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How Does Running a Vacation Rental Impact Your Homeowners Insurance?


Photo Courtesy: [Klaus Vedfeldt/Getty Images]

Vacation rentals are a unique type of property. They’re not their owners’ primary residences — but their owners may choose to live or vacation in them occasionally while renting them out to other travelers in need of lodging throughout most of the year. Depending on how often an owner uses it, their vacation rental could rightfully be considered both a home and a business.

Owning and operating a vacation rental can be a lucrative prospect and an enjoyable endeavor in many ways, but the logistics of figuring out an appropriate insurance policy for this nontraditional type of property can complicate things. Homeowners insurance policies typically cover a person’s primary residence, and landlord insurance covers a rental property that houses long-term tenants and isn’t owner occupied. But what kind of insurance policy covers the unique case of a vacation rental?

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Homeowners insurance covers the homeowner’s use of the specific home for which the policy is purchased. This home is almost always the owner’s primary residence, as homeowners insurance policies are designed to cover owner-occupied properties. Any covered events that result in damage to the structures on the property, any injuries that occur on the property and any damage that the homeowner causes to someone else’s property are typically covered under regular homeowners insurance.

Note that a vacation home is a second home, so it’s not the owner’s primary residence. This means that the policy on the primary home won’t cover the second home; when you have a vacation home, it needs its own separate homeowners policy. According to Allstate, the liability coverage on your primary policy may extend to your vacation home, but the elements of the policy that cover damages to the actual structure and the contents inside likely won’t. For the highest level of protection, purchase a second policy for your vacation home — your mortgage lender might also require this, regardless.

Homeowners insurance, even for a regular primary residence, doesn’t automatically cover some of the most damaging types of natural disasters. Wind damage, flood damage, hurricane damage and earthquake damage are often excluded from coverage in a homeowners insurance policy. Considering that vacation rentals are more likely than primary residences to be located in hurricane- or flood-prone beach towns, it’s vital to purchase sufficient additional riders on a second home’s separate policy to cover damage stemming from the types of natural disasters that are more likely to occur.

Homeowners insurance typically doesn’t cover business endeavors, and this can be an area where things get particularly murky if you decide to rent out your vacation home for short-term stays. Using a home as a vacation rental often constitutes business activity because the home is generating income for you, so your basic homeowners insurance policy may not cover anything if, for example, a guest gets injured in the pool. Because using a home for a business is riskier than simply owning a home, again, it’s vital to purchase the proper type of insurance to ensure your property is covered appropriately.

Because homeowners insurance isn’t typically intended for income-generating properties that don’t have an owner living onsite, this type of policy may not include any sort of income protection. That’s why there are insurance policies designed specifically for landlords. This type of insurance features provisions designed to protect properties that are tenant occupied.

Vacation Rental Coverage Options

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What’s the insurance situation when you own a vacation home and want to open it up to short-term rentals, not use it for yourself or a long-term tenant? Vacation rental owners who opt to use services such as Airbnb and VRBO may be enticed by the insurance available through those specific platforms. Both companies offer vacation rental owners $1,000,000 in primary liability coverage for the extent of the stay of any guests who book using the platform. This is a very limited type of insurance that may not cover the full scope of your needs, especially if you don’t always use an online platform to book rentals.

Primary liability coverage only covers liability and damages that happen accidentally. If a guest trips and ends up breaking a balcony, falling and breaking a leg, this type of insurance could be extremely useful. However, if two guests get into a fight and one pushes another over the balcony, this type of insurance is useless. A fall is an accident, and a fight is not. Primary liability insurance doesn’t cover events that aren’t accidents.

Whether you use a short-term vacation-rental platform to book stays in your home or not, you may need to purchase what’s called a commercial liability policy. This reflects the fact that income-generating (or commercial) activities are taking place on the property, and some of these policies are designed specifically for homes that house short-term renters. You may need to purchase this type of insurance separately from the vacation property’s homeowners insurance or add it as an endorsement to your existing policy. Some companies also offer commercial short-term rental coverage that’s designed to replace your existing homeowner policy. Whatever option you decide works best, it’s vital to talk with an insurance agent to determine appropriate coverage limits that ensure your property is sufficiently protected.

Vacation Rental Considerations

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Well-known companies such as Farmers, Allstate, Nationwide and Progressive offer vacation rental insurance policies. There are also companies like Proper Insurance and CBIZ that specialize in dedicated vacation rental insurance. While the policies available from these companies are designed to accommodate the specialized conditions at vacation rentals, be aware that a vacation rental policy can cost as much as or more than your primary homeowner policy.

As is the case with homeowners insurance, there’s a wide variety of coverage options for vacation rental insurance. The cost of the insurance premium also varies greatly from company to company. The length of time you spend at the property will also play a role in determining the cost of the policy. Some companies charge less if a homeowner lives in the home for most of the year. Others require the property owner to purchase an additional homeowners insurance policy (in addition to the short-term rental policy) if the home is the owner’s primary residence for too many months of the year. Having multiple people stay in the home increases the likelihood of damages occurring that the insurance company will have to cover. Most companies set prices for vacation rental insurance based on the frequency at which the property is rented.

Speaking to an insurance agent is a great first step for deciding how much coverage you need and what kind of coverage to purchase. Different owners use their vacation rentals in different ways, and there are unique risks in certain areas of the country. A licensed insurance agent can help you find the right type of coverage that takes your home’s location, your living situation and your rental plans into consideration, providing the appropriate level of coverage at a cost that works for you.

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