It’s every Airbnb host’s worst nightmare. They return home to find out that their guests have caused serious damage to their beloved home.

Sometimes it’s accidental damage and other times more malicious such as the numerous cases of groups renting houses on Airbnb as venues for wild parties. Other times the damage isn’t significant enough to merit a national news story but the consequences to the homeowner are still painful.

Some of the headlines make scary reading such as this one

House trashed, wrecked, destroyed by guest

Minneapolis woman says Airbnb renters trashed her apartment

Business Exclusion on Homeowners Policies

Most hosts are blind to the financial consequences of such events. Some may think their homeowner’s policy will kick in if there’s substantial damage to their property. Think again. Insurance companies consider your Airbnb hosting a business activity and every major home insurance provider excludes coverage for claims resulting from business activities.

State Farm Insurance Company is the largest provider of Home Insurance in the United States. State Farm’s home insurance policy explicitly excludes business activities.

“insured location” means….any part of a premises occasionally rented to an insured for other than business purposes;

Unless you have a specific endorsement on your homeowner’s policy that covers damage resulting from business activities, any claim you submit relating to damage caused by a guest will likely be denied. In addition, any lawsuit submitted against you by an Airbnb guest suffering an accidental injury on your property will also be denied.

SECTION II – EXCLUSIONS
1. Coverage L (personal liability) and Coverage M (medical payments to others) do not apply to:
b. bodily injury or property damage arising out of business pursuits of any insured or the rental or holding for rental of any part of any premises by any insured.

Compounding the problem, many hosts report having their homeowner’s policies canceled after calling their State Farm agent to inquire about coverage for short-term rentals. The decision makers at State Farm have also apparently read the stories. They don’t know how to properly underwrite the additional risk of homesharing so they are choosing to avoid it completely.

 

Which Companies Provide Short-term Rental Insurance?

The second and third largest homeowners insurers, Allstate and Farmers, haven’t taken such drastic steps. But if you have a policy from either of these companies, don’t think you’re safe. Just because you haven’t had your policy canceled doesn’t mean they will cover any claim resulting from hosting paying guests. Both of these companies also include exclusions for business activities in their standard homeowners’ policies.

If you’re the risk-taking type you might be thinking to yourself, “How will these companies ever know that I’m renting to guests through Airbnb or VRBO?” These companies are now so aware of the prevalence of short-term rentals that, upon receipt of a claim, they will check Airbnb and VRBO to see if the home is listed. If they find it, they’ll deny the claim based on the business activities exclusion.

A recent case in California highlights this problem. A homeowner submitted a claim for damages after a storm caused a tree to fall on her house. Her insurer, Travelers Insurance, denied the claim after they found her house listed on Airbnb despite the fact the damage was completely independent of her Airbnb rental business. This case is currently being heard in court.

Airbnb Listing Led To Wrongful Coverage Denial, Suit Says

Airbnb Host Guarantee

If your insurance company isn’t protecting you, who is? Airbnb claims to have you covered with its Host Guarantee of $1 million. According to the website, the host guarantee provides “Peace of Mind. Guaranteed” but just a little further down the page also states: “The Host Guarantee should not be considered a replacement or stand-in for homeowners or renters insurance.”

