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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.
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.
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.
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.
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.
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.