Are you an investor who owns short-term vacation or rental property? Or, are you a homeowner with a nice home located near an area of interest that you lease out periodically for vacationers or weekend travelers looking for a three-day getaway? If so, this question is for you: What’s the difference between a rental home occupied by a full time tenant and another home occupied by multiple tenants, each for a short period of time?
From an insurance perspective, A LOT.
Also (get ready), as you read this article, if you have a property that you lease infrequently or on a short-term basis, there is probably a 90% or better chance that you are completely and totally uninsured – regardless of how long you have been paying insurance premiums, how much you have paid, or who your insurance company is. You might as well paint a bull’s eye on your back and hang a sign above your door that simply says “Sue Me Here”. You are at serious risk for a denied claim or litigation brought against you (without liability coverage to pay legal defenses) and you probably don’t even know it.
Concerned yet? If not, you should be.
The impetus of writing this article is due to the fact another agent/broker dealt with this very situation and, as an insurance professional who understands the ‘big picture’ of how small issues quickly become large court cases, I was appalled at what he learned.
In order to appreciate the information contained later in this article, as it pertains to you as a reader, investor, and/or insurance consumer, you need to understand the issues that I was required to remediate in order to put it into context with your own situation.
The Situation
As a brief overview, here is a real example of a person in Texas who is a very successful, sincere, and trusting individual who had, through years of talent and hard work, acquired a large estate and a respectable net worth. This client lives in (as an owner-occupant) a very custom and high-value 8,000 square foot home in a very desirable area of Central Texas, complete with steel framing, marble floors, multiple kitchens and baths, a very expensive roof, and even a full multi-floor elevator. In addition, this individual had an estimated $1M of personal contents in the property, including an estimated $300,000 or more of original artwork. Because of the location, construction, and condition of this home, the bottom floor (approximately 3,500 square feet) was leased out (though infrequently) between three days and a week at a time, at an average cost of $600 per night, to ‘weekenders’ looking for a luxurious mini-vacation or others looking for a wonderful place to stay for a short period of time. Needless to say, this was a very custom and very high-value home requiring very specializing underwriting and insurance considerations regarding personal liability, business liability (due to the type of rental), innkeeper liability, personal property and scheduled contents, etc. In addition, this individual owned at least two more high-value properties of similar types which were also used for similar investment purposes. In summary, this was a very special situation requiring very specialized and tailored coverage designed specifically for this client’s property types, business, and personal liability risks.
As an insurance consumer and someone who does not work in the insurance industry, the client was obviously not an expert in all-things insurance-related and he, like many people, had simply relied on his agent to be a professional and do what was in his best interest and properly insure the property.
Unfortunately, the prior agent had either not taken the time to understand this client’s situation and he/she was primarily concerned with selling a few policies to earn a healthy commission and meet this ‘well advertised’ company’s sales quota or he/she had little or no real knowledge of the insurance industry and had no concern for the risk that this individual faced. Regardless of the reasons, at the end of the day, all of the homes were simply insured with standard homeowner and dwelling policies designed for typical ‘main street’ homes. Not only were these absolutely the incorrect types of policies, but the client was, for all intent and purposes, completely uninsured the entire time – and had been for years because even the agent prior to the one mentioned above had done exactly the same thing. This only came to light when the insured had to finally file a large property claim and the problems began.
Just a Few of The Problems Faced
To begin with, standard homeowner policies (which are designed for owner-occupied residences and second homes) are not intended in any shape, form, or fashion to provide coverage for extremely high-value homes, those with unique construction attributes, homes with large amounts of personal property or large amounts of scheduled items, and those with special liability risks or business exposures (which the short-term rental is considered to be). Although these policies vary greatly from one insurance company to the next, the fact is that they are generally designed for typical ‘main street’ homes with typical property and liability risks that a typical owner or family would have (even though most of these are improperly quoted and issued as well, but that’s another topic for another article).
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Short-term rental exposure (this alone prevents placement in a ‘standard’ insurance market)
This item, in and of itself, is a blatant violation of the underwriting guidelines for all ‘standard’ homeowner’s insurance policies. From an insurance perspective, this is considered to be the same type of exposure or risk as faced by a bed and breakfast or a hotel/motel due to the continual turnover of tenants and short-term occupancy status. This alone takes these properties out of the realm ‘personal insurance’ and places them into the ‘commercial’ insurance market. The fact that the home may also be occupied by the owner is irrelevant.
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Some of the homes are vacant for extended periods of time between tenants.
