Vacation rentals are a great way for investors to earn a steady income, build wealth through property appreciation, and diversify investment portfolios. What investors may not understand is why a typical homeowners or landlord insurance policy may not be enough coverage. Today, our return guest, Jacqui Price, is here to share how to insure your vacation and short-term rentals.
Jacqui is the EVP of Compliance at National Real Estate Insurance Group. Her vast insurance experience over the past 12 years has made her an expert in many areas of our program and has contributed to her success. Welcome back, Jacqui!
Why do you feel like vacation rentals are so popular? Because we’ve seen a huge uptick in the last three to five years.
I think vacation rentals started as a more affordable rental than maybe a hotel room. But I think over the last four or five years, they’ve really morphed into more of a convenience. I have a couple of vacations coming up and I’ve searched high and low to make sure I could find a vacation rental that had a separate bedroom for my children and that they had their own bed. Whereas in a hotel room, all four of us would be crammed in one room with only two beds. Being able to travel somewhere else but still have that at-home feeling and a good place to retreat to at night is another perk.
We’ve seen a lot of our clients investing in vacation properties. So, we want to talk through how the insurance looks. First, what is considered a vacation rental?
Yes. We have a lot of investor clients with us, that as you said, have started investing in vacation rentals. With vacation rentals, instead of that long-term tenant, that 12-month lease, you are leasing the property for a shorter time. Maybe it’s a weekend, maybe it’s a week or two. Anything under 30 days is going to be considered a short-term or vacation rental.
Some people will rent out a portion of their personal home, like an upstairs loft or downstairs apartment as a vacation rental. So, that’s another option as well.
And then lastly, people will buy a secondary home, where they like to vacation. But when they’re not using it, they’ll rent it out as a vacation rental. And as far as NREIG is concerned, and I believe most carriers, as long as you’re using it as an investment property more than 50% of the time and using it as a personal vacation home less than 50%, they will still insure it as a vacation rental. And you should insure it as a vacation rental because it is primarily an investment property.
Why are homeowners and typical landlord insurance policies not enough coverage for vacation rentals?
A homeowners policy is for your personal home. Think about your personal liability, personal contents, and the building in which you live. All those things go under a homeowners policy.
Now, I already mentioned that sometimes people may use part of their home as a vacation rental. My advice is to make sure that your carrier or your agent knows that you’re doing that so they can make sure that your carrier is okay with it. Because sometimes homeowners policies have short-term rental exclusions.
Furthermore, a landlord policy is for a traditional 12-month rental. So, there’s one tenant and they bring in all their furniture, live there night after night, and raise their kids there. They’re going to be treating that like their home. It’s going to be the same people coming on and off the property for at least 12 months.
Whereas with the vacation rental, you have a lot more people on the property. You might have new guests every week. You might have a cleaning crew come in between the guests. You probably have a maintenance crew that comes. And so that’s a different risk. Insurance carriers look at it differently because not only are they not likely to treat the property as well as a long-term guest because they’re going to use it for three days and never come back, but there’s also a higher liability risk. It’s definitely advisable to make sure that your agent and carrier know that it’s a short-term rental so they can make sure they insure you properly.
What are some of the specific coverages that investors need for a vacation rental?
The first thing I will say is liability coverage. First and foremost, for any piece of property that you own, you should have liability coverage. You never want to have a lawsuit on your desk that you don’t have coverage for because someone slipped and fell on a property. So, I think it’s most important that we talk about liability coverage first.
Like I just said, you have all kinds of different people on the property with a vacation rental. That’s a lot of different people that could injure themselves on the property. So, you want to ensure you have liability coverage all the time, regardless of who might be there.
You also want to think about the amenities that you are offering your guests. Because if you have a pool, that increases your chance of a lawsuit, and you need to make sure you have insurance for that. If you have a trampoline, swing set, or something in the backyard, you want to make sure you know how your policy is going to react to that type of amenity, and you need to make sure you’re comfortable if there’s an exclusion there. Also, if you’re offering kayaks to your clients or some other type of water sport amenity, you need to know how your coverage is going to react should something happen. So, there are all different kinds of things that you need to think about from a liability perspective on a vacation rental that you don’t have to think about on a typical landlord policy.
Next, property coverage. Your property coverage covers the dwelling, so the physical house. What are you going to do if that house burns down, and you’re left with rubble? You must think about how you would recover and how you would want insurance to pay you for that loss. Also think about lower risks, whether that be a pipe burst, theft, vandalism, or some other type of lower loss than a total loss. How do you want your insurance carrier to pay you after that type of loss? Some of those losses you could potentially pay out of pocket. Some of those losses you would want to make sure are fully insured. So, it’s important that you talk to your insurance agent to know what type of property coverage you have and make sure it’s what you expect post-loss.
Next, let’s talk about contents coverage. With a 12-month rental, it’s an empty apartment building that you’re leasing out to your tenant, and they bring in all their furnishings. But, of course, with the vacation rental, you must fully furnish that property. You need to think about all the furniture you have in the property, all the bedding, and all the kitchenware. Again, what do you expect to be repaid for after a loss? Sometimes people will say, “I don’t need contents coverage, I can repurchase everything myself.” Or some people may say, “I want everything insured, so I need to make sure I have total contents coverage for what I have in there.” Everyone’s different, but you must make sure your policy covers you the way that you want.
Lastly, I will talk about Business Income coverage or Loss of Rent. So, let’s say a property is damaged from a covered loss and now you cannot take bookings for the next six months, but you have three months of bookings already on file. Loss of Rent works a little bit differently on a vacation rental than a typical landlord policy because the carrier is only going to pay you for the bookings you lost that were booked before the loss occurred. So, if you only have three months of bookings, but your property is down for six months, you’re not going to get a full six months of Business Income coverage back. You’re going to get three months of Loss of Rent. So, that’s just something also to consider when you’re looking at your insurance policy.
