(NU Property Casualty 360) - As the world springs back to life post-pandemic, the vacation and secondary home markets are surging and shifting. Vacationers, still bound by international travel restrictions, are looking to holiday nearer to home now they can travel more freely and safely in the USA. Also, the “work-cation” is gaining momentum as semi or permanently remote workers look to take advantage of the flexibility of working from anywhere. As a result, they are either looking to buy second homes of their own or stay in short-term rental accommodation for longer periods of time.
So whether homeowners want to capitalize on a resurgent vacation market by renting out their primary residence or wish to recoup some of their investment in their own vacation homes through short-term rentals, the insurance implications can be complex. Independent agents need to work closely with their clients to make sure the recommended coverage accounts fully for how properties are being used and by whom.
It’s important to get the right information from the owner. Any material omissions can cost both the property owner and the agent dearly when it comes to property insurance.
Here are four fundamentals of vacation rental coverage to understand and ensure the best coverage for your clients.
What’s the usage profile of the property?
Digital platforms such as Airbnb and Vrbo make it simple to rent out properties. Owners can dive in and out of the vacation or short-term rental markets with ease. They can also offer up everything from their entire home to a room or the apartment above the garage to vacationers.
Traditional insurance policies tend to be vague when it comes to cover for usage beyond the primary residence. So it’s critical to start by asking some basic questions. First off, is it a primary home, or is it secondary or seasonal? Was the property purchased to exclusively rent out? Or is it used by the owners sometimes and possessions are kept there?
Related to this is clarity around the ownership structure of the property. If it is owned by an LLC or other type of legal entity, as opposed to an individual who lives there, different types of coverage will be applicable.
How many days will the property be rented out?
Policies are available for all the options described above, but traditional policies can be either too vague or too specific in how they treat short-term rentals. This can be particularly troublesome if the owner rents out their primary property only from time to time. A regular homeowner’s contract may allow for short-term rentals “occasionally,” but it will often not give much clarity beyond this terminology. Is it 10 days? 30 days? One month or two or three months? Equally, some carriers are incredibly specific about rental days allowed. If it’s proven that the owner violated the allowed number, claims can be denied.
This can be risky and end up in any claims being denied for the primary residence if the carrier believes they were misled either by omission or intentionally. How long people choose to rent out their property can alter over time, so it’s important they know to keep their agent up to date should their rental intentions change.
Any gaps that need extra coverage?
The kind of liabilities a property owner can be exposed to also increase when they join the property rental market. If it’s a business like a bed and breakfast, for instance, will the owner be cooking for guests, driving them around or serving alcohol? Liability coverage in traditional homeowner’s contracts is unlikely to cover these kinds of activities. Also, anything that happens in a detached structure, like a rented garage apartment, is usually not covered by the primary residence insurance — for liability or loss.
For those renting a room, it’s important to understand the difference between a ‘room rented to others’ versus ‘home-sharing activities.’ For the former, sub-limits are very low, between $2,500 and $5,000 for landlord contents. Therefore, if there’s a fire, anything lost or damaged in that room may attract very little cover if the agent didn’t understand how the policyholder was really using the property.
When it comes to home-sharing, it’s becoming more common for coverage from companies like Airbnb to be primary, not secondary. For example, Airbnb’s Host Protection Insurance offers primary liability insurance, and their Host Guarantee (not an insurance policy) offers property damage protection — both up to $1,000,000. But it may not be comprehensive enough on its own.
Homeowner, landlord or commercial?
The further it gets away from a seasonal, intermittent or temporary rental arrangement for the property owner, the more likely it is that other forms of insurance will be a better fit.
If a property is going to be rented out 100% of the time, then landlords insurance will be a better option than homeowners. Landlord policies from traditional carriers tend to be ‘dwelling fire’ policies that only cover the structure, loss of use and maybe lost income. It’s usually very limited or non-existent for contents.
So it’s worth hunting around for newer insurance carriers that understand that the rental market has changed considerably with the advent of companies like Airbnb. Look for more modern products with modern pricing models that get granular when it comes to risk assessments. For example, some allow owners to add a landlord’s endorsement to their primary policy that can be activated for the periods that a property is available to rent.
Of course, if it truly is more a business, commercial insurance options are likely to be more robust. If the owner has numerous properties they rent out and/or they offer a range of services beyond accommodation — meals, liquor, transfers, tours, etc. — it makes sense to thoroughly investigate the full list of likely risks they may face. There is likely to be more than a few that would fall outside the usual purview of homeowners and, certainly, landlords insurance.
Commercial insurance will provide many more options particularly when it comes to the different kinds of liability that arise when an owner is offering food services, liquor, a shuttle or other value add services.
There are many new options
As the nature of vacation and short-term rental markets are changing in response to how people are choosing to spend both their vacations and now “work-cations,” insurers are finding ways to meet new coverage requirements. From more sophisticated landlords insurance to adding liability insurance to a second home even if it’s not provided on the primary residence, there are ways to make sure owners can take advantage of the rental boom without being exposed.
Take the time to really understand the property owner’s intentions when it comes to insuring not just their vacation or secondary homes but also their primary residences. You never know when they may decide to enter the holiday rentals market.
By Ty Harris
October 08, 2021
Ty Harris (ty@openly.com) is CEO and co-founder of Openly. Before founding Openly in 2017, Harris spent 12 years at Liberty Mutual, where he rose to executive vice president and Chief Product Officer. Prior to Liberty Mutual, Ty did research at the Brookings Institution and taught economics and statistics at the Massachusetts Institute of Technology and Northeastern.
