Services such as VRBO.com, AirBNB, and HomeAway have made it easier to turn a home into a rental property, and the homeowner into a landlord. But how can you assure your rental property is insured against damage? If you’re among those thinking about listing your home as a rental property, be sure your risks are fully covered first.
Setting aside the reality that your neighbors might not appreciate a rental next door, many first-time landlords make the mistake of assuming that they can move out of a home and continue their old homeowners insurance to provide coverage for what is now a rental property. Unfortunately, that is not often the case. Most insurers judge the risks on an owner occupied home differently than they would for a tenant occupied property. You’ll also likely find that short-term or vacation rental activities may be specifically excluded in the policy, either explicitly or through a careful reading of the policy language.
In many communities, operating a short-term rental like VRBO or AirBNB is considered a home based business, requiring a business license. In addition, since your homeowner’s policy and personal umbrella policies may not cover these activities, you should look into the options for additional insurance coverage that would be required.
Here are some things to consider as you prepare for your vacation rental experience:
Carefully review the coverage provided by your rental company. Whichever company you choose to book your property, most now offer limited coverage options for their landlord clients (“hosts” on AirBNB). Although the coverage might sound adequate, there could be holes and hidden limitations. For example, AirBNB’s Host Guarantee program specifically states that it does not cover personal liability, and carries a $1,000,000 limit. That might be enough in some neighborhoods, but consider a situation in which a condo renter causes a fire destroying the entire building. Or consider some of the very expensive homes in Mission Hills or Del Mar.
The AirBNB Host Guarantee does not cover losses outside of the booked period. So a guest who arrives early or stays after their booked rental isn’t covered. Also, the Host guarantee might cover booking income lost due to a covered loss, it won’t cover income you could have earned through another booking service like VRBO if you’re using multiple services.
Review your personal insurance with your insurance carrier. Although you often get the best prices putting all of your coverage with one company, some companies just don’t compete in all insurance markets. For example, direct insurers like Farmers and State Farm are very good at relatively modest, ordinary homes, but are less competitive for complex situations like expensive, custom or historic homes, or multiple properties. Here it pays to shop around, especially since companies that deal primarily with personal insurance may not offer competitive prices or coverage when it comes to commercial insurance.
Here are eight questions to ask regarding rental property insurance:
- Beyond the structure, is my personal property (furniture, decorations, clothing, etc.) covered for damage caused by my guests?
- Does the policy cover damages outside of the booked period, such as water overflows, bedbugs, or other things that could take time to become apparent?
- Would my guests’ personal property be covered by this policy?
- What if my guest injures someone, or damages a neighbor’s property?
- Will the policy cover lost income while damages are being repaired?
- What losses are and aren’t covered by this policy? This will help you determine what risks will be left on the table. For example, terrorist acts usually aren’t covered by insurance policies.
- Is there any property that isn’t covered by the policy (like watercraft or snowmobiles that might be stored at your rental property)?
- What are the limits and deductibles for property that is covered? For example, jewelry and artwork often have special limitations.
The good news is that many insurance companies have rental property insurance solutions, and are now adapting to that gray area between purely personal property and part-time business use of your personal property. Still, if you’re considering part-time rentals (or driving) as a way to supplement your income, you need to be sure your risks are fully covered first.
At Blankinship and Foster, we work with many clients who have rental properties, second homes, or other real estate properties. We don’t shy away from these, in fact we enjoy helping our clients navigate all the financial aspects of their lives, no matter how many pieces are in the puzzle. If your financial situation seems a too little complex for comfort, contact us to learn how we can help you.