Are there any coverages that you cannot obtain through short-term rental policies?
An exclusion that you might be expecting on a vacation rental is similar to exclusions you would be expecting on a landlord policy. Wear and tear is generally always going to be excluded on an insurance policy because insurance policies are not maintenance plans. If you have a slow leak behind your fridge for three months and you find out that it ruined your flooring and you have to replace the whole flooring, that’s really a maintenance issue, not an insurance issue. Insurance is for sudden and unforeseen circumstances. You really want to keep in mind that those maintenance issues from general wear and tear are never going to be covered by insurance.
Additionally, mold and fungus are very common exclusions on property policies. And so again, if that leak were to lead to mold, that likely is not going to be covered by your vacation rental policy. So, things like that are most likely always going to be excluded.
Damage by guests is another one. If you have a rowdy crowd come and stay at your vacation rental for a couple of days and they leave the property worse for wear, all those repairs are likely going to be out-of-pocket because your policy is not going to pay for damage caused by your guests.
Is there any way to get coverage for damage from guests?
Sure, there are ways, and it’s up to you whether you enforce them. I know some rental booking platforms, like Airbnb or Vrbo, will offer guests the opportunity to pay for damage protection for things like that. Some owners require that it be purchased, and some leave it up to the guests. Damage protection could cover things like damage to the property or contents. It could cover additional cleaning fees from maybe pets or smoke odor. It could also cover income lost if you need to cancel confirmed bookings due to damage caused by previous guests.
I will also say that those policies will typically always offer liability coverage for your guests while your booking is enforced. So, if there is a slip and fall on the property while your guests are there, that liability coverage may come from Airbnb’s or Vrbo’s policy. But you still want to make sure that you have liability coverage outside of that. Because it’s not guaranteed for guests and what if the cleaning crew falls and breaks their leg on your property? That’s not going to be covered by a rental booking platform’s policy. That’s going to be covered by your policy.
What about the belongings that the guests bring to the rental? How are those covered, if say a theft occurred?
That’s going to be covered under their personal home, condo owner’s, or even renter’s policies. Your personal homeowners policy follows you wherever you go, in most cases. So that means their contents coverage from their homeowners policy is going to follow them to your vacation rental.
Let’s talk cost. Typically, we know that vacation rental insurance can be more expensive. Is that always the case?
Well, it can be more expensive, and it’s more expensive because carriers see it as a riskier piece of business. Again, we talked about how liability risks are enhanced – you have more people on site and probably have amenities that you’re offering. So, it’s a higher liability risk and that makes it more expensive.
From a property standpoint, it’s the same thing we’ve talked about, you know, guests are not going to treat your property as well. They may not tell you when something goes wrong. They may leave the stove on more common than a regular tenant. And so, the potential loss to a property is also going to be higher. So yes, carriers look at vacation rentals as a riskier move for them to insure. Therefore, the rates generally are higher.
As far as National Real Estate Insurance Group is concerned, it depends on where the vacation rental is located and whether that location is more expensive. It’s not more expensive than a traditional landlord policy with us. But of course, a vacation rental in Florida is going to be more expensive to own and insure than a vacation rental in Colorado.
— Game Segment: Insuring Unique Vacation Rentals —
I’m going to show you some out-of-the-ordinary vacation rentals found on Airbnb and you’re going to tell us and our viewers some insurance considerations for those properties. This is not legally binding advice.
Cliff Dweller – Kentucky
It’s on the side of a Cliff. And so right away, I just think about the liability risk involved should the floor give way, should one of the stairs become unsupportive and someone gets hurt. I think liability risks all the way. Whoever is ensuring this is probably charging quite a bit for liability insurance. Additionally, your property insurance cost is probably going to be higher as well because the cost to rebuild this is going to be a lot more than a property on the ground. There are probably cranes and different machinery involved in rebuilding. So, all in all, you just want to think about your liability concerns and then the cost to rebuild and make sure that you’re insured adequately.
Band Wagon – Tennessee 
I’m not sure if you would be able to insure the wagon. You might be able to get a small policy to cover the wagon. But essentially for this, I would mostly recommend liability-only coverage. I’m not sure how much out-of-pocket you would be if you had to replace that wagon or if you’d say, well, that was fun while it lasted and I’m not going to rebuild it. So, my main advice would just be to make sure that you have liability coverage on the property just in case anything happens.
Kellogg Doolittle – California
I’m not sure what kind of construction materials were used in this. So, you want to consider your rebuild cost for this as well. If it’s using non-common construction materials, you’re always going to have a higher rebuild cost. You want to make sure you have a policy that covers the original construction materials. This is going to take a lot of construction cost to rebuild because it’s not a super commonplace to be building.
Bruno Steel House – Texas
The stilts are one thing that I want to point out. Anytime the home is not on a firm foundation, that’s going to probably unattract a lot of carriers. So again, not sure who’s insuring this, but it’s going to be someone who’s comfortable with a home being on stilts. It’s also made of steel. So, the same thing that we talked about with the California house. You don’t want a policy that’s for like-kind construction materials because they want to make sure they’re going to get paid to rebuild it in the same kind of steel that they built it with the first time.
Space Ship – Washington
It is kind of like a yurt for those carriers that will insure yurts. I don’t think it’s going to be too hard to insure but think about your rebuild cost. I don’t know what it takes to build a spaceship, but just think about that when you’re insuring it. This one is probably the easiest one to find a carrier for of the five that we looked at.
Watch or listen to the interview here!
