Amongst the many gripes that exist about the Insurance Industry, its glacially slow response to changes in our economy ranks high. The capital markets quickly veer to accommodate new products and processes. However, the ability for insurance carriers to model products and forecast losses, so they can create premiums always lags. Within the modern “gig” economy, the concept of owner-offered short-term rentals such as Airbnb, VRBO, and similar companies has created large gaps in coverage and unaware owners bearing the brunt of improper coverage.
In a traditional homeowner’s policy, the dwelling’s owner occupies the premises as a requirement for coverage. This makes these policies completely unfit for an Airbnb property. Dwelling policies (sometimes called Dwelling Fire or Landlord policies) are generally designed for unfurnished, long term rental situations. They typically require owners to use year-long leases with tenants and, by default, assume the tenant has their owner furniture and fixtures in the house.
Airbnb rentals can often be a mixture of an owner-occupied home that is sometimes rented out when it suits the owner. It can even exist that an owner stays in their home, and they just rent out a room or perhaps a portion of the house. The variability in short-term rental models and risks associated with them make it very difficult to create a one-size-fits-all insurance product. Even if you only rent your home out one time a year, you fall into the category of a short-term rental operation. To insurance carriers, the scenario is black and white. You do or you don’t — not just that you do it “sometimes”.
As an increasing number of my clients look to rent out their homes, I have them focus on three areas of insurance:
1. Dwelling and Contents Property Coverage
When you think of dwelling or homeowners’ insurance, this is the category you typically think of. This is the coverage that responds when a fire or similar peril destroys the house. The carrier will pay for the damages so you can restore the house.
There are multiple issues with short-term rentals and dwelling coverage. Most notably, a good number of carriers simply won’t write the policy if they know you are renting out your house at any time. Withholding the fact that you sometimes rent the house could be considered fraud and could cause a heap of issues. Additionally, many carriers have a “vacancy” clause so that if the house is vacant for a period between renters, coverage can be diminished. Remember that standard exclusions for dwelling policies are also going to exist including flood, earthquake, and other similar perils. Just as you would plug those gaps in a standard policy, the same attention is required in short-term rental policies as well.
A further complication is that most traditional annual-lease policies rent houses that are unfurnished. The renter provides their own furniture and fixtures (the insurance term is personal property). At all the Airbnb’s I’ve stayed at, the owner provides a hotel-like experience without me having to lug my own bed into the rental. Clearly there is a gap in coverage of personal property between what carriers assume by default and the reality of a short-term stays. A good broker will provide an insurance policy that has substantial coverage for not just the dwelling itself, but also all of the investment you have inside the house.
All these issues combined really leave a narrow window to ensure you purchase a policy that properly covers short-term rental risks. The common fix is to purchase a standard dwelling policy with a “short term rental” endorsement added on that manages these gaps. There are a few (and a slowly increasing number) of carriers that will offer this endorsement. Make sure your policy has that coverage and that your broker points out the wording to you.
2. Loss of Use (Loss of Income) Coverage
Airbnb owners expect to make money. They aren’t renting their homes for community good. The issue is that if the house is unrentable for a period of time, bills continue to mount even though there is no income. Taxes, utility bills and other expenses will still be due even while the property is vacant.
I recommend to my clients that they carry multiple months (up to a year) of income replacement coverage because if there is true destruction, it will take that long to get your income stream moving again and the bills won’t wait. Remember that this coverage doesn’t kick-in unless there is a covered loss to the dwelling first (such as a fire). It doesn’t simply pay if you are unable to rent the unit—there has to be an insurable loss first. This type of coverage is relatively cheap and if you are investing in a proper policy, loss of income coverage is an absolute priority to consider.
3. Liability Coverage
The most important and often under-purchased coverage is liability coverage. This is the coverage that responds in case you are sued as the owner of an Airbnb. Although no policy covers every scenario, a basic liability policy will respond to most cases of injury by other parties that bring about lawsuits.
Here is the issue: Although dwelling coverage is important, the most you could ever lose is the value of the house. If the house goes up in flames, you are out the cost of the house. In a liability situation there really is no upward bound. You could be sued for any amount the plaintiff decides to go after. Without liability insurance, your attorney bills, defense bills, and any judgments are 100% on your own nickel.
The short-term rental environment is ripe for these types of lawsuits, since the owner tenant relationship includes:
· Tenants you have no long-term relationship with
· Typically, visitors who are unfamiliar with the area
· Our incredibly litigious society
Just as short-term rentals increase owners’ liabilities, the gaps in insurance policies leave more owners exposed. Some dwelling policies specifically exclude liability of short-term rentals and some carriers won’t provide coverage for this situation. It’s critical that your broker provides a policy that extends liability coverage to include an Airbnb. In addition, I recommend purchasing higher liability limits. I often see customers with $100,000 or less of coverage which I don’t feel is enough. I’ve seen enough claims to know that $100,000 gets used up incredibly quickly.
There is a difference between brokers who know what they are doing and those that don’t. Customers need to find a broker that understands the implications of these short-term rentals and is willing to review “fine print” contract wording to confirm that concerning exclusions have been removed and/or short-term rental endorsements have been added to the policy to provide the needed coverage. Partnering with a knowledgeable broker is essential to navigate the complexities of insurance for short-term rentals, enabling you to maximize your profits while minimizing potential pitfalls. Don’t leave your financial security to chance; take proactive steps to protect your property and your livelihood today.