What are the main differences between a short term rental policy and a regular landlord (dwelling) policy?
A standard ‘dwelling’ policy is normally used to insure non-owner occupied properties that are occupied by the same tenant(s) on a regular full-time basis – such as an annual lease. They do not provide coverage for property which is vacant for more than 30 to 60 days at a time. These are also sometimes referred to as ‘landlord’ policies. These policies may be issued in a DP-1, DP-2, or DP-3 policy coverage form and, depending upon the company, normally include liability coverage (personal, premises, or both). The underwriting guidelines and property eligibility requirements for dwelling policies often specifically exclude, in very clear language, coverage for any properties that are rented on a seasonal or short-term basis.
A short-term rental policy is also a type of dwelling policy as mentioned above, however, they are underwritten and issued through very specialized companies that do not consist of well-known companies like State Farm, Farmers, Allstate, Nationwide. These well-known national companies do not have an ‘appetite’ for these types of short-term risks and they simply will not cover them. Also, a short-term rental policy, depending upon the unique characteristics and nature of the risk itself, may be written as a specialized dwelling, a bed and breakfast, or even as a hotel/motel. What determines how the policy is to be written and issued is dependent upon the unique liability aspects of the risk as opposed to the physical features of property itself. For example, is the property also occupied by the property owner? Are there employees on site (gardner, kitchen staff, etc)? Is the property rented only for a few days as a time or is it rented for weeks or sometime months at a stretch? How many units or apartments are present (ie: two family, four-family, six apartments, etc)? Is the property titled in the name of an individual person or a corporation? These are just a few of the many considerations. In addition, depending upon how the property is insured, the policy may contain varying types of liability coverage such as innkeeper liability, premises liability only, or all three combined. Each risk is unique and each policy is designed specifically for that risk. Finally, policies for vacation and short-term rentals are always more expensive than the same policy for the property if it were occupied year-round by the same full-time tenants.
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What if I have a second-home that I use part of the year and rent out the rest of the year for vacationers and/or weekend rentals?
As mentioned in answer to the question above, each policy is designed specially for the risk to be insured. Normally, a typical homeowner’s policy, which is what is commonly used to insure second-homes, will not provide any coverage whatsoever if the home is rented out to others while not in use by you as the owner. Even if this is your second home that you live in part of the year, you will still need to obtain a policy designed for short-term rental exposures.
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How should I insure my short-term rental property if it is also my primary residence? Will my homeowner’s policy cover me? For example, I live in central-Austin and rent my home out for a couple of weeks a year during special events like ‘South by Southwest Music Festival’.
You really should read this claim summary article directly related to this question. Renting your home to others is a specific violation of the homeowner’s insurance contact and in the event of a claim resulting from any party that the property is rented to, you will more than likely find yourself without insurance coverage. Even in this is your own primary residence that you occupy 98% of the year and only rent out 2% of the year for special events, that 2% rental exposure is what causes a problem and violates your insurance contract. You need a specialized homeowner/short-term rental policy to protect yourself against physical loss and litigation and this policy is probably going to cost more than your current existing homeowner policy does now.
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Why does insurance for short-term rentals cost more than regular ‘landlord’ insurance?
The reason short-term rentals cost more than a regular ‘landlord’ policy is due almost entirely to the difference in liability exposure that is represented. With regards to a rental property occupied on a full-time basis by the same tenant(s), this is considered to be the tenant’s primary residence and the liability exposure is average. The landlord is not responsible for the tenant’s personal belongings and there are normally no unusual hazards related to the premises. However, with short-term and vacation rentals, the liability landscape changes. In this situation, the property is often considered a ‘commercial venture’ with high rental rates by the insurance companies due to the revolving nature of tenant occupancy. In addition, many of these properties are located in desirable areas near lakes, hillside slopes, etc and they often have unique property characteristics such as large balconies, swimming pools, hot tubs and Jacuzzis, boat docks, and so on which pose a higher probability of physical injury to tenants. Also, since these properties are not the tenant’s primary residence and they are rented for special occasions and outings, less care is normally taken by occupants with regards to the property and their behavior can be more reckless with regards to alcoholic beverages and similar. For an example of some of the liability issues related to vacation and short-term rentals, read some of our claim summaries.
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Why don’t other insurance agents and professionals know about insuring short-term rentals and why was mine insured incorrectly in the first place?
