Insurance and short term rentals: What you need to know while considering enrolling with Airbnb

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Considering becoming an Airbnb?

The thought of renting a room, or even on a whole house on a short-term basis is enticing to many. Especially here in the beautiful Northwest. With events like Ironman, Car d’Alene, Tri-Athlons, the Hayden Marathon, and more, often traditional hotels and motels are full. If you have an extra room or can leave for a time, your home could generate income, but what are the insurance issues with these short-term rentals?

Understanding the risks of short term rental

You have decided to rent your home out for Ironman. Reservations have been made at a campground at Priest Lake, and you are going to enjoy a vacation while your home is rented out for the week. Consider the following:

Returning from camping, your beautiful home is trashed and ransacked. Furniture destroyed, clothes ruined.

A swing in your back-yard breaks unexpectedly and while swinging, the client breaks their neck.

After a night of partying, a client has a heart attack, but his widow claims your hot tub was too hot.

I am sure that you can think of lots of examples. Here are a couple of real situations: guest falls off balcony who is responsible in a sharing economy

Unlikely? Yes. impossible? No. Claims, especially liability claims can run into the millions of dollars, so the question is, am I covered in the event of a claim by a client?

What about my Homeowners?

Homeowners insurance does not have coverage for business purposes. Before you rent you should consider these definitions on the Homeowners Special Form-3 (the most often used form) before hosting:

  • Business. The policy defines “business” as a trade, profession or occupation engaged in either full-time, part-time or occasionally, or one or more activities for which an insured receives no more than $2,000 in total compensation for the 12 months prior to the beginning of the policy period. This is sweeping language that covers a multitude of businesses, including innkeeper.
  • Insured. Insureds are “you and residents of your household that are your relatives or are under the age of 21,” and in the care of anyone previously named, as well as students under age 24 attending school full time who were residents of the household prior to leaving for school. Not an insured: nonresident, nonrelative vacationing tenants.
  • Insured location. The insured location is the residence premises (the dwelling where you reside), the part of the premises used by the insured as a residence. If the location is not being used by you as a residence, it is not an insured location.

On an Airbnb forum, several hosts report their insurance carriers advise purchasing commercial coverage for business operations (at significantly higher premiums). Others report carriers sending out cancellation notices when they find out rental operations are being carried out on the insured premises. (Property and Casualty)

Some internet brokers (like Airbnb) offer a no additional charge “coverage” but you really need to understand the exclusions in these policies. They can include the following scenarios with a limit of 1 million for property damage. You should consider the following issues that typically would be covered by a homeowner policy, but that are not covered when it is a “business”.

  • Prior to contacting the internet booking for reimbursement, the homeowner must attempt to resolve the property damage issue with the guest.
  • The damage must have occurred during the booking period. Damage occurring before or after the booking period is not covered.
  • The host must be in compliance with all requirements of the Airbnb contract prior to the loss.
  • The damage must be reported within 14 days.
  • Payout may be actual cash value on some items, rather than replacement cost.
  • Not covered: cash, securities, pets, personal liability and common areas.
  • Should a guest cause property damage or theft, many exclusions in the Host Guarantee expose the host to monetary losses. Out of pocket could easily be higher than the rental fee. (Property and Casualty)

Gaps in this coverage. These gaps in coverage could leave you without coverage, a few examples of gaps include:

  • Coverage is limited to $1 million per occurrence; $2 million per location. The policy total is only $10 million for all insured locations in the U.S. Shared limits are not your friend.
  • Coverage is only in excess of any other available coverage. The host must submit the claim to his Homeowners insurance and the claim must be denied by that company before Airbnb’s insurance will pay. Likely, the homeowners insurance would also be cancelled because of business use.
  • The summary document lists these other “key” exclusions: (1) intentional acts (of the host or any other insured party), (2) loss of earnings, (3) personal and advertising injury, (4) fungi or bacteria, (5) Chinese drywall, (6) communicable diseases (7) acts of terrorism, (8) product liability, (9) pollution, (10) asbestos, or lead or silica, and (11) insured vs. insured (i.e., host sues Airbnb or vice versa).
  • The coverage is limited to an actual stay, not a booking. No show — no coverage. Overstay or early arrival? No coverage.

Consider this MAJOR coverage gap:

What if a guest burns down your house that is worth 2.5 million? Even if there is coverage, anything beyond $1 million would be the responsibility of the host. If the host’s Homeowners policy does not cover them, neither will their personal umbrella, or excess liability insurance.

Vacation owner’s websites are doing their level best to protect themselves by offering what looks like insurance to their hosts. Hosts however are shouldering lots of risks with limited protection.

I hope that this article has helped you understand the risks involved in short term rentals. Here at jan jesberger insurance we want to sit down with you and have a conversation about your risk management. Call us at 208-762-2122