Vacation Rental 101: Insurance

Astrid LindstromLeave a Comment

Vacation Rental 101: Insurance

You have permission to operate a short-term rental business, you’ve gotten all the proper licenses and fees filed, and you’re prepared to pay your taxes.

Ready to invite people into your home? Not quite. We need to make sure you’re covered in case anything happens to your property while you’re hosting guests or to your guests while they’re staying in your property. Which means it’s time to talk about insurance.

You need to think about a few different kinds of coverage:

  • Coverage for injuries a guest sustains while staying in your home
  • Coverage for damage to the guest’s property while staying in your home
  • Coverage for damage to your own property caused by the guest
  • Coverage for adjacent property damage caused by a guest (if you’re in a condo complex, for example, harm to your property may cause harm to your neighbor as well)

To get all of that coverage, you’ll need a few different types of insurance. Here’s the bare minimum of what you’ll need – but be sure you double-check with your coverage provider! Different areas may have additional requirements to ensure full coverage.

Homeowner’s Insurance

Whether or not you’re renting out your property as a vacation rental, you should have homeowner’s insurance.

In general, these policies will cover any damage to your home or possessions and liability coverage for accidents on your property. If a tree falls on your garage or someone slips on your stairs while visiting you, your homeowner’s policy is designed to cover you in those unforeseen situations.

When you’re renting out your home, however, your homeowner’s policy may not cover damages in the same way. There are often stipulations where coverage no longer applies if you are operating your property “as a business,” but whether this applies to you depends on your area and your insurer.

Check with your insurer to see if renting out your home short-term will alter your coverage, and if so, in what ways. You’ll need to make up any gaps in your homeowner’s policy with other types of coverage.

The way the policy changes will vary from state to state and provider to provider, but one very common exemption is that your homeowner’s policy will not provide liability coverage for a paying renter.

Which is to say: your policy might pay the medical bills if your mother-in-law slips on your stairs, but not if a paying guest does. You’re going to need some coverage that specifically covers your renters.

Rental Property Insurance

As a short-term renter, you’re technically a “landlord” – it’s just that you have a tenant who’s on a short-term, rather than a long-term lease. You can still be held responsible for a tenant’s or visitor’s injuries on your property in the same way a long-term landlord would, and so it’s best to look for rental property insurance (sometimes referred to as “landlord insurance”).

Your rental property insurance policy should include coverage for any damage caused by unforeseeable circumstances such as fire, storms, burglary, or vandalism. You’ll also want to be sure it includes liability insurance that covers injuries and losses suffered by tenants and visitors on the property.

Liability insurance will cover you in the case of a renter hurting themselves on your property, or any damage to the renter’s property if it’s damaged as the result of your failure to maintain the property.

This can happen even if you couldn’t have foreseen the issue. A heavy storm could cause an unexpected leak that damages the renter’s possessions, for example – it’s hard to be 100% certain your property won’t have any issues that affect the renter. It’s better to be safe than sorry when it comes to liability insurance – particularly as you’ll have lots of renters coming and going.

Liability insurance will also cover the cost of legal bills if someone brings suit against you.

We’ve covered how to be sure you’re protected if someone damages your property accidentally or if a renter is injured on your property. But how do you protect yourself against willful damage to the property by a renter?

Deposits and Damage Coverage

The go-to method of covering damage to a rental property, for both long-term and short-term tenants, has always been a deposit. If you rent an apartment for a year, you’ll be asked to put down a deposit of approximately one month’s rent. When you move out, the landlord can use that money to repair any damage you caused to the property during your tenancy, and will refund you the rest.

Short-term landlords have been doing much the same thing – but they get a lot of push-back from guests because the cost of the deposit can be prohibitively high compared to the cost of the rental.

When you rent long-term, you know you’re going to get a year’s tenancy out of your deposit, so the amount seems like a reasonable investment in the landlord’s risk. When you rent short-term, you might put down $600 for a three-night stay. If the deposit is $500, you might feel like it’s far too much cost for such a short visit – even if you’re confident you’ll get it back.

Deposits also open up the potential for disputes between landlord and tenant. If the tenant leaves your property in such a condition that you feel it’s necessary to take an additional cleaning fee out of the deposit, you may wind up arguing with the tenant over whether or not the property was dirty enough to require the extra cleaning. Similarly, you may wind up disputing over whether the tenant broke the air conditioning or if it was broken when they arrived.

Such disputes – even if you’re entirely in the right – can result in the guest leaving you a bad review and accusing you of wrongdoing, damaging your reputation in the eyes of future potential renters.

Personally, we prefer getting a property protection plan instead. Our own plan covers our owners for up to $3,000 worth of damages to their property, and only costs the renter a small flat fee between $20-$100, depending on the length of their stay.

There’s no dispute about the deposit return because the fee isn’t refundable, and you as a landlord don’t need to force the guest to admit they’re at fault. You simply take pictures of the damage, submit a claim to the provider with receipts, and your costs will usually be fully covered.

The other advantage is that you get far more coverage. Most damages caused by guests are quite small, such as accidentally breaking a coffee cup, but some can be substantial. If your $1,000 couch gets a cigarette burn on it, you’ll need to replace the entire couch – and a $500 deposit won’t cover the full amount. A good property protection plan will.

Additional Insurance

This isn’t a comprehensive list of every single type of insurance you’ll need! These are the basics for how to get covered for the most common problems in short-term rental, but you may need additional types of insurance depending on your area or insurance provider.

For example, if you live in a flood, hurricane, or earthquake area, you may need separate coverage to be sure you’re not liable if a renter is harmed during such a catastrophe.

The best way forward is to explain to your insurance provider that you intend to rent your property short-term, and ask for their advice on every type of insurance you might need. This article will give you some good starting points, but make sure you ask about any potential problem you’re concerned about! Your insurance provider should be able to point you toward the right type of coverage for any liability issue that’s causing you concern.

This post is part of Evolve’s Vacation Rental 101: The Expanded Ultimate Guide to Success series, where we discuss the ins and outs of vacation rental ownership for newcomers and experienced veterans alike. Tune in next week for our 101 post on what you need to include in your short-term rental lease!

To be sure you don’t miss a post, download the Ultimate Vacation Rental Success Guide below and we’ll send you an email notification every time we publish a new 101 article. Have questions or want to know how we make vacation rental ownership easy and profitable? Call our Homeowner Consultants at 877.818.1014 (press 2) or click here to learn more about Evolve.