In a word, apathy. Most insurance agents and brokers are simply salespeople (not risk managers or problem-solvers) that work for well-known captive ‘personal lines’ companies that primarily sell home and auto insurance and that compete based on price with every other company on TV and radio. These companies have a very limited ‘appetite’ for the type of business that they will write and the agents, as a general statement, never make any effort to learn any more than they absolutely have to in order to sell their products. While most insurance agents and brokers are good people that mean well, the dirty little secret is that very few of them actually understand the ‘in and outs’ of the very industry that they actually represent and virtually none of them have ever sat down and read the policies that they themselves are selling to others. Without meaning to sound negative, the fact is that most agents are simply order-takers that sell insurance products to meet their company’s quotas and they rarely know what questions to ask; they normally only know the very basics of home and auto insurance (if that); and virtually none of them have any first-hand experience in business ownership, contract law, the civil court system, or real estate investing.
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How do I know if my vacation or short-term rental is properly insured?
Unfortunately, if you are even asking this question, the immediate answer is that it probably isn’t and you are wide open to physical loss, litigation, and financial ruin. As mentioned above, most agents no little or nothing about real estate investing (especially short-term rentals) and without intending to sound trite, if your rental property was properly insured, you would already know it and you wouldn’t have to ask.
As the landlord and owner of a short-term rental property, you’re obviously concerned about the potential for a loss or claim arising from your guests – but what could really happen? After all, they’re probably only in the home for a few days, right?
Below are some of the claims we have experienced related directly to short-term rental exposures. As a disclaimer, many of these actually occurred prior to the property owner’s contacting us to properly insure the homes – and, unfortunately, the claim itself was simply the catalyst for the call. We obviously cannot provide any identifiable details related to the claimants themselves or their associated properties, but we can give you a summary of the issues as they occurred. While you yourself may never have a claim of any type (and we hope that you never do), it’s important to understand that no one is immune from disaster and unexpected situations can arise without notice.
Rotted Railing
At a rental property in a lakeside location, which was being rented to a family for a 4-day vacation, the wife of the couple renting the home, while having morning coffee, leaned against the railing on a deck built approximately four feet above a hillside slope. The post holding the railing upright broke loose from the deck (due to rotted wood the screws were anchored into) and she fell off of the balcony and several feet down the slope. This was on the morning of the second day of their occupancy. She suffered a broken arm, lacerations, and a mild concussion. The family brought litigation against the property owners for her injuries, financial loss due to lost income and contracted household services, and pain and suffering due to the children seeing their mother injured along with the sudden and unexpected termination of a planned vacation period. The owners were found negligent with regards to property maintenance, especially related to occupant safety (due to the rotted wood around the railing). Settlement Amount: $46,000
Tree Branch
During a couple’s stay at a rental property located in an area populated with a number of large trees, they parked their Cadillac Escapade in the property’s driveway under a canopy of large established oak trees. A late-night storm approached and during the wind and rain, a medium-sized branch from one of the trees unexpectedly broke and fell onto the roof and hood of their SUV. Over $20,000 of physical damage occurred to the vehicle. They filed a premises liability claim against the property’s insurance policy only to have the claim denied because the policy had been improperly issued by the agent as a standard ‘dwelling’ policy – not as a short-term rental exposure – and there was no coverage. The property owner’s policy was cancelled due to an improper risk being insured and the vehicle’s owners filed a suit against the property owner. The property owner chose to fight the suit but without insurance to cover legal costs, he paid over $4,500 in legal fees, lost the suit, and was ordered to pay the $20,000 in damages in addition to the other party’s legal fees and ancillary costs associated with the rental vehicle and other expenses.
Property’ Owner’s Dog Destroyed Wedding Dress
Approximately 3,000 square feet of a very beautiful (and very large) owner-occupied home in a very-desirable area of Central-Texas was regularly rented out on weekends and holidays for $350 – $500 per night. Because of this size and layout of the home, the owner-occupant lived in one portion of the home and rarely had interaction with the guests renting the other portion. The home was complete with a large pool, sport court, and other amenities. On this particular weekend, a group of young women (college friends) had rented the available portion of the home as a ‘weekend getaway’ and bridal event prior to one of the women getting married within the next two weeks. The would-be bride had brought her $4,200 wedding dress with her in order to show off to her friends. After returning from an afternoon out at the pool, the bride-to-be discovered that the property-owner’s dog had ventured into the part of the home that they had rented and had proceeded to tear up and urinate on her wedding dress as it laid upon on of the bed. She was furious and in tears and inflamed emotions obviously made a bad situation worse. The property owner filed an insurance claim only to be denied coverage due to the fact that the policy had been improperly issued as a standard homeowner’s policy (with one of the well-known ‘big-name’ companies) and that because the property was being partially used as a short-term rental with the increased liability exposure. The policy was immediately terminated (due to the risk violating eligibility guidelines) and the property owner ended up having to unexpectedly pay over $6,000 in damages, rental refunds, and other costs prior to the wedding. In addition, the owner was forced to finally purchase the proper coverage (as a Bed and Breakfast with Innkeeper Liability) – but the uninsured financial loss had already occurred.
