Insurance for a Rent-by-the-Room House: What to Buy and What to Ask

Why a homeowners policy usually does not fit

A homeowners policy is written for the person who lives in the house. The National Association of Insurance Commissioners' consumer guide describes it as covering the home, your belongings and your personal liability, and notes that homeowners insurance is not designed to cover most business uses of a home. Renting rooms to several unrelated people is a business use, and many insurers either exclude it, limit it or want to know about it.

If you live in the house and rent out one or two rooms, some insurers will cover it on a homeowners policy with an endorsement for renting rooms; others will not. If you do not live there, you almost always need a policy written for a rental. Either way, the only safe approach is to describe exactly how the house is used and get the insurer's answer in writing.

• Homeowners: for the owner who lives there
• Renting rooms is a business use the insurer needs to know about
• Living there and renting one or two rooms: ask about an endorsement
• Not living there: a policy written for a rental

Landlord and dwelling policies

Policies for rental houses are often called landlord policies or dwelling policies. North Carolina's Department of Insurance describes the common dwelling forms: a basic form that covers a short list of named causes such as fire and lightning, a broad form that adds more named causes such as windstorm, hail and some water damage, and a special form that covers the building against all causes except those excluded. It also notes that dwelling policies typically do not include liability coverage, which is why you may need to add it or buy it separately.

For a house full of residents, the special form is usually worth the extra cost, because the losses that happen in shared houses (a burst pipe, a kitchen fire, an overflowing bathtub upstairs) are exactly the ones a narrow form may not cover. Ask whether claims are paid at replacement cost or actual cash value, which subtracts wear and age.

Ask about loss of rent, sometimes called fair rental value or loss of use. If a covered fire makes the house unlivable for four months, this pays the rent you would have collected. In a house rented by the room that can be several thousand dollars a month that would otherwise stop at the same moment your repair bills start.

• Basic form: a short list of named causes
• Broad form: more named causes, including some water damage
• Special form: all causes except those excluded
• Replacement cost or actual cash value: ask which
• Loss of rent: your income while the house is repaired

Liability: the coverage that matters most

Liability coverage pays when someone is hurt and you are found responsible: a resident falls on a broken stair, a guest trips on an icy walk, a fire spreads to the neighbor's house. A shared house has more people coming and going than a single-family rental, so it has more chances for a claim, and injury claims can be far larger than the cost of rebuilding a kitchen.

Choose the limit with your agent, thinking about what you own that a lawsuit could reach. Many owners carry the highest limit their landlord policy offers and add an umbrella policy, which sits on top of your other policies and raises your total liability protection. Some owners also hold properties in a company for the same reason; that is a legal and tax decision to make with a lawyer and an accountant, and the insurance still has to be in the right name.

The cheapest liability insurance is prevention. Working smoke and carbon monoxide alarms, a fire extinguisher in the kitchen, sound stairs and railings, outdoor lighting and fast repairs reduce claims and are what an insurer asks about anyway.

• Injuries to residents, guests and visitors
• Damage that spreads to neighbors
• A limit chosen against what you own
• An umbrella policy for more protection
• Prevention: alarms, extinguishers, stairs, lighting

Renters insurance for every resident

Your policy covers your building and your liability. It does not cover your residents' belongings or their costs if they have to move out after a fire. The Insurance Information Institute puts it plainly: a landlord's policy will not replace a renter's possessions or pay their living expenses while the building is repaired. Renters insurance does both, and it also gives the resident their own liability coverage, for example if their space heater starts a fire or their guest is hurt.

Require it in the lease, unless your state or city limits that, with a minimum liability amount, and ask each resident to add you as an interested party so the insurer tells you if the policy is cancelled. Ask for proof at move-in and check that it stays in force. A requirement nobody checks is the same as no requirement.

In a house rented by the room, each resident needs their own policy. One resident's policy generally does not cover a housemate who is not a relative, so "my roommate has insurance" does not protect anyone else.

• Each resident buys their own policy
• A minimum liability amount, set in the lease
• You listed as an interested party
• Proof at move-in, checked while the lease runs

What standard policies leave out

Read the exclusions with your agent. Floods are the big one: the federal flood insurance program's site says most homeowners insurance does not cover flood damage, and the same is generally true of landlord policies, so ask whether the house needs a separate flood policy, even outside a high-risk zone. Earthquakes are usually excluded too.

Other gaps to ask about: slow leaks and mold, sewer or drain backups (often an add-on), damage while the house is vacant for a long stretch (common during a big rehab), short-term guests if any room is rented by the night, and the cost of bringing an old house up to current code after a loss, which an ordinance or law add-on can cover.

• Flood: usually a separate policy
• Earthquake: usually excluded
• Sewer and drain backup: often an add-on
• Vacancy during a long rehab
• Nightly guests in any room
• Rebuilding to current code after a loss

Questions to ask your agent

Put the facts in writing to your agent: the address, that the house is rented by the room to unrelated adults, how many residents, typical lease length, whether you live there, whether any room is ever rented by the night, and any use such as sober living or student housing. Then ask the questions below and keep the answers with the policy. An insurer that learns after a claim that the house was used differently from what the application said may deny the claim or cancel the policy.

RentCaddie keeps the resident side of this in order: the lease can require renters insurance, each resident's policy is recorded with its end date, and you are warned before one runs out, as far ahead as you choose. Repair requests arrive with photos and a date, which is the kind of record an insurer asks for after a loss.

• Does this policy cover a house rented room by room to unrelated people?
• Which form is it, and are claims paid at replacement cost?
• Is liability included, and what limit do you recommend?
• Does it include loss of rent, and for how long?
• What is excluded: flood, sewer backup, vacancy, nightly guests?
• What do you need from me to keep coverage in force?

• How RentCaddie runs a house rented by the room