There’s a lot of confusion in the marketplace about property insurance. I’m not talking about guest property damage protection or traveler insurance. I’m referring to insurance to actually cover the physical property and it’s belongings. Many homeowners are investing in short-term rentals (vacation rentals) and anticipate this investment to be a sizable portion of their retirement portfolio. Insurance is never exciting…EVER! But, it’s important to understand the nuances of the insurance products that are available so you have confidence you’re making the best decision possible to protect your assets. My attempt in this article is to provide a simplistic view of the insurance options available for our marketplace, but I’m certainly not a professional and highly recommend you do your homework and ask the opinion of multiple insurance brokers.
First: the 3 different types of insurance coverage
Type 1: Homeowners Insurance
I think most people understand typical homeowners insurance. You purchase insurance to cover any incident that takes place on your property and protect the house and its contents. This type of insurance does not qualify for any income producing business. If you’re renting out your primary house as little as 1-week a year, you may be able to negotiate with your agent if damage has occurred, but you likely won’t be protected if someone is hurt on your property. Also consider, insurance companies are big business and they will look for opportunities to deny your claim.
Type 2: Tenant Insurance
This type of insurance is designed to address long-term rentals and provides protection for your physical property along with General Liability for injuries related to a tenant. The problem with this insurance is the protection is limited to the area within your property. If a person is traveling and is injured off your property – you’re likely not going to be covered. This doesn’t sound like much of a risk, but if your guest uses a bike, tennis racket or surfboard and is injured, you’re likely to be involved in a claim. Even if you don’t provide the bike, tennis racket or surfboard, if an accident happens to a guest beyond the perimeter of your property, you’ll likely get brought into the claim.
The key with any insurance policy is what’s being excluded. Many policies state they cover ‘Short-term Rentals’, but if you read their exclusions they typically remove coverage for anyone that’s ‘staying on the property on a temporary basis (less than 30 days); acts of theft or vandalism; guests paying for their use of the property’.
Type 3: Commercial Insurance
This final type of insurance is designed for business. This gives you the protection you’ll desire for incidents that take place beyond your property boundary. It does come at a slightly higher price (typically ~30% more) and does have some limitations you’ll need to consider. The most significant: anyone coming on your property to perform work is not going to be covered. Example: at your primary residence (your home), if you have a neighbor boy mowing your grass and he falls, breaking his arm, your standard homeowners insurance would cover this claim. That’s not the case with commercial insurance.
So what’s the solution?
In order to utilize a Commercial insurance policy and protect yourself for people doing work on the property, it’s critical you validate each person has the proper insurance. Here’s what I would recommend, but once again, please consult with a professional:
- Require proof of insurance, specifically General Liability and Workers Comp
- Get a Certification of Insurance (COI) from each contractor
- If your contractor can’t provide the above, add them to your insurance policy
If you’re uncertain your current insurance policy has you covered, an insurance broker I talked to recommended sending the following message to your insurance company and asking for a written response from their underwriter. Don’t settle until you receive a clear ‘Yes’.
Question: If I regularly entrust my property/home to a paying vacation rental guest for a period of less than 30 days, and that guest vandalizes or steals my property, or is injured and claims me liable, do I have property coverage?
What if I utilize a Property Manager?
Insurance isn’t clear-cut and it’s certainly not the glamorous element of our job. Unfortunately, it’s something we all must do and the risks associated with not doing it right could be catastrophic. If your property manager hasn’t already discussed insurance, you should reach out to them and start the conversation. Your property manager should be requiring the following from you and you should ask the property manager if they have the proper COI from each of their contractors or if the Property Manager has added them to their policy. Allowing contractors to operate on a property without the proper protections could come back on the property owner.
For Property Managers:
- Hold COI, proof of Workers Compensation and General Liability from each contractor
- Hold COI from owners for each property and validate with each contract renewal
- Proof of Commercial General Liability from each owner for each property
- Require the owner add the Property Manager as additionally insured
- Note: not added as additional interest (important difference)