Luxury Homes Listed for Rent on Home Sharing Websites Need Specific Insurance Coverages To Ensure Proper Protection
By Kurt Thoennessen, CAPI
July 23, 2018
Most people who rent their homes on websites like Airbnb.com and Homeaway.com are not in the hotel or real estate business. They simply recognize they have an asset that other people would enjoy using and are willing to pay for that privilege. Before Home Sharing websites were popular, the prospect of entering the short-term home rental business was daunting and fraught with risk. Today, the barriers to entry have been reduced and the rewards can be very high, especially for owners of luxury homes.
Luxury property owners who are entertaining Home Sharing should speak with their trusted independent insurance specialist during the planning phase. An insurance expert may be able to find a simple solution by conferring with an underwriter or they may suggest a different strategy. Either way, it is not recommended to figure out the insurance through a do-it-yourself solution as something may be overlooked.
(Please feel free to click here to start. An insurance professional who specializes in insuring luxury homes will contact you to discuss your options.)
Will my homeowners insurance cover me when I rent my luxury home on a Home Sharing website?
There are certainly a lot of benefits to getting involved with the “Sharing Economy,” but there are also significant risks. Many people incorrectly assume that their homeowners insurance will cover them for this activity. Risks are even greater for owners of luxury homes with property values exceeding $1,000,000 because the coverage being provided by Home Sharing websites typically does not go above that amount.
To ensure proper insurance protection for luxury home rentals, there are three areas that should be considered when designing an effective coverage program. Those areas include:
- Any current policy exclusions
- Recommended coverages for Home Sharing risks
- Risk management considerations.
This article will provide an overview of several aspects within each of these areas.
What policy exclusions should I be aware of when renting my luxury home on a Home Sharing website?
The first area to review is the policy exclusions in the policy covering the luxury home. Reviewing policy exclusions involves looking at all related policies, which include: homeowners, flood, earthquake, and umbrella, and any coverage afforded by the “Home Sharing” website. Two exclusions that may cause a coverage problem for owners of luxury homes are as follows.
- Business exclusion – Homeowners insurance includes an exclusion for business activity. If the income from the rental is more than what is acceptable according to the policy language, usually $10,000 to $15,000 per year, the policy may not respond to a loss.
- Occupancy exclusion – Homeowners insurance policies are designed to cover homes that are owner occupied. In some contracts there are specific sections that define the “residence premises” as the location “where you reside.” This language has been used to deny coverage for homes being rented to others.
The bottom line is Homeowners insurance is not the correct solution to insure a home that is being rented to others.
What insurance coverages are needed to cover my luxury home being rented to others on a Home Sharing website?
The second area to consider is the coverage involved in properly insuring a luxury home while it is being rented on a Home Sharing website. A luxury home being rented to others has very different coverage needs than an owner occupied luxury home. Here are some of the coverages that should be contemplated in these situations.
- Loss of rents – If there is a loss and the home is unable to be rented, there will be loss of income. Choose a limit for “Loss of Rents” coverage that matches the annual income received from the property.
- Replacement Cost Coverage – Ensure the policy meant to cover the home provides Replacement Cost coverage for the dwelling and the contents inside. Actual cash value coverage is less costly, but will also provide a reduced settlement in the event of a loss.
- Theft coverage – Some policies may exclude coverage for theft. This coverage can be added for an additional cost with some insurers.
- Landlord’s Liability – The risk of a lawsuit due to an injury at a rental property is higher than it is at an owner occupied home. The proper coverage program will include liability coverage designed to cover the home while it is being rented to others. Owners of luxury homes typically require higher limits of liability coverage to ensure they are well protected. A good rule of thumb is to match total liability coverage limits with net worth.
- Dwelling and other structures coverage – Luxury homes require significant coverage limits, often more than $1,000,000, to rebuild after a loss. Ensure the policy covering the rental home provides adequate coverage for the dwelling and all outbuildings by having the insurance company conduct an onsite appraisal.
- Back-up of sewer and drains – Many rental home policies limit coverage for back-up of sewers and drains to $5,000 or $10,000. Luxury homes require higher limits and many insurers can offer that for an additional premium.
- Unbundled Coverage – Luxury rental homes are often located in exotic locations that carry an increased risk of loss from hurricanes, flooding, earthquake, or mudslide. These coverages are not included with a typical rental home policy, and should be addressed.
How can I reduce risk and help prevent a loss from occuring while renting my luxury home?
In addition to having the right coverage in place, it is crucial to ensure that risk management measures have been implemented to reduce the risk of loss. Some insurance companies may even require certain steps be taken to help prevent losses from happening. Here are four common risk management strategies that can be used with luxury rental homes.
- Limited Liability Company Ownership – Homes can be re-titled into limited liability companies (LLCs) to limit an individual person’s exposure to a lawsuit. If this is done, it is important to restructure any related insurance policies to ensure the LLC is included. (Be sure to consult appropriate legal and financial experts for specific advice regarding this particular strategy for your luxury home.)
- Safety Measures – Luxury homes often include pools, treehouses, zip lines and other features designed to bring further enjoyment to the property. These features also increase the risk of injury and need to be accompanied by risk mitigation measures to reduce the risk of injury. Some insurance contracts require certain measures to be implemented, like installing a fence around the pool, in order for coverage to respond.
- Valuable Property Protection – Luxury homes often contain artwork, silverware, jewelry and extensive wine collections. Valuable articles should be relocated to a safe/secure location while the home is being rented to avoid accidental damage or theft.
- Local Ordinance Compliance – Towns and cities may have local ordinances and laws regarding rental properties. It is important to comply with them to ensure the safety of renters.
What are the steps to properly insuring my luxury home when it is listed for rent on a Home Sharing website?
Insurance is often an afterthought when people begin renting their homes on Home Sharing websites, but it should be a priority. Here is a quick recap of the roadmap to obtaining the proper insurance protection.
- Assess Current Coverage – First, determine if the current policy is the right kind of policy to cover a home that is rented to others. If it is a standard homeowners policy, it is likely that it is not providing the right coverage. There are exclusions and coverage deficiencies that will expose owners of luxury homes to unexpected losses.
- Contact a Specialist Insurance Professional – Next, speak with a personal risk manager or specialist insurance professional who works with successful individuals and families to design the right kind of policy for a luxury rental home. (Start a quote here. A specialist insurance professional will contact you to discuss your situation.)
- Implement Risk Management Strategies – Finally, take the time to implement safety measure at the luxury home and consider risk management strategies to reduce exposure to liability lawsuits.
Renting a luxury home on a Home Sharing website can be a quick way to earn some serious income, but it is not without risk. Owners of luxury rental homes can gain peace of mind by following the above steps to obtain proper insurance coverage and implement intelligent risk management strategies.
DISCLAIMER: This article is for illustrative purposes only, consult appropriate insurance, legal, accounting and financial experts for specific advice regarding your activity or plans to share (rent) your luxury home.
Kurt is a Senior Advisor with Ericson Insurance Advisors and a Certified Advisor of Personal Insurance (CAPI). He works with high net worth individuals and families to design and implement risk management and insurance programs.