Renting Out That Extra Room: Know Your Risks

Home rental clearinghouses such as Airbnb and VRBO make it easy for homeowners to rent out a spare bedroom or a second home when they aren’t using it. This might sound like a good way to earn extra money. Before diving in, consider the risks and your insurance coverage.
VRBO and Airbnb

VRBO handles mainly second homes/apartments that owners want to rent out to generate income. Airbnb primarily lists vacant rooms, in-law units or accessory dwelling units (ADUs) in or on the owner’s residence. Both scenarios create security and risk exposures for property owners.

Homeowners who sign up with VRBO have a choice of two levels of service: do-it-yourself or property management. In a do-it-yourself arrangement, the homeowner creates the VRBO listing for their home, answers inquiries and handles booking. Alternatively, VRBO will handle these chores for a higher percentage of the rental fee. However, the responsibility for insuring the property and any other risks of renting remains with the homeowner.

Airbnb offers homeowners a $1 million Host Guarantee. This guarantee provides protection for up to $1 million in damages to eligible property “…in the rare event of guest damages which are not resolved directly with the guest…” The guarantee applies only in certain countries (including the U.S.). However, Airbnb cautions that the guarantee does not apply to cash and securities, and it provides only limited coverage to high-value and difficult to replace items such as jewelry, collectibles and artwork. Further, it does not apply to damage that occurs in common areas, or wear and tear.

So the Airbnb Host Guarantee meets your insurance needs, right? Wrong. As Airbnb says, “The Host Guarantee is not insurance and should not be considered as a replacement or stand-in for homeowners or renters insurance.” In addition to kicking in only after negotiations with your guest fail, it lacks two important coverages you find in your homeowners or renters policy: medical payments coverage and liability coverage.

Airbnb states specifically that its Host Guarantee does NOT cover liability. So if you rent your spare bedroom to an Airbnb guest who falls on your stairs and breaks her arm, will you have coverage? The answer to that depends.

Homeowners, Vacation Home or Landlord’s Policy?

Homeowners policy: If you are living in the property and occasionally rent out a spare room or in-law unit, your homeowners policy might provide the coverage you need.

The medical payments portion of your homeowners policy will pay up to a specified amount toward the medical or funeral expenses of a third party (person not covered by the policy). That person must suffer accidental injury or death on your property for coverage to apply, but he/she does not have to prove that you were liable. A basic homeowners policy will pay up to $1,000 for medical payments. You can increase this amount, but even limits of $5,000 will only make a dent in a major claim. However, it can help prevent minor incidents from escalating into major disputes and claims.

The liability portion of your homeowners policy provides more coverage. It will cover your costs if a third party is injured on your property or suffers a property loss (such as theft). Coverage applies even if you are negligent, but not for your “intentional acts.”

Read your policy carefully to ensure it doesn’t exclude coverage for rental activity. Most homeowners insurance policies exclude coverage for liability due to “business pursuits.” To date, we don’t know of any insurers denying claims on the basis of an Airbnb rental being a business. However, if you rent frequently, you might want additional liability coverage or specialized innkeeper’s coverage.

Vacation home policy: If you plan to rent out a vacation or second home, you might not want to rely on your vacation home policy for coverage. Those policies are designed to cover a property that will be occupied by the owner, not one rented out for income. A homeowners or vacation home policy will cover your invited guests for injury they receive on your property, but your insurer might not consider a renter an “invited guest,” leaving you with a potentially serious coverage gap.

Landlord policy: A landlord policy will cover you for liability you incur if a renter is injured on your property. It will also cover you for loss of rental income if fire or other insured casualty damages your property and prevents you from renting it out. One thing you will want to check, however, is your policy’s definition of a rental. Many policies consider a rental property one that is rented out for at least a month’s time. If you are renting your property out on a shorter-term basis, you might lack the coverage you need. An innkeeper’s policy might prove a better choice.

If you’re considering renting your primary residence or a second home, we can help you evaluate your existing insurance policies to see if they will meet your changing coverage needs. You should also check your local zoning. Many localities restrict short-term rentals to certain areas. Renting out your property where it’s forbidden could give your insurer a reason to deny a claim.

Any property owner considering renting out space—whether in your primary residence or a second home—should also consider buying an umbrella liability policy.

An umbrella liability policy extends the coverage of your homeowners and auto policy. Coverage begins once you reach the limit of your underlying auto or homeowners policy (whichever applies), up to the policy limit. An extra $1 million in liability coverage can cost you as little as $200-$300 per year. Your actual cost depends on such criteria as the amount of coverage, the insurance company issuing the policy and your own “personal risk factors.” These include the number of traffic tickets you’ve gotten in the past few years, and possibly your credit report. You can buy limits of up to $5 million, which might make sense for families with unusual risk exposures, such as a high net worth, celebrity or a high-profile position.

For more information on protecting your home and your finances from rental-related risks, please contact us.