Loss of rent coverage for Texas landlords

Short answer. Loss of rent coverage, also called fair rental value, pays the rent you lose while a covered loss such as a fire makes your rental unlivable and it is repaired. It does not pay when a tenant stops paying, breaks the lease, or the unit sits empty between tenants.

How much it pays, and for how long, depends on the policy: some forms pay for the reasonable time repairs take, within a percentage of the dwelling limit (the amount the house itself is insured for); others stop after a set number of months. In Texas, if a fire, storm or similar damage makes the home totally unusable and the tenant did not cause it, either you or the tenant may end the lease, and that is exactly when this coverage matters.

When does loss of rent coverage pay?

The trigger is physical damage from something the policy covers. The Texas Department of Insurance (TDI) has its own standard dwelling form, the Texas Dwelling Policy Form 3 (TDP-3, last revised in 2002). Insurers may still use it, but many now use their own approved forms (Ins. Code §2301.052), and surplus-lines insurers use theirs; we quote it because it is public. It puts it this way: "If a loss caused by a Peril Insured Against makes the dwelling on the described location wholly or partially untenantable," the policy covers "fair rental value, meaning the fair rental value of that part of the dwelling on the described location usually rented to others by you, less any expenses that do not continue" (TDP-3, Loss of Use).

Three phrases in that sentence do most of the work:

• "Peril Insured Against." A cause of loss the policy covers. The damage has to be covered in the first place. A flood, foundation settling or a slow leak, where the form excludes it, won't trigger lost rent either.
• "Untenantable." The home has to be unfit to live in, wholly or partly. A damaged fence doesn't qualify; a gutted kitchen may.
• "Less any expenses that do not continue." If some of your costs stop while the house is empty, the payment may be reduced by those costs.

An illustration (invented). A covered kitchen fire makes a rental unlivable for six weeks and the tenant moves out. The rent you don't collect during the repair may be reimbursed under loss of rent, subject to the limit.

What it does not cover

On flood: FEMA's summary of the NFIP lists "Financial losses caused by business interruption or loss of use of insured property" among the things a standard flood policy does not cover (FEMA, NFIP Summary of Coverage).

Unpaid rent is a credit problem, not a property loss. Protection against non-payment (sometimes sold as rent default insurance) is a separate product, not part of a landlord property policy.

Why it matters in Texas: the lease can end

Texas law decides what happens to the lease after a casualty (sudden damage such as a fire or storm). Under Texas Property Code §92.054 (statute):

• If the premises are "as a practical matter totally unusable for residential purposes" and the loss was not caused by the tenant, the tenant's family, or their guests, either the landlord or the tenant may terminate the lease by written notice any time before repairs are completed. The tenant is then entitled to a refund of rent for the days after they move out.
• If the premises are partially unusable, the tenant is entitled to a proportionate rent reduction, "but only on judgment of a county or district court," unless the lease says otherwise.
• For an insured casualty such as fire, smoke or hail, the landlord's period for repair "does not begin until the landlord receives the insurance proceeds."

So a serious fire can leave you with no tenant and no rent while the house is repaired, and the repair may have to wait for the insurance money. Loss of rent coverage is built for that gap.

How long does loss of rent coverage last?

Forms handle this differently.

On the TDP-3:

• The limit for all loss of use is 20% of the dwelling limit. That one limit covers both fair rental value and additional living expense.
• It is not additional insurance: "a loss under this extension of coverage will reduce the amount of coverage available for Coverage A (Dwelling) by a like amount."
• "Any policy deductible does not apply to this extension of coverage."
• Payment is "for the reasonable time required to repair or replace the damaged property," and the period is "not limited by expiration of this policy."

On other forms: many dwelling policies list fair rental value as its own coverage with its own limit, often a percentage of the dwelling limit. Some pay for as long as repairs reasonably take; others stop after a set number of months. Two policies can show the same lost-rent amount and still differ on how long it lasts, which is where the real difference usually sits.

How to read the limit. Divide the lost-rent limit by the monthly rent: that is the most months it could pay. It still pays only for the time repairs reasonably take, and on a form like the TDP-3, anything paid reduces what is left for the house itself. On a policy whose limit is 10% of the dwelling limit rather than 20%, the same house gets half as many months.

Short-term rentals

For a house rented by the night, "rent" is less predictable and the insurance company needs to know how the home is used before any loss. TDI notes that landlord insurance "is mainly for traditional, long-term leases, and may not be appropriate for short-term rentals" (TDI). See Short-term rental insurance in Texas.

Your tenant's side

Your loss of rent pays you. Your tenant's own costs of living somewhere else are a separate matter for the tenant's renters policy, which TDI says includes "Additional living expenses" (TDI, Renters insurance). See Landlord vs renters insurance in Texas.

Questions to ask about your policy

• Is loss of rent (fair rental value) on the policy?
• What is the limit, in dollars?
• Is it paid for the time repairs reasonably take, or only for a set number of months?
• Does it share a limit with anything else, or reduce the dwelling limit when used?
• Does a deductible or waiting period apply to it?
• If the home is rented short-term, does the insurance company know?

AIV Insurance is an independent insurance agency in Texas. We explain what your landlord policy includes, lost rent too, before you choose. We are not an insurance company: claims are filed with and decided by the insurance company named on your policy. To go through your own declarations page, email it to us at hello@aivinsurance.com.