Post written by Kelin Johnson, Producer/Agent Stockman Insurance
In recent years we’ve seen the rise of the phenomenon known as the sharing economy or collaborative consumption. Collaborative consumption allows consumers to share access to products or services, rather than having individual ownership.
Whether you’ve participated or not, you’re likely familiar with some of the bigger names in this industry: Airbnb, FlipKey, HomeAway, VRBO. The impact is vast and, for perspective, Airbnb now boasts of 2 million listings in 34,000 cities across 191 countries.
In 2015 the market’s potential growth was underscored by Expedia’s acquisition of HomeAway, at a cost of $3.9 billion. The industry has made such a significant impact that politicians are getting involved.
They’re citing concerns such as communities and consumers being at risk through violations of sensible health, safety and zoning regulations under state and local law. Among the issues being debated is the topic of insurance coverage.
Insurance is the allocation of risk for a specified financial compensation. The challenge for insurance companies is determining the propensity for loss and an appropriate premium to offset the risk. Without prior data, the majority of insurance companies stay as far away as possible and exclude any related activity. Thus, the market for residential sharing insurance products is very narrow.
By definition, a short-term/vacation rental is defined as any residential structure that is rented on terms less than 30 days.
With respect to the owner of the property
The property owner is exposed to the risk of their property being damaged and also liability for personal negligence. The tenant could cause damage to the property or commit theft of the owner’s personal belongings. Many of the short-term rental companies offer coverage for these situations but have significant limitations such as property damage caps of $50,000 (and differ greatly across each platform).
In the event of a total loss, a coverage cap of that size will force the owner to look at their primary insurance for indemnification. That assistance will only be applicable if the home is insured properly. Though the market for this type of policy is narrow and likely has additional costs, they are available.
In terms of liability, there are numerous preceding cases of discrimination and bodily injury. In terms of cost, liability claims can far exceed property damage claims and settle well into the millions. A standard home or landlord policy won’t cover these types of claims. Even if the owner has a personal liability umbrella policy, the claim will be denied because the risk has converted to commercial exposure.
It’s important for a homeowner to understand that their standard home insurance ceases to provide coverage as soon as any revenue is generated. A landlord/rental policy will deny coverage when the terms change to less than 30 days. Claims representatives are searching the web as soon as a claim is submitted and denials are immediately issued if the address comes up on any vacation rental site.
With respect to the short-term renter
Whether you’re a homeowner or renter, the good news is that the liability associated with your homeowners or renters insurance will likely extend to the short-term rental, but is your coverage enough?
If an individual has a renter’s policy with a $300,000 liability limit and they’re negligent for a fire that takes a $1,000,000 home, clearly there’s a significant gap.
The owner may submit a claim and have their home rebuilt, but this situation would be far from over. The owners’ insurance company is likely to subrogate or file a lawsuit against that negligent renter. That’s not a good position to be in.
The positive is that insurance companies want and need to adapt to accommodate this market as it is only going to grow from here.
Emerging risks are often opportunities for companies to step in and be the leader in a new product. They’re accumulating data and research on necessary coverages and prior claims so they know what consumers need and what premium to charge to maintain profitability.
Over the last couple weeks, I’ve been reaching out to some owners of short-term rentals in Missoula. I went on one of the popular sites and contacted 20 people who were renting out either a room in their home or the entire home.
Of the 20 people contacted, only three had discussed the issue with their agent and made changes to their standard home insurance. 85% of the sampled audience is putting themselves and their tenants at risk.
I’ll end this with some questions that should be considered when using a vacation rental. These are questions you may be facing without even knowing it.
- If the property owner’s insurance denies a claim and you don’t have any insurance that applies, who pays the damages?
- If you don’t have home or renters insurance and are negligent for a fire in one of these rented properties, how do you pay for it?
- What if you rent out your primary or secondary residence for a weekend and there’s a crime that takes place there. Who’s liable?
- Lastly, if you rent out your home for a week and the tenant burns down the house but you’ve neglected to adjust your insurance, who pays to rebuild? What if the tenant can’t pay the judgement?
If you hear of anyone who may be renting their property on this platform, I’m certain they would be happy to get more information. We want to help you enjoy your life by not taking a step backward but by being prepared for the unexpected.