Standard companies will not write any insurance at all on a property that is currently vacant or which is expected to be vacant for any extended period of time (over 30 days). Many of these homes have vacancy periods in the ‘off season’ and coverage automatically ceases or is severely limited due to the ‘vacancy clause’ contained in the policy wording. High-Value homes with customized construction features that prevent the proper reconstruction costs with a traditional homeowner’s policy
- Unusual Exposures or Custom Features
Standard replacement cost estimators used by insurance comapnies for ‘main street homes’ do not allow the input of many custom features such as type of framing (ie: steel stud), flooring (Class-A marble), copper roofing, etc. In addition, these policies have limits on the amount of coverage available for a home as well as the contents it contains. These are often very inadequate for this type of risk and these reconstruction costs figures are usually grossly under-estimated. Examples of unusual features that we have experience in many vacation homes include:
- In-house elevator or exterior tramway
- Mutiple unfenced pools and/or hot tubs
- On-site sport facilities
- On-site live-in service workers
These are special liability-related risks far beyond the ‘normal’ rental property which, more often than not, violate the company’s underwriting guidelines and risk ‘appetite’.
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Coastal or High-Risk Exposures
Many vacation rentals are located in areas that present a high risk of catastrophic loss by insurers, such as coastal areas, mountaneous regions, and similar environments. Because of these higher-than-normal risk areas, many insurers refuse to offer coverage.
- Value of Personal Property (and its lack of coverage)
In the case of owner-occupied dwelling also used for short-term rental (such as a bed and breakfast), the owner is considered an ‘innkeeper’ and because the coverage must normally be written through a commercial policy, personal belongings, by default, are excluded from coverage. This means that the owner would have no coverage for jewelry, artwork, clothing, or any other personal belongings.
In addition, some of the very real risks that this insured faced included:
- NO LIABILITY COVERAGE
Because the home/risk was improperly issued as has already been made clear, the client had no liability protection whatsoever. This is due to the short-term rental exposure and the fact that it violates carrier policy guidelines. This means that if the insured were liable for a claim (animal injury, personal injury, bodily injury on premises), the company would probably find that there is no coverage for any legal or defense costs. In addition, there is absolutely no coverage whatsoever for the liability exposure faced from leasing to tenants. If anyone leasing the property were injured (drinking on the deck, injured near the boat dock, animal bite, slipping on slick floor, etc), the property owner and his or her assets are completely at risk with no insurance protection to pay legal fees, medical bills, or settlement costs.
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NO INNKEEPER LIABILITY
In addition to the lack of liability protection just mentioned, the property owner, in a situation such as this, also has full liability for the personal belongings of the individual(s) leasing the property in the event that they are stolen or damaged while on the client’s property. This is no different than if you were staying at a hotel or resort which was burglarized or which caught fire and destroyed your camera, clothing etc. The hotel or resort would have the legal responsibility for indemnifying you for your loss. Regular personal liability does not protect you against this liability, a specialized type of coverage known as ‘innkeeper’s liability’ is necessary to guard against this risk.
Furthermore, most of the items mentioned above could be considered a ‘material misrepresentation’ on the insurance contract due to the fact that this information, if known, would have prevented the company from issuing coverage in the first place. Whether the omission of this information was intentional or unintentional is irrelevant. An insurance company isn’t going to willingly pay a $300,000 claim on a policy that should have never been issued in the first place and which clearly violated their written guidelines.
Not only were these homes insured improperly with the wrong type of insurance policy, but no consideration had been given to the coverage of the contents, including the high-value artwork and other property. This had simply been ignored by the agent or he/she had no idea of how to insure it – so it was simply left uninsured.
The Solution
If you are an investor or a property owner and you believe that you are in a similar situation with similar exposures to loss and/or litigation, the first two things you should do are:
Read your current existing policy and ask questions - NEVER just ’assume’ you are covered.
If it is a typical homeowner’s policy (regardless of the company), you are probably uninsured or you could face severe legal or claim challenges in the event of a loss. Also, find out if you are insured for your scheduled items and if the reconstruction cost of your property has been accurately calculated using the correct physical features and custom items associated with the property.
Contact your agent
- If he seems unaware of what you are talking about, he is unfamiliar with this type of risk, or he is unsure of his answers and seems to lack knowledge regarding commercial coverage or high-value property insurance; find another agent who is experienced and who understands your business and/or personal situation as well as the intricacies of the insurance industry.
In many cases, situations like the one described above need to be insured as either a Bed and Breakfast or a Hotel / Motel risk, even if theproperty is your own primary residence. Although the property may be residential in nature and it may seem to you (and many agents) to be something that requires home insurance, from an insurance perspective, it is anything but residential – and you are running a great risk in the event of any unforseen event or litigation.
If you have questions or would like to know more, call Steve at (888) 432-5301 and we’ll be happy to help you better understand your own insurance situation and find the solutions that best fit your own specific needs.