Q

What is fair rental value coverage?

A

It replaces lost rental payments when a covered loss prevents you from renting out your unit.

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Fair rental value coverage (Coverage D) is a type of coverage included in most landlord and homeowners insurance policies. If you're unable to rent out your property because of a covered loss, this coverage replaces the rent payments you’re not able to collect due to the inconvenience. 

However, fair rental value coverage does not cover your monthly mortgage payments, property taxes, electric bills, or any other expenses that would continue regardless of whether a tenant was living there or not. It also doesn’t cover tenants’ damaged property or relocation costs after the loss — they’ll need their own renters insurance policy to cover those expenses.

Key Takeaways

  • Fair rental value coverage is essentially income protection for landlords

  • If your rental property is damaged and can’t be rented out after a covered disaster, like a fire or burst pipe, fair rental value coverage pays rent on behalf of your tenants. 

  • Fair rental value is its own separate coverage on landlord insurance policies. On homeowners insurance policies, it’s included with the policy’s loss of use coverage.

  • On landlord policies, fair rental value coverage is generally 20% of your dwelling coverage limit, which is the amount of insurance on the property. With homeowners insurance, you’re typically covered for 30% of the policy’s dwelling coverage limit.

What does fair rental value cover?

Many investment property owners rely on rent payments for mortgage payments and unit improvements. But if your rental property is badly damaged by a storm or plumbing issue and your tenant is forced to temporarily relocate — this source of income may be interrupted if you don’t have insurance. That’s where fair rental value coverage comes in.

With fair rental value coverage, insurance pays your rental income while your property is being rebuilt or repaired after a covered loss. You still need to continue to pay down your mortgage and utility bills even after a disaster — so fair rental value coverage provides a crucial layer of financial padding in addition to your dwelling and personal property coverages. 

Fair rental value coverage example

Imagine you rent out a room in your house for $1,000 a month. One day, a fire damages the portion of your home where your room is located, forcing the tenant to relocate for two months while your house is being repaired. With fair rental value coverage, your insurance company would pay you for the $2,000 in lost rental income while the property is being repaired.

Coverage is provided for as long as it takes to repair the damaged portion of the residence or a maximum of 12 months — whichever amount of time is shortest. You can use this coverage whether you have existing tenants or not. 

Genius tip: Fair rental value coverage may kick in if your neighbor’s property is damaged

This coverage also applies if a neighbor’s residence is damaged by a loss that’s covered by your policy and a civil authority — meaning the government — prevents you from using the property. However, coverage is only provided for a maximum of two weeks.

What does fair rental value coverage not cover?

Loss of rent coverage does not pay you for lost rental income if the cause of property damage isn’t a covered peril in your policy. For example, flooding generally isn’t covered under landlord or homeowners insurance policies. So if your property incurs flood damage and your tenant lives somewhere else during repairs, insurance won’t cover your lost rental income. 

Fair rental value coverage also only applies to the owner of the rental property — not the tenant. That means if your tenant is forced to relocate due to a covered loss, this coverage won’t help pay for their temporary living expenses. Your tenant will have to turn to their own renters insurance policy to get paid for damaged belongings or additional living expenses after a loss.

How is fair rental value determined?

In the event of a fair rental value coverage claim, your insurance company will likely determine your payout based on the amount you were charging for rent before the loss. It’s also possible that your insurance company will make their own calculation based on the fair market rent value of similar properties in your area. 

There is usually a limit to how much your insurance will pay out for any one claim. In a landlord insurance policy (aka a rental property insurance policy), your fair rental value limit is 20% of your property’s dwelling coverage limit. That means if you have $300,000 in dwelling coverage, you have $60,000 in loss of rent coverage. On homeowners insurance policies, this coverage is 30% of your dwelling coverage limit.

Frequently Asked Questions

Does fair rental value cover property damage?

No, this coverage only provides rental income protection. To repair or replace the structure of your rental property, you’ll need to file a claim under the dwelling coverage portion of your landlord policy.

How do you calculate fair rental value?

To determine the amount of rent to charge, research what other landlords in your area are charging for properties with similar size, bedrooms, and bathrooms. Websites like Zillow, Trulia, and Redfin are a good place to start.

Is fair rental value the same as loss of use?

Fair rental value and additional living expenses are types of coverage included in the loss of use portion of your homeowners insurance policy. Fair rental value reimburses you for lost rental income, while additional living expenses pays for your temporary living expenses if you’re forced to relocate due to a covered loss.