(0)Cabins for YOU gets calls daily from current or prospective vacation property owners asking about insurance requirements or what kind of insurance they should buy.
Though you may see your new vacation rental property as your family’s 2nd home, if you’re generating income from it and deducting your expenses as business costs, you should think of your property as a business. As such, you should be insured as a business. After all, would you use a personal-level insurance policy to protect your other businesses? Of course not. You need a commercial level of property, content, liability, and loss of income coverage!
The information below should help guide you through your decision-making process and offer ideas on questions to ask your local property and casualty insurance agent when choosing what type of coverage you need.
What is considered short-term renting?
In the insurance world, a property that is rented for less than 30 days at a time - by a renter who does not reside at the dwelling - is typically considered short term.
Why does my homeowner's policy not cover my short-term rental?
All homeowner's policies carry a "business activity exclusion,” so any claim involving a "business activity" could rightfully be denied.
Is my short-term rental considered a business by the insurance company?
Generally speaking, yes.
I have been told my landlord policy covers my short-term rental. Is this correct?
Generally speaking, no. Landlord policies also carry a "business activity" exclusion. Landlord policies are written for landlords, not business owners. A long-term lease rental is not a business.
Let's use a liability example:
A renter leases your home for 6 months. Two months later, the renter slips and falls in the shower because there is soap scum buildup on the tub floor. Does this liability fall on the landlord? No, of course not; it's the tenant'sresponsibility to keep a clean tub. Consider the same situation with a different outcome. When a vacationer rents a home for a week, it is absolutely the property owner's responsibility to keep a clean tub. The vacationer assumed they were renting a clean/safe property, no different than a hotel. The liability falls on the property/business owner.
How do I get covered for business activity?
Buy a business insurance policy. Your local property and casualty insurance agent can help you understand these policies. Make double sure to tell your agent that this policy is for a short-term rental property!
What kinds of perils does this type of policy cover?
It covers your business property (rental home/contents), business liability, and the business income it generates.
If I insure my short-term rental as a business, can I also stay there?
Yes. There are no standard occupancy restrictions on a business policy. This means the property is insured while you, friends or family, and paying guests stay there.
My short-term rental is also my primary residence. Can I still purchase the Business Policy?
Generally, the answer is yes; however, this can vary from state to state and insurance company to company. If the short-term rental home is also your primary residence, the insurance company adds additional coverage for personal liability and for loss of use to relocate in the event the property is being rebuilt. This is very important if you do not carry a homeowner's policy elsewhere.
What is personal liability?
Personal liability is found in homeowner's policies. It covers you for personal negligence and follows you anywhere you go in the world. This is why you should add it to your policy if your short-term rental doubles as your primary residence.
Does my personal umbrella cover my short-term rental?
No. The same "business activity" exclusions apply because it's personal; however, standard personal umbrellas do cover a long-term landlord property. It's not a business.
What is a commercial umbrella policy?
A commercial umbrella policy is a policy that covers "above and beyond" a standard business policy’s liability limits. Depending on the size of your vacation rental property, the number it sleeps, and whether or not you have a pool, you may want the higher policy limits an umbrella policy can provide. Ask your agent about this option.
My short-term rental property is “titled” as/under a Corporation/LLC. Is this okay?
Yes. Most professional planners (attorneys/CPAs) encourage this. Since your short-term rental is a business, it's always smart to incorporate. You can write your policy with the named insured as an individual, partnership, LLC, Corp, or Trust.
Vacation rental insurance can be complicated.
You must know the owner's “Rule of Three.”
ONE: Liability - The biggest insurance exposure you have as a vacation rental property owner is liability. What if a guest were to injure themselves while staying at your property? What if you were found liable? Maybe the bathtub was not thoroughly cleaned and a guest slipped on soap scum. Or worse, the house caught fire and resulted in a guest's death. The proper insurance policy can cover you with commercial general liability (business liability) coverage.
TWO: Building and Contents - The second-biggest insurance exposure you have as a vacation rental property owner is the actual property itself (building and contents). What if a guest were to accidentally burn down your property or steal items? What if the property was occupied by a guest when a toilet leaked and destroyed your flooring? The proper insurance policy insures your building and contents as a business (commercial form) with replacement cost (new for old) on special form (all risk).
Make sure to get REPLACEMENT COVERAGE – NOT FAIR MARKET VALUE COVERAGE (if available). The reason to use a commercial policy is because there are no standard occupancy restrictions as in a homeowner's policy. This means at the time of a covered loss, the property can be vacant or occupied by you, the owner, friends or family, or paying guests. It's the only way to properly insure a short-term rental, especially if it's a vacation home or nightly rental.
THREE: Business Income - You have worked hard to turn your property into an income-generating vacation rental business. What if a tree fell on your roof and you could no longer rent your property for the summer? What if you had a total loss on the property due to a fire? You need to protect your income. The proper insurance policy ensures your income as "actual loss sustained" with no time limit. You are only subject to the limit of insurance you choose.
Please Note:
The purpose of this paper is to provide you with general insurance information as it relates to vacation rental properties. Cabins for YOU is NOT a property or casualty-licensed entity. As such, any questions or concerns about your specific situation should be directed to a properly licensed person/agency where the property in question is domiciled.