Living in Southern Utah, we are fortunate to have only a short drive to reach several national and state parks. Many travel to the area from around the world to see the spectacular country that surrounds us here. In turn, as web platforms such as Airbnb and Vrbo have become popular in our area, many homeowners have decided to open their doors to travelers as a way to generate some additional income.
Vacation rentals can be a great investment, but homeowners and investors need to carefully think about this new revenue stream and how it can affect them. It’s simple to set up an account and start renting out a home through home sharing sites, but many don’t understand that they have now started a business. Essentially, these individuals are now operating a mini-hotel or bed and breakfast, and with these new operations come many new risks and responsibilities to consider.
Many don’t realize that by renting out their home or another investment property that they may be voiding their homeowners insurance. Most homeowner policies have a business use exclusion that can be triggered by vacation rental operations. Airbnb recommends adding a home-sharing coverage endorsement to homeowner policies to overcome this coverage gap. This form can be used to fill the gap, but not in all circumstances. Some insurance providers will not offer this endorsement and owners must be living onsite for this endorsement to apply. This can even be the case for units separate from the home that are on the same property. Homeowners policies also provide no coverage for business income loss as the result of the destruction of the property due to a covered loss.
Landlord insurance can fill some of the gaps that a homeowners policy contains. Owners do not have to live onsite for coverage to apply and these policies will usually include coverage for loss of rental income. The problem is that most landlord policies include guidelines regarding the required rental contract time frame. Usually, these statements outline that owners must have a rental agreement for six or more months for coverage to apply. Once again, this clause can void coverage and leave owners open to property or liability losses.
AirCover through Airbnb
Airbnb offers a great free supplemental coverage for owners and investors using their platform. This helps to fill many of the gaps traditional insurance may have, but Airbnb recommends directly on their website that, “hosts carry additional coverage in the form of an endorsement or commercial policy.” AirCover is a great incentive, but it is not intended to be a replacement for traditional insurance. Relying on AirCover alone may leave owners wanting more.
Commercial Insurance and Carrier Specific Programs
In short, we recommend a full commercial insurance policy for any owners or investors that are not occupying their rental property full time. Hosts should purchase a full commercial package or business-owners policy including both property and liability insurance. Other enhancements can be added to these policies such as: equipment breakdown, cyber liability, sewer backup, food contamination, spoilage, inn-keepers liability, business income, and more. Commercial policies can be more robust, but in turn, are usually more expensive than homeowner or landlord policies. We do recommend the extra expense to procure proper commercial coverage, but some insurance providers are starting to offer carrier specific programs.
Some homeowners insurance providers are realizing the need for enhancements that allow for vacation rental use. These policies are very specific to the provider and should be reviewed carefully to understand any exclusions. These policies can be a good option if they are available and are often cheaper than a full commercial policy. Keep in mind that liability limits will likely be lower than a commercial policy and may or may not offer coverages such as business income loss.
The Bottom Line
Vacation rental insurance is a relatively new risk to the insurance world. Coverages are constantly being updated and changed. It’s important to carefully discuss your vacation rental with your insurance agent and find an expert that understands your needs. Vacation rentals are a great opportunity so long as owners properly protect themselves from the added risk.