Most people are oblivious to the risk. They have a couple of spare bedrooms or a mother-in-law suite but the mother-in-law rarely visits (thankfully). Maybe they travel a lot and their home is left empty.

The brilliance that is Airbnb is that it enables people to make money from the unused or underutilized space in their homes. Airbnb has created an entirely new category in the hospitality industry, that of home sharing.

In the early days of Airbnb, the hosts were mostly people renting rooms in their homes. This was the original idea behind Airbnb and is still a key component of their mission statement: the feeling of being at home wherever you may be in the world.

 

New Sharing Economy = New Risks

Disruptive new businesses introduce new, unforeseen risks. Insurance is a neat little world ruled by actuaries and underwriters. They don’t get out much. They’re not exactly known for their innovative approaches to new ways of doing business.

No sir. They like the status quo. They like the known. The predictable makes them happy.

Actuarial science is about using past data to predict future events. With historical data, one can predict what might happen in the future as long as no one introduces new variables, i.e. no one disrupts the status quo.

Actuaries develop models to predict loss ratios for different classes of risk. Underwriters then select which risk category your home should belong and this determines the policy type you purchase and the premium you pay.

Before Airbnb, there were two main risk classes for homes: primary homes and vacation homes. Vacation homes were (and still are) considered slightly higher risk because you frequently have guests, and if something happens to those guests, they might sue. The added risk means higher premiums.

But what happens in this new sharing economy? Now we have homes that are a combination of primary residence and vacation home. How are the actuaries going to predict losses? There is no historical data. How are the underwriters going to choose if your home is a primary residence or a vacation home?

 

Farmers Insurance and the Sharing Economy

An innovative insurance company might quickly identify home sharing as a third risk class and develop a new product to meet the needs of its customers. Farmers is not an innovative company.

What Farmers has done is take a very conservative view to Airbnb hosting. They view this activity as unexpected, unanticipated risk and rather than figure out a mutually beneficial solution for themselves and their customers, they are trying to find ways to deny coverage to their customers who rent space on Airbnb.

 

Farmers Homeowners Insurance and Airbnb Risks

What protection does your Farmers home insurance policy provide should an incident occur while you are hosting Airbnb guests?

A Farmers home insurance policy has 2 main components:

Your Property

This is the part of the policy that outlines your coverage in the event of damage to your home (and/or possessions). The possible added risks you assume as part of your Airbnb hosting include the following:

  • A guest leaves a candle burning, it sets fire to your furniture and burns your house down (or destroys part of it).
  • It’s party time. Without your knowledge or consent, the host throws a party and your home is trashed or if you’re lucky they just cause $14k worth of damage to your beautiful hardwood floors.  
  • You’ve fallen foul to a scam. Your supposedly nice, sweet Airbnb renters rob you blind and clean out all of your valuable possessions.
  • A guest brings a pet which pees all over your house and it’s not just average pee but that really stinky cat pee or maybe even a baby goat (I know it’s a kid). And yes, this did happen!  

 

Family Liability and Guest Medical Protection

The liability section describes your coverage in the event a third-party makes a claim against you for damages caused by an incident that occurred on your premises. The possible added risks you assume as part of your Airbnb hosting include the following:

  • A guest slips and falls on the icy pathway leading to your house.
  • A guest trips and falls down a steep staircase.
  • A child falls and smashes their head off of your coffee table.
  • One of your renters eats something left in your fridge and ends up hospitalized with food poisoning.

These risks are possible even if you never rent on Airbnb. Maybe you allow friends to stay at your place or use house sitters while you’re away. Insurance companies allow for occasional risks when they provide you with a policy and price the premium.

However, when you start hosting on Airbnb, your potential risk increases dramatically. The more guests you have, the greater the chance of potential incidents. This is where the problem with traditional homeowners insurance policies lies. The actuaries and underwriters didn’t predict you would have so many visitors. Your Airbnb hosting has changed the risk class.  

But nevermind what the Farmers employees did or didn’t do. You have the policy and you’ve paid your premiums. Maybe the risks have changed a little bit but that’s not your fault right? You must still have coverage right? Maybe yes and maybe no. The devil is in the policy language and the way it’s interpreted by Farmers.

 

Farmers Claims Adjusters and Short-term Rental Risk

Insurance companies are in the business of making money. They do so by selling insurance for risks that are in some way predictable. When the risks change, they take a conservative approach to claims handling to protect their profit margins.

Renting rooms through Airbnb presents a different risk category to the one assumed when the policy was written. So while your Farmers policy doesn’t specifically exclude coverage for losses arising from your Airbnb hosting, it does contain language that can be used to deny claims.

 

Where in the policy could they deny claims?

The point of contention with your Farmers policy revolves around the issue of whether or not your Airbnb hosting is a business. Homeowners insurance policies typically exclude all claims from business activities because the risks of a business are different and should be insured under a separate business insurance policy.

Some homeowners policies provide a minimal amount of coverage for home-based businesses. This is meant for people running a consulting business or working remotely as a salesperson. Whatever the position, it’s meant to low risk with little to no customer or client contact. It’s not meant to cover a hospitality business.

There are several clauses within a Farmers home insurance policy where coverage for Airbnb rentals could be denied. Our review has been conducted on the standard Farmers Smart Plan Home Insurance Policy (form 56-5460, 1st Edition, 6-15). Your policy may be different depending on your state and any additional coverages that have been added by your agent.

