How to Calculate the Right Coverage Limits for Your Multifamily Building

Nate Jones, CPCU, ARM, CLCS, AU
2 days ago
2 min read

Choosing the right coverage limits is one of the most important—and most misunderstood—parts of multifamily insurance. Underinsuring an apartment building can lead to major out-of-pocket costs, while over insuring may mean paying unnecessary premiums.

To properly protect your investment, multifamily building insurance limits must reflect real replacement costs, liability exposure, and rental income risk.

Step 1: Calculate Property Replacement Cost (Not Market Value)

Property limits for multifamily insurance should be based on replacement cost, not purchase price or market value.

Replacement cost considers:

Building materials and construction type
Square footage and number of units
Local labor and material costs
Building age and code requirements

Many apartment owners underestimate rebuild costs, especially during periods of rising construction prices.

Step 2: Set Liability Limits Based on Risk Exposure

Liability coverage is a critical component of multifamily rental insurance due to:

High tenant density
Common areas and amenities
Increased likelihood of injury claims

Industry guidance from the National Apartment Association suggests that apartment owners carry higher liability limits than single-family landlords.

Most multifamily owners choose at least $1 million per occurrence, often paired with an umbrella liability policy for added protection.

Step 3: Determine Loss of Rental Income Limits

Lost rental income coverage should reflect actual gross rental income, not net profit.

To calculate the right limit, consider:

Monthly rent per unit
Total number of units
Estimated repair timeline after a major loss

For larger properties, 12 months or more of coverage is often recommended. The Insurance Information Institute explains how business income coverage applies to rental properties.

Step 4: Account for Ordinance and Law Costs

If your building is older, rebuilding after a loss may require compliance with updated codes. Ordinance and law coverage pays for:

Demolition of undamaged portions
Code-required upgrades
Increased construction costs

Without this endorsement, standard multifamily insurance limits may fall short after a major claim.

Step 5: Review Optional Coverages That Impact Limits

Certain endorsements can significantly affect how much coverage you need, including:

Equipment breakdown coverage
Sewer and drain backup coverage
Flood insurance (separate policy)

Flood losses are excluded from standard multifamily insurance and require separate coverage through programs such as the National Flood Insurance Program.