The standard insurance policy used by most homeowners is homeowners insurance. That is as long as the owner is living in the home and not using it as a rental property.
If the home is being used as a rental, the owner is expected to get the landlords insurance.
But what happens when the home is a vacation rental? Vacation rentals are occupied by their owners only a few weeks in the year. The home is also rented to guests for several weeks a year. But the rest of the time, the property is probably vacant.
Should homeowners insurance or landlord’s insurance be used for a vacation rental? As the owner of a vacation home are you protected when you use any of these abovementioned insurance plans?
The answer is no. Vacation rentals need a different type of insurance.
Homeowners and landlord’s insurance have critical coverage gaps when they are used for a vacation rental. Landlord insurance is for tenant-occupied homes and homeowners insurance is for owner-occupied homes. But a vacation rental is both tenant-occupied and owner-occupied.
Using a landlord’s insurance for a vacation rental will leave the home exposed to risks when it is occupied by its owner. But insuring a vacation rental with homeowners insurance will also not provide coverage for the risks associated with having tenants in a home.
Property insurance ensures that owners are adequately shielded from financial risks. But this will only happen if the policy you choose is the right one for the particular type of home.
Revenue Scout, a marketing agency for accountants, explains in this post why you need vacation rental property insurance for your vacation rental.
Understanding vacation rental property insurance
Why homeowners insurance will not work
Homeowners insurance does not cover homes that are used for business activities. If the home is being rented to tenants, that is a business activity and it will disqualify the home from coverage under homeowners insurance.
But if you only let your friends and family use the home, homeowners insurance may work for it. The ideal insurance policy for a vacation rental is vacation rental property insurance. It does most of the things homeowners insurance does but with some very important additions.
Why channel policies are not enough
If you use platforms like Airbnb and Vrbo, you will be aware that they offer some form of insurance policies. However, these policies are not recommended as substitutes for vacation rental property insurance because:
- These are not insurance policies in the real sense of the word.
- The coverage offered does not cover all possible damage to your home such as pipe bursts and accidental flooding.
- The coverage is limited to direct damage caused by guests and it often excludes damage by guest’s pets.
- It does not always offer liability insurance.
- It will not include loss of income insurance.
- The policy is not in your name, so you can’t file a claim directly to the insurer.
What your insurance company will look at
Insurers will look at the way a vacation rental is used to determine the level of risk and the type of vacation rental property insurance that is suitable for the home.
- A vacation rental may be used principally for short-term rents that are less than 30 days in duration.
- The vacation home may also be rented on a nightly basis or for a few days at a time.
From the insurance company’s point of view, homes that are rented nightly or for a few days at a time, pose a higher risk than homes rented on a monthly basis. Nightly or daily rentals will attract a hotel-type insurance policy, which is usually more expensive.
What vacation rental property insurance should cover
The extent of coverage offered by the policy will mostly depend on how the rental is used and its location, but the standard coverage which should be included in the policy are:
- Protection for your property: This mitigates the risk of intentional or accidental damage to your property by guests. It covers the structures, systems, and contents of the building.
- Liability coverage: If a guest is injured in the home and sues you, the policy will cover your legal fees. If you are found culpable, it will pay any awards and the injured person’s medical bills. It also offers protection from damage to other people’s property.
- Loss of income: If you are unable to rent the home due to unavoidable damage, the policy will cover the loss of income during the period.
What kind of policy do you need?
Depending on the type of property and how you use it, you may need to get:
- A rider if you rent out the home occasionally. The rider will cover any gaps left by your homeowners insurance
- Or a full-fledged commercial or business policy, if your home is rented out frequently
In addition to the policy, you should consider getting additional insurance coverage for those risks not covered by vacation rental property insurance, such as flood and earthquake insurance.