We often get questions about insurance for vacation rentals. What are the best insurance policies for a vacation rental? What type of insurance do we need for our home? And where do we go to get what we need?
In an effort to answer these questions, we brought in Darren Pettyjohn, National Sales Manager at Proper Insurance. Darren has spent his entire professional career working in specialty insurance programs from U.S. import bonds to marine cargo insurance, and his company, Proper, offers a specialty insurance policy designed for vacation rental properties that replaces a homeowner’s or landlord policy.
Here’s what he had to say about vacation rental insurance:
Rented.com: So, what is speciality insurance?
Darren Pettyjohn: Specialty insurance, better known as program insurance, is basically when you create a special insurance policy for a unique risk—a risk or exposure that isn’t covered correctly by a commodity insurance product. For example, auto, home, and life insurance are not special or unique risks, because you can buy them virtually anywhere.
rented.com: Okay, and what is a special risk?
DP: A special risk would be something like a skydiving company, a fine art dealer, or a winery. You can’t simply buy a commodity insurance product for these risks; you need something special.
Rented.com: Would you consider a vacation rental a special risk?
DP: Well, some might say no, and some might say yes. The founders at Proper Insurance say yes, and that’s exactly why we created our specialty insurance program for short-term or vacation rental properties.
Rented.com: Why and how do you consider a vacation rental a special risk?
DP: Well first, you have to identify the gaps in traditional insurance coverages to see if there is even a need for a specialty product.
With vacation rental properties, owners historically have had three options for insurance:
- Homeowner’s policy
- DP-3 landlord policy, or
- A hotel/motel business policy.
It’s important to understand that virtually all insurance companies use standard forms approved by the Insurance Services Office (ISO). There is a homeowner’s (HO), there is a landlord/dwelling’s (DP), and there is business’ (CP). The way these forms and coverages differ is through endorsement to them. Some endorsements reduce coverage, and some endorsement enhance coverage.
Rented.com: Could you talk more about each type?
DP: Sure! Here's an overview:
Homeowner’s policies or forms were created and designed for a property that is owner-occupied, a primary residence. It’s great for the protection of a primary home against property damage (i.e., fire, theft, water damage, etc.), and it carries personal liability for the owner and their family in the event they are personally found liable for bodily injury or property damage.
The problem is that it excludes, or does not cover, business activity or renting of the home if it’s not occasional and used as the person’s residence. When someone regularly rents a vacation rental, it’s not their residence or where they live, and it’s not typically occasional.
These are huge gaps that simply can’t be ignored. For example, if a renter damages your home or claims bodily injury against you, the claim could be denied.
In fact, many homeowner insurance carriers will drop insureds when they discover the home is being rented on a short-term basis, typically 30 days or less at the time. If this happens, they’ll just tell you, you’re not covered.
Rented.com: Interesting. What about landlord insurance?
DP: It’s another form of insurance that might not necessarily cover everything.
DP-3 Landlord Insurance:
Landlord policies or forms were created and designed for a property that is rented to others, or one that is “tenant” occupied. It is what you want to carry if you have a rental property.
Rented.com: So what then is the gap, as a vacation rental is a rental property?
DP: There are a few key issues or gaps here.
First, a landlord policy carries what’s called “premise liability,” which covers bodily injury at the premise only.
It does not extend beyond the premise. So, if the roof collapsed on a tenant, then yes, in theory, there is bodily injury coverage for the owner.
But what happens if the guest is injured on a bicycle or canoe provided by the rental? Or if the guest brings their dog, and the dog bites someone off premise? Or if the tenant assaults a neighbor, and it’s tied back to the owner?
Secondly, a landlord policy also has this same business activity exclusion.
If a renter accidentally burns the vacation rental down, and the insurance carrier decides this person was a “guest” who paid you money to stay there for a weekend, and was not a “tenant/long-term renter,” they could deem this a business activity, and they could deny the claim.
These are two of many gaps in a landlord policy, and it’s simply too risky to roll the dice.
Rented.com: Is hotel/motel and business insurance any better then?
DP: Not exactly.
Hotel/Motel & Business Insurance:
This policy and forms are used for a hotel or motel. Since it’s a business policy, it clearly does not exclude business activities. It’s also
significantly more expensive than a homeowner’s or landlord policy and carries many coverages a vacation rental does not need—like signage, property in transit, refrigerated products, salespersons samples, and many more.
