Fair rental value coverage is coverage that typically comes included in a standard home insurance or landlord insurance policy. It is coverage that can be incredibly important to a landlord who relies on rental income for some or all of their income. Damage resulting in the loss of the ability to rent out a room or rental property can be devastating to a homeowner’s livelihood, but fair rental value coverage can help.
- Fair rental value coverage provides rental income protection for homeowners when covered damage occurs and the room or property can not be rented out for a period of time.
- To what extent the fair rental value is covered depends on the type of home insurance policy the landlord owns, but is the same in that it is capped at 12 months of coverage.
- Fair rental value is typically determined by looking at what the property or room was being rented out for and what similar properties or rooms in the area are being rented out for.
What is fair rental value coverage?
Fair rental value coverage is the coverage contained within a home insurance policy or landlord policy that protects the homeowner from lost rental income when damage caused by a peril covered under the policy, occurs. In standard home insurance policies, fair rental value coverage is part of section D (loss of use) coverage. In landlord insurance policies such as DP-2 and DP-3, fair rental value coverage is its own separate section of coverage.
Fair rental value coverage kicks in only after the occurred damage meets two thresholds. First, the damage must be caused by a peril that is covered in the home insurance policy and then the damage needs to be extensive enough that it makes the rental property or room uninhabitable for a period of time.
It is important to note that fair rental value coverage is designed to protect the landlord, not the tenant. The tenant of the rental property will need to have their own separate renters insurance policy in order to have their personal belongings or relocation costs covered. It is also important to note that normal bills and living expenses that would have accumulated whether there was a tenant in the property or not, would not be covered under fair rental value coverage. It is strictly designed to replace the lost rental income that the landlord could have or did have coming in.
Fair rental value coverage is typically limited to 12 months’ worth of rental income. This means that if the repair takes longer than a year to complete, the insurance company will only cover the first 12 months of lost rental income.
What does fair rental value coverage protect?
Fair rental value coverage protects the homeowner for any lost rental income that they had coming in, up to the coverage limits. When covered damage occurs to a property that a homeowner was renting out to a tenant and the tenant has to relocate while repairs are being done or the property is being rebuilt, that tenant is no longer paying rent to the landlord. This leads to a hole in the landlord’s income. The insurance company will step in and provide the homeowner with the rental income they would have had if the tenant were still renting out the property.
Fair rental value coverage, whether under a landlord policy or standard home insurance policy typically only provides coverage until the repairs or rebuild have been completed and the home is inhabitable again or up to one year, whichever case comes first.
Here is an example of how this coverage can work. Let’s say you have a rental property that you typically rent out for $1,500 per month and one day a lightning storm comes through that starts a fire engulfing the home causing major damage. The damage is so great that repairs will be extensive and the tenant living there will be forced to move for 6 months while repairs are complete. This would mean a loss of $9,000 of rental income to the landlord while the tenant is not living at the property and paying rent. With fair rental value coverage, the insurance company will pay you, the landlord $9,000 to match the lost rental income, while the home is being repaired.
Let’s say the damage was actually more extensive than previously thought. It is going to take 18 months to rebuild the property entirely. This would result in $27,000 of lost rental income to the homeowner, but the insurance provider would only reimburse the homeowner for $18,000 of lost rental income because the coverage stops after 12 months. The remaining $9,000 of rental income will be lost.
What does fair rental value coverage not protect?
Fair rental value coverage will not provide any protection to the homeowner if the damage is caused by a peril not covered under the home insurance or landlord insurance policy. If damage is not covered by dwelling coverage A of the policy then there is no chance that fair rental value coverage will kick in even if your tenant has to move out for a period of time while repairs are being made. It is encouraged to read through your policy and talk with your insurance agent to understand what you are covered for and to what extent you are covered.
As mentioned earlier, this coverage will not protect the tenant in any way, only the landlord. The tenant will need their own renters insurance policy to have any sort of protection if the property they are renting becomes uninhabitable and/or their personal belongings are damaged. Fair rental value coverage will also not protect the home if the home is able to be inhabited still. Damage may be covered under section A, but if the tenant can still live in the home, fair rental value coverage will not kick in. Lastly, as mentioned before, the coverage will not cover any lost rental income beyond twelve months or beyond the repairs being completed, whichever one comes first.
Fair rental value coverage limits
Fair rental value coverage limits typically equate to a different percentage depending on if the policy owned is a standard homeowners insurance policy or landlord insurance policy. When the fair rental value coverage is part of a home insurance policy, the coverage limit is typically 30% of the dwelling coverage limit (Section A). For example, if the coverage A limit was $250,000 then the fair rental value coverage limit would be $75,000. Under a landlord insurance policy, the coverage is typically capped at 20% of the dwelling coverage limit. This would mean that if the dwelling coverage limit is $250,000 then the fair rental value coverage limit would be $50,000. Again, this limit may end up being lower if the damage repairs last over 12 months and the amount of rental income lost over 12 months is less than the dollar amount determined by the percentages above.
Summary
Fair rental value coverage is important coverage to have for owners of rental properties or homeowners who rent out rooms in their homes. Luckily this is a standard coverage included in home insurance in landlord insurance policies, so no additional premium payments are needed to obtain this coverage. Rental income may be a large portion of the landlord’s monthly income and could be devastating to their livelihood if they do not have that income coming in. fair rental value coverage can be extensive, but will be capped at 12 months maximum if the repairs take at least that long.
