One the most common questions we get from customers who want to rent out their homes to guests is a very understandable one: “I have homeowners insurance, so why do I need vacation rental insurance?” It’s a great question that identifies a need to clarify a misconception in the industry as a whole. People get into the vacation rental or home-sharing game not realizing that they need more protection than they currently have under a homeowners policy. In this article, we're talking all things homeowners insurance and why it can't protect your vacation rental home in the event something goes wrong during a guest's stay. Let's dive in!
What is Homeowners Insurance?
First things first: what is homeowners insurance exactly? Homeowners insurance is designed to protect homeowners from the risk of loss to their residences from unforeseen events. For example, if a tree in your front yard falls on your garage during a thunderstorm or if your roof is damaged during a tornado, your homeowners coverage may pay for the necessary repairs.
Homeowners insurance also contains a personal liability component, which protects you and your family from third party liability claims such as bodily injury or property damage. (We’ll discuss that in more detail down below.)
We've laid out the main reasons why your homeowners insurance policy can’t provide the right coverage for your home that vacation rental insurance will when you're renting it out to short-term visitors.
#1. Renting Out Your Home Requires Commercial Coverage
It’s easy to understand the appeal of getting into the vacation rental game. Thanks to the rise of the gig economy, more and more people are looking for ways to supplement their incomes. Listing your home as a vacation rental on sites like Booking.com, Airbnb, Vrbo and the like is a great way to do just that.
This is where the misconception arises: renting out your home on a short-term basis is considered a business activity. Therefore, you would need commercial insurance to make sure you’re protected from the specific risks you’ve now opened yourself up to. With business-related activities like renting out your property, your coverage needs change significantly because the risks involved also change. Most importantly, you’ll quickly discover that your homeowners policy typically excludes losses related to business operations.
#2. Homeowners Insurance Typically Doesn’t Cover Renter-Related Property Damage
Here’s the long and short of it: homeowners insurance isn’t designed to cover short-term rental use, which is what your vacation rental business is considered. That being said, one of the unique risks you face with a short-term rental is guest-related property damage. Typically, your homeowners policy won’t cover damage caused by guests, which means that should a renter damage your property, you’ll have to foot the bill to repair or replace your property.
So, if you have a rambunctious renter who sets your couch on fire or leaves a gaping hole in the wall, your homeowners claim would most likely be denied. You could leave said naughty guest a bad review on the home-sharing app you used to list your vacation rental, but it would do little to compensate for those hefty (and unexpected) out-of-pocket costs you just accrued.
#3. Commercial Liability is Different than Personal Liability
“So I’m all good!” you say to yourself as you hurry to click out of this article.
Not so fast! While commercial general liability and personal liability have similarities, your need for them changes depending on how you’re using your property. And that makes all the difference when it comes to insuring your short-term vacation rental.
What is Personal Liability?
Personal liability coverage will protect you up to your policy limits from lawsuits related to third party accidents and bodily injury incidents on your property as well as property damage.
Let’s say a friend comes over and their child falls off the swing set in your backyard. If this person decides to sue you (what a friend!), they’re holding you personally accountable for their bodily harm that occurred while on your property. In that case, your homeowners policy, which most likely includes personal liability coverage, should protect you from your former friend’s claim.
What is Commercial General Liability?
Commercial general liability, on the other hand, does indeed protect you from third-party claims related to injury, accident and property damage (as well as libel and slander) but specifically in regards to business operations. Once again, operating a short-term vacation rental out of your home qualifies it as a business, therefore requiring the need for commercial general liability coverage.
If a renter slips, falls and breaks his wrist on your driveway during his stay, your homeowners insurance (and the personal liability coverage within it) won’t be enough to cover you should that renter send you a medical bill or take you to court…or both.
Fortunately, a CBIZ Vacation Rental Policy not only contains commercial general liability coverage, but we also offer personal liability coverage for those homeowners who both rent out their homes and use them as their primary residences.
#4. Homeowners Coverage Can’t Protect Against Lost Income
Another major difference you’ll find in regards to homeowners coverage and commercial rental insurance is loss of income coverage.
You got into this business to make money. You could be trying to pay off your mortgage, to send a kid to college or to create a passive revenue stream for bankrolling your jet-setting lifestyle. But suddenly--disaster strikes! Your property is badly damaged by a fire or water or vandalism, so much so that you are now unable to rent out your home for months. Not only would your losses not be covered by homeowners insurance, but now you would be unable to make that extra income while you wait out repairs.
Fortunately, commercial coverage like that found in a vacation rental insurance policy has a lost income component built in to the policy. That way, should your property become uninhabitable and you’re facing down months without revenue, you’ll be covered. You’ll essentially be paid to wait until your repairs are completed. Whew!
Homeowners Policies Typically Don't Cover Business Activities. That Includes the Short-Term Renting of Your Home
The reality of all this is that homeowners policies are designed for residential owners who are not engaged in the short-term rental of their home. Renting your vacation home is a business activity, so losses related to business activities are typically excluded from coverage under homeowners policies.
Clear as mud? Need more clarification about the differences between your homeowners insurance and vacation rental insurance? Contact a trusted CBIZ Vacation Rental Insurance Professional today to discuss the coverage needs of your vacation rental home!