Between 1995 and 2000, there was a period of extreme growth in the “dot-com” industry. Venture capitalists, speculators, and investors poured millions into new business ventures that were built on ideas and concepts. During that time, the stock market flourished, and so did the secondary housing market. When the market crashed, the housing market crashed along with it. The result was an increase in the need to turn secondary homes into income-generating properties.
Today, about five percent of Americans own second homes. Of those, it is estimated that 60 percent have some sort of rental exposure.
There are numerous pitfalls concerning insurance coverage for these homes. For example:
The following types of policies are commonly used for vacation rentals and each have serious gaps in coverage:
The need for specialized insurance for short-term vacation rentals was first recognized with the introduction of AirBnB in 2008. It soon became apparent that there was a serious insurance liability coverage issue, not only for the property owners, but also for AirBnB.
AirBnB now includes primary Personal Liability coverage for the property owner (“host”), as well as first-party coverage for damage to the host’s property. However, this coverage is not a substitute for a homeowners or vacation rental policy and, most importantly, only covers the property owner (“host”) for liability or damages that occur while the home is being occupied by a guest who made their reservation on the AirBnB website.
There are several other specialty insurance programs designed for short-term vacation rentals, and each one is unique. Most online booking companies have also partnered with insurance vendors such as CSA Travel Protection, Rental Guardian, Proper Insurance, INSUREstays, and CBIZ. However, none of these vendors provide comprehensive coverage for the homeowner’s “non-business” related Property or Personal Liability exposures.
Standard homeowners insurance policies provide minimal coverage for business activities that are conducted in the home. The following scenarios explain what is covered and the coverage gaps.
Primary residence (single-family dwelling) that rents to no more than two roomers (long-term) or boarders (short-term) at a time.
Seasonal or secondary residence occasionally rented to others
Business liability is excluded, except when the residence is:
Other structure at the primary residence, such as a cottage, is rented to others (short or long-term)
Condominium is rented to others (short or long-term)
The ISO Personal Injury Endorsement (HO 04 82 10 00) excludes “injury” arising out of or in connection with a business conducted from the insured location. However, the exclusion does not apply to the rental of an insured location.
While many insurers offer a homeowners rental endorsement, some have specifically restricted Personal Injury to the premises shown in the declaration. This is a problem if the insured also uses the covered location as their primary residence because it restricts personal injury, which is otherwise not location specific.
Many carriers now offer specific homeowners rental endorsements that address each of the coverage issues above. These complement the standard coverages and can provide a policy that protects the client’s personal and short-term rental insurance needs in one comprehensive policy.
When performing a coverage review with a client for a primary or secondary home, always ask if there is any rental exposure at any time. Understanding the actual occupancy and exposure will reduce potential – and costly – E&O claims and protect your reputation.
This article was written by Kris Zebratski, CIC, CPRM, TRS, Senior Vice President and Personal Lines specialist with AmWINS Access in San Francisco, CA.