Thanks to websites such as Airbnb and VRBO (Vacation Rentals By Owner) more and more homeowners are renting their properties as a source of additional income or to capitalize on a major event (such as the Superbowl) bringing a slew of visitors to their hometown.
The insurance implications of such rentals are often overlooked. If your insureds are renting their homes for short term guests, there are things they need to be aware of. In many cases, specialized coverage is needed.
The protection afforded by the ISO Homeowners 3 – Special Form policy is in jeopardy when the residence is rented on a short-term basis, as there are both property and liability limitations that may apply. Let’s examine this policy for coverage while a home is rented on a short-term basis.
As coverage for the Dwelling is on an open peril basis, any damage to the house itself is covered unless excluded. In the “party condo” loss, the damage to the building itself is not excluded since there is not an exclusion to take coverage away. The loss to the personal property is covered as long as the cause of loss is determined to be vandalism or malicious mischief or one of the other named perils. While theft is one of the named perils, it includes a significant limitation. There is no coverage for the theft of personal property from that part of the residence premises rented to others. When the entire residence is rented, there is no coverage for the theft of property from any part of the residence.
There are two questions that need to be answered before coverage can be determined:
Is the rental of the residence a business, as defined in the policy?
Is the house only occasionally rented or held for rental?
If the rental is a business by definition, the Coverage E–Personal Liability and Coverage F -Medical Payments To Others business exclusion applies. However, there is an exception for the rental or the holding for rental of the house on an “occasional” basis for use as a residence. When this is the situation, liability coverage continues to be provided, subject to any other applicable exclusion.
Personal Injury Exposures
Personal injury coverage for this exposure is a must! Clients need the protection in the event the tenant makes a claim against them for wrongful eviction, wrongful entry, or the invasion of the right of private occupancy. Coverage may also be needed if the tenant is unhappy with the online review of the tenant given by the homeowner, resulting in a libel suit. While ISO requires an endorsement for Personal Injury Coverage, many policies automatically include this valuable protection .
Does the rental arrangement include the tenant’s use of recreational vehicles and/or watercraft? Don’t forget that the homeowners policy excludes coverage for an otherwise covered recreational vehicle or watercraft if rented to others.
Protection Provided By Online Home Rental Service
While insurance protection may be available from the online home rental service, the client should read the contract care fully so they understand what property is limited or excluded, as well as their responsibilities in the event of damage to their property.
There are insurance companies that offer endorsements to provide coverage for clients who occasionally rent their home to others through an online service. This endorsement typically removes the exclusions discussed previously and may also give back coverage for watercraft and/or recreational vehicles while rented to others. As these are non-standard forms, they need to be closely analyzed to determine the coverage actually provided.
Non-Insurance Related Considerations
In addition to the more traditional types of losses occurring when a home is rented to others, clients need to be aware of the local/state laws that apply. An individual in California learned the hard way that renting for a period longer than 30 days gave the tenant rights to occupy the house even when failing to pay the rent. The homeowner was then forced to go through months of a costly legal battle to evict the tenant. Clients may also be required to have a business license and be responsible for collecting sales tax, paying tourist fees if applicable, paying B&O (business and occupation) taxes, etc. Many Homeowners Associations may prohibit the rental, as well.
It is important to know when clients have this rental exposure. Include a question on new business and renewal questionnaires about renting their home to others through an online service or similar business.
Be sure clients understand their exposures to loss and the coverage provided by their personal insurance.
Consider making these recommendations to them:
It’s vital that one identify clients who are participating in the home rental/home sharing market in order to counsel them on the risks and appropriate coverage options available to them.
Adapted from “Mi Casa es Su Casa” by Joann Clarke. Resources, Summer 2016.