Also, it does not tailor or endorse coverage that may be relevant to a vacation rental. It excludes watercraft liability and liquor liability, and it carries a vacancy clause if the property goes 60 days unoccupied.
Rented.com: We’ve heard about bed & breakfast policies. Could that work for a vacation rental?
DP: Unfortunately, not exactly. While yes, a B&B policy is special, it is also still not tailored for a vacation rental. Typically the owner must be onsite. It’s often guaranteed replacement cost as many B&B’s are historic buildings. It carries food liability coverages, and is terribly expensive.
Rented.com: Well, it’s apparent that there is a market for a special insurance policy designed specifically for short-term vacation rental properties—one that is a combination of a homeowner’s, a landlord, a business, and a B&B policy. Does that exist?
DP: That was the problem! It didn’t exist!
A few carriers had tried to endorse a homeowner’s policy and landlord policy, but still, there were too many gaps.
Domestic insurance carriers are traditionally slow to adapt to new markets, and they often don’t want to get involved with specialty insurance, as it’s seen as very high risk.
An insurance company needs to collect more premium than it pays out in claims. The higher the risk, the higher the premium.
A hotel/motel is higher risk than a primary home, both from a property and liability standpoint. So it makes sense that a hotel/motel policy is more expensive than a homeowner’s policy. It’s that simple.
Rented.com: So what carrier will insure a specialty risk?
DP: Lloyd’s of London is the world leader in insuring specialty risk, an emerging or unusual market.
We knew we had a market and a need for a specialty insurance program, and Lloyd’s was the perfect insurer.
Because Proper is a Coverholder at Lloyd’s, we are approved to submit business into the Lloyd’s market. But instead of submitting a single risk (e.g., the Empire State building), we submitted a program, a policy that all vacation rental owners could purchase.
We were able to create a policy that covers all the exposures of a vacation rental. And we able to get very competitive rates, typically about 35% more than a standard homeowner’s policy.
Rented.com: What does the policy cover?
DP: Well, as the owner of a vacation rental, you’ll need to insure four specific areas:
- your building(s)
- income, and
This would be similar to a homeowner’s policy. You need to insure the actual property itself, the building(s). We were able to get the highest coverage form, (special, all-risk), with replacement cost valuation (new for old) in the event of a claim. And since it’s written as a business, there is NO business activity exclusion. This means that at the time of a loss, it doesn’t matter who is staying at the property. It can be you, the owner, your friends or family, or paying guests. Again, because it’s written as a business, it just doesn’t matter.
This also would be similar to a homeowner’s policy. The contents are all of your stuff at the rental: furniture, electronics, linens, dishes, etc. We enhanced this coverage form to match that of the building (all-risk, replacement cost). But we knew theft would be an issue with vacation rentals, so we put NO limit on theft, meaning theft is covered to the full limit of your contents.
Business Income Coverage:
This would be similar to a hotel/motel business policy. Income coverage is written as “actual loss sustained,” not fair market value as found in a landlord policy. We know how much revenue vacation rentals generate, and that needs to be protected. We also know that it can be 18-24 months before a vacation rental would become whole again after a total loss. That’s why we put no time limit on business income. You are only subject to the limit you choose.
This also would be similar to a hotel/motel business policy. It carries $1,000,000/$2,000,000 in commercial general business liability. This is the highest form of liability coverage a business can purchase. Except, we have a few key endorsements to tailor it to vacation rentals: We remove the watercraft liability, so canoes, kayaks, paddleboards, and boats 10 HP or less are all covered from a liability standpoint. It covers pools, spas, bicycles, and so much more. We even remove the liquor liability exclusion. Yes, that means if you wanted to furnish a few bottles of wine at the rental for your guests to enjoy on their stay, you are covered.
Rented.com: This sounds too good to be true.
DP: It’s not. The truth is, after years of back and forth, Lloyd’s agreed to write the program and price it very competitively to get business. Yes, we have claims, just like any other insurance carrier, but we feel good about vacation rental owners and their properties. You take care of your properties, are professionals, and all around are good people!
Rented.com: How can homeowners and property managers get insured?
DP: Keep up the good work, and keep claims low! It’s good for everyone.
If anyone has any questions, please feel free to reach out to Proper Insurance anytime. You can go to our website or call (888) 631-6680 to get a quote online in five minutes or to talk to an expert about the coverage you currently have. We are licensed in all 50 states.