Kitchen Fire
A group of four young men from California had rented a small home in a trendy area of Central-Austin for one week in order to attend the annual ‘South by Southwest Music Festival’ held each year. The home was the primary residence of another couple who only rented it out twice a year in order to take advantage of the additional income they could receive at a rental rate of $2,000 per week. They would stay with friends during the time that the home was rented. The home itself was insured by one of the ‘big name’ insurance companies as a standard homeowner’s policy. However, during the week that it was being rented, one of the tenants inadvertently started a grease fire in the kitchen that ended up causing a large amount of damage in addition to a great deal of resulting smoke damage to the remainder of the home. The owner’s filed a claim on their homeowner’s policy – which was quickly denied – due to the fact rather than occupying the home as owner-occupants as the policy required, they had actually rented the property to others (especially on a short-term basis) and that was a blatant violation of the policy language. The owners tried pursuing legal action against the tenants responsible for the fire, but all four were young males (musicians) under the age of 25, each lived in an apartment or with friends, they were out-of-state, and none of them had any renter’s insurance with liability coverage or any monetary resources for which to sue for. The result was that the homeowners had to slowly make repairs to their home paying for all labor and materials with their own money. While they utilized labor from friends to lower costs, they still had to purchase new materials, manage the City’s permitting process, obtain inspections, and perform the work themselves. The total repairs took over six months and cost over $25,000.
If you have read Part I of Insuring Vacation or Short-Term Rental Property, then you have an understanding of how and why these properties differ from a typical one-tenant rental unit.
However, there are some other things that you should be aware of as well; first and foremost…
(1) Insurance for short-term property insurance is ALWAYS (yes, 100% of the time) more expensive than a standard ‘dwelling’ policy for the same property if it were occupied full-time by the same tenants.
(2) Even though you’re paying money for insurance premiums and you may think you have insurance covering your vacation rental property right now, you probably don’t and you are completely unprotected in the event of a loss or any type of litigation involving the property or the tenants.
(3) Very few companies provide any type of coverage for vacation rentals and this is a specialized area of insurance.
(4) If you don’t want to change you rinsurance policy to be correct for the actual short-term rental exposure because you are afraid that it’s going to cost more and affect your cash flow, see # 2 above.
For example, if you were paying $800 a year for dwelling insurance for a single-family property that was rented to the same occupants on a full-time basis and you decided, for whatever reason, to begin renting that same property on a seasonal or short-term basis; you would most likely pay $2,000 or so for comparable coverage with a new policy designed for short-term rental exposures. That’s right, the premium more than doubles in many cases.
Unfortunately, there is no way around this and it simply is what it is. Although the physical property itself may not have changed, short-term rentals represent a significantly higher liability exposure to insurance companies and the premiums are adjusted accordingly because of this reason.
Using the example of the $800 policy mentioned above, although it may sound counterintuitive, what is even more expensive is not telling the insurance company that the property is used for short-term or vacation rentals and keeping the existing dwelling policy in place with no changes. Your premium may stay at $800 per year (less than the $2,000 you would pay if the policy were modified correctly), but you are not insured – you’re simply making a free $800 annual donation to whatever company issued the policy. In the event of a claim, especially related to any type of liability, the policy is going to be deemed null and void due to violation of the company’s eligibility guidelines and you are going to be left high and dry with absolutely no insurance protection (read our article about claims related to short-term rentals). If the claim were related to property damage (ie: hailstorm), you may or may not be covered (depending on the company and who reviews the claim) but your policy will be immediately terminated afterwards. In the event of a liability claim, you’re almost guaranteed not to have coverage in any shape, form, or fashion. In short, you’ll probably end up paying 100% of any amount due for losses, legal fees, tenant injuries etc. completely out of your own pocket – which is more than what the premium itself costs.
