. These ideas will help on how they could provide and serve their tenants as well as their policies into it.