The impetus of this article is simple – we are asked multiple times a day by well-intentioned investors... More...
Are you an investor who owns short-term vacation or rental property? Or, are you a homeowner with a nice home located near an area of interest that you lease out periodically for vacationers or weekend travelers looking for a three-day getaway? If so, this question is for you: “What’s the difference between a rental home occupied by a full time tenant and another home occupied by multiple tenants, each for a short period of time?“
From an insurance perspective, A LOT.
Also (get ready), as you read this article, there is probably a 90% or better chance that you are completely and totally uninsured – regardless of how long you have been paying insurance premiums, how much you have paid, or who your insurance company is. You might as well paint a bull’s eye on your back and hang a sign above your door that simply says “Sue Me Here”. You are at serious risk for a denied claim or litigation brought against you (without liability coverage to pay legal defenses) and you probably don’t even know it.
Concerned yet? If not, you should be.
The impetus of my writing this article is due to the fact that I recently came across this very situation and, as an insurance professional who understands the ‘big picture’ of how small issues become large court cases, I was appalled at what I found.
In order to appreciate the information contained later in this article, as it pertains to you as a reader, investor, and/or insurance consumer, you need to understand the issues that I was required to correct for this client in order to put things into context with your own situation.
As a brief overview, I met with a client who is a very successful, sincere, and trusting individual who had, through years of talent and hard work, acquired a large estate and a respectable net worth. This client lives in (as an owner-occupant) a very custom and high-value 8,000 square foot home in a very desirable area of Central Texas, complete with steel framing, marble floors, multiple kitchens and baths, a very expensive roof, and even a full multi-floor elevator. In addition, this individual had an estimated $1M of personal contents in the property, including an estimated $300,000 or more of original artwork. Because of the location, construction, and condition of this home, the bottom floor (approximately 3,500 square feet) was regularly leased out between three days and a week at a time, at an average cost of $600 per night, to ‘weekenders’ looking for a luxurious mini-vacation or others looking for a wonderful place to stay for a short period of time. Needless to say, this was a very custom and very high-value home requiring very specializing underwriting and insurance considerations regarding personal liability, business liability (due to the type of rental), ‘innkeeper’ liability, personal property and scheduled contents, etc. In addition, this individual owned at least two more high-value properties of similar types which were also used for similar investment purposes. In summary, this was a very special situation requiring very specialized and tailored coverage designed specifically for this client’s property types, business, and personal liability risks.
As an insurance consumer and someone who does not work in the insurance industry, the client is obviously not expected to be an expert in all-things insurance-related and he, like many people, had simply relied on his agent to be a professional and do what was in his best interest and properly insure the property and guard his liability exposure.
Unfortunately, the prior agent had either not taken the time to understand this client’s situation and he/she was primarily concerned with selling a few policies to earn a healthy commission and meet this ‘well advertised’ company’s sales quota or he/she had little or no real knowledge of the insurance industry and had no concern for the risk that this individual faced. Regardless of the reasons, at the end of the day, all of the homes were simply insured with standard homeowner and dwelling policies designed for typical ‘main street’ homes. Not only were these absolutely the incorrect types of policies, but the client was, for all intent and purposes, completely uninsured the entire time – and had been for years because even the agent prior to the one mentioned above had done exactly the same thing. This only came to light when the insured had to finally file a large property claim and the problems began.
To begin with, standard homeowner policies (which are designed for owner-occupied residences and second homes) are not intended in any shape, form, or fashion to provide coverage for extremely high-value homes, those with unique construction attributes, homes with large amounts of personal property or large amounts of scheduled items, and those with special liability risks or business exposures (which the short-term rentals are is considered to be). Although these policies vary greatly from one insurance company to the next, the fact is that they are generally designed for typical ‘main street’ homes with typical property and liability risks that a typical owner or family would have (even though most of these are improperly quoted and issued as well, but that’s another topic for another article).
Just a few of the many obvious features of these homes that blatantly violated each and every ‘standard’ insurance company’s underwriting guidelines included:
- Short-term rental exposure (this alone prevents placement in a ‘standard’ insurance market)
This item, in and of itself, is a blatant violation of the underwriting guidelines for all ‘standard’ homeowner’s insurance policies. From an insurance perspective, this is considered to be the same type of exposure or risk as faced by a bed and breakfast or hotel/motel due to the continual turnover of tenants and occupancy status. This alone takes these properties out of the realm ‘personal insurance’ and places them into the ‘commercial’ insurance market. The fact that the home may also be occupied by the owner is irrelevant.
- Some of the homes are vacant for an extended period between tenants.
Standard companies will not write any insurance at all on a property that is currently vacant or which is expected to be vacant for any extended period of time (over 30 days). Many of these homes have vacancy periods in the ‘off season’ and coverage automatically ceases or is severely limited due to the ‘vacancy clause’ contained in the policy wording.
- High-Value home with customized construction features that prevent the proper reconstruction costs with a traditional homeowner’s policy
Standard replacement cost estimators for ‘main street homes’ do not allow the input of custom features such as type of framing (ie: steel stud), flooring (Class-A marble), copper roofing, etc. In addition, these policies have limits on the amount of coverage available for a home as well as the contents it contains. These are often inadequate for this type of risk.
- In-house elevator or exterior tram
These are special liability risks which, more often than not, violate the company’s underwriting guidelines and risk ‘appetite’
- Value of personal contents and scheduled items
The value of personal property and scheduled items, which are higher-than-average with these types of high-value properties, exceed the coverage amounts allowed in the company’s underwriting guidelines. In addition, theft is sometimes excluded and there are very, very low policy limits for items such as jewelry, firearms, artwork, furs, etc. This leaves the client woefully underinsured and open to large losses.
In addition, some of the very real risks that the insured faced included:
- NO LIABILITY COVERAGE
Because the home/risk was improperly issued as has already been made clear, the client has no liability protection whatsoever. This is due to the short-term rental exposure and the fact that it violates carrier policy guidelines. This means that if the insured were liable for a claim (animal injury, personal injury, bodily injury on premises), the company would probably find that there is no coverage for any legal or defense costs. In addition, there is absolutely no coverage whatsoever for the liability exposure faced from leasing to tenants. If anyone leasing the property were injured (drinking on the deck, injured near the boat dock, animal bite, slipping on slick floor, etc), the property owner and his or her assets are completely at risk with no insurance protection to pay legal fees, medical bills, or settlement costs.
- No ‘Innkeeper’ Coverage
In addition to the lack of liability protection just mentioned, the property owner, in a situation such as this, also has full liability for the personal belongings of the individual(s) leasing the property in the event that they are stolen or damaged while on the client’s property. This is no different than if you were staying at a hotel or resort which was burglarized or which caught fire and destroyed your camera, clothing etc. The hotel or resort would have the legal responsibility for indemnifying you for your loss. Regular personal liability does not protect you against this liability, a specialized type of coverage known as ‘innkeeper’s liability’ is necessary to guard against this risk.
Most of these items mentioned above could be considered a ‘material misrepresentation’ on the insurance contract due to the fact that this information, if known, would have prevented the company from issuing coverage in the first place. Whether the omission of this information was intentional or unintentional is irrelevant. An insurance company isn’t going to willingly pay a $300,000 claim on a policy that should have never been issued in the first place and which clearly violated their written guidelines.
Not only were these homes insured improperly with the wrong type of insurance policy, but no consideration had been given to the coverage of the contents, including the high-value artwork and other property. This had simply been ignored by the agent or he/she had no idea of how to insure it – so it was simply left uninsured.
If you are an investor or a property owner in a similar situation, the first two things you should do are:
Read your current existing policy. If it is a typical homeowner’s policy (regardless of the company), you are probably uninsured or you could face severe legal or claim challenges in the event of a loss. Also, find out if you are insured for your scheduled items and if the reconstruction cost of your property has been accurately calculated using the correct physical features and custom items associated with the property.
Contact Your Agent. If he seems unaware of what you are talking about, he is unfamiliar with this type of risk, or he is unsure of his answers and seems to lack knowledge regarding commercial coverage or high-value property insurance; find another agent. These types of property risks need specialized coverage for the exposure they present and few agents are experienced in this area of insurance.
In many cases, situations like the one described above need to be insured as either a Bed and Breakfast or a Hotel / Motel risk. Although the property may be residential in nature and construction, and though it may seem to you (and many ‘personal’ agents) to be something that requires regular home insurance, from an insurance perspective, it is anything but residential – and you are running a great risk in the event of any unforeseen event that results in a claim or litigation.
If you have questions or would like to know more, call us at (800) 299-8994 or email us at firstname.lastname@example.org and we’ll be happy to help you better understand your own insurance situation and find the solutions that best fit your own specific needs.
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