 

Farmers Property Damage Insurance for Airbnb Rentals

In the property section of your policy, there is a clause in Section 1 titled “Coverage B: Separate Structures” that states:

We do not insure:
1. separate structures which are intended for use in business or which are actually used in whole or in part for business purposes by an insured or any other person;
2. separate structures used principally for the storage of business property; or
3. separate structures rented or held for rental to any person who is not a tenant of the dwelling unless used solely as a private garage.

Should you own an additional dwelling unit, e.g. a separate unit meant for guest accommodation that is still on your premises, this clause could deny you coverage should your Airbnb guests damage that unit.

How the Farmers policy would respond if your main home was damaged, is less clear. There are no specific exclusions for damages caused to your main home while renting rooms on Airbnb. However, as we discuss below, this might be irrelevant due to the overall policy conditions governing the use of your property for business-related activities.  

 

Farmers Liability Coverage for Airbnb Rentals

The liability section of the policy contains several clauses relating to the denial of coverage for “business” activities and pursuits.

“We do not cover bodily injury, property damage or personal injury which arises from, during the course of, or in connection with any past or present business engaged in by any insured or conducted from any insured location. This includes, but is not limited to, any warranty, any act, or any duty rendered, promised, owed or implied to be provided because of the nature of the business.”

However, this clause then goes on to state:

“This exclusion does not include the rental or holding for rental of that part of the residence premises not occupied by any insured.”

So it’s possible that Farmers Insurance might provide coverage should your Airbnb guests suffer property damage or bodily injury while on your premises. Farmers further explains the extent of their coverage this separate clause titled “Rental Property” in the Liability Exclusions section:

“We do not cover bodily injury, property damage or personal injury which arises from, during the course of, or in connection with the rental or holding for rental of any property or any part of any premises by any insured to any party. This exclusion does not apply to the rental or holding for rental of that part of an insured location which is rented or available for rent:

a. to that part of the residence premises not occupied by any insured;
b. on an occasional basis for sole use as a residence;
c. to no more than two roomers or boarders at the same time for sole use as a residence;”

This clears up some of the confusion. We now know that the Farmers Smart Plan Home Policy will not provide coverage for guests staying in your main home – i.e. renting private rooms. It may provide coverage if you are renting a separate unit on Airbnb but the use of the term “occasional” makes it a grey area.  

Damage to Property of Others
The “business” exclusion pops up once again in a clause referring to damage to property of others. This clause would determine whether your insurance would cover claims made by your guests if their personal property was damaged or destroyed.

“We will not pay for property damage which arises out of any business engaged in by an insured;”

 

Is Hosting on Airbnb Really a “Business”?

This is an essential question that needs a clear answer. You may claim that you are not operating a business. Farmers will probably claim that you are. Farmers’ definition of “business” in the first section of their policy doesn’t help clarify the situation. It says:  


Business means any full or part-time employment, trade, profession, or occupation, or a commercial, mercantile or industrial undertaking of an economic nature. It does not matter whether it is continuous or regular or is a secondary or supplemental source of income or is an insured’s principal means of livelihood. Profit and profit motive are irrelevant.”

It would appear that Farmers considers your Airbnb hosting a business and thus, most likely excludes coverage for your Airbnb hosting unless you are hosting guests only on an “occasional” basis.   

Farmers General Policy Conditions

There are 2 more clauses of your Farmers policy that you should give you cause for concern.

Prior to purchasing your Farmers Homeowners Policy, were you asked if you were conducting any business from your home? If you answered no, and Farmers finds out that you are renting space on Airbnb, your policy could be canceled and any claims outstanding denied.

Misrepresentation, Fraud or Concealment

“We reserve the right to deny coverage for any loss or damage or claim for injury or damage or, as permitted by law, to void this policy, including but not limited to from its inception, if you or any insured has, at any time either before or after a claim or loss:
(1) negligently or fraudulently concealed, omitted or misrepresented any material fact or circumstance:
i. as permitted by law in the application for, change to or renewal of this insurance; or
ii. in the presentation of a claim or loss; or
iii. during our investigation of a claim or loss”

Cancellation
“We may also cancel for one or more of the following reasons, in which case we will notify you at least 30 days before the date cancellation takes effect:
ii. discovery of fraud or material misrepresentation in the obtaining of the policy or in the presentation of a claim thereunder;
iii. discovery of: (1) an act or omission; or (2) a violation of any condition of the policy; which occurred after the first effective date of the current policy and substantially and materially increases the hazard insured against;
iv. a material change in the nature or extent of the risk, occurring after the first effective date of the current policy, which causes the risk of loss to be substantially and materially increased beyond that contemplated at the time the policy was issued or last renewed;.”

What this means is that if Farmers decides that your Airbnb hosting represents a substantial change in risk, which was not assumed when the policy was issued, they will cancel your policy. Furthermore, if you submit a claim, Farmers may decline it saying you concealed your Airbnb hosting activities.

 

How do you properly protect yourself?

The best course of action would appear to be calling your Farmers agent to tell them about your Airbnb hosting. Most likely you will be told that Farmers won’t cover your Airbnb hosting.

It seems clear that your Farmers homeowners policy will not provide coverage while you are hosting Airbnb guests. This might change in the future, but for now, you have 4 choices:

  1. Stop renting your spare space on Airbnb;
  2. Continue renting space on Airbnb but find a new insurance company, one that provides coverage for both homeowners and short-term renting;
  3. Keep your Farmers policy and find an additional policy to cover your short-term renting;
  4. Keep your Farmers policy and rely on Airbnb’s Host Guarantee and Host Protection Insurance for your hosting;

Read our article on insurance for Airbnb hosts and decide which option best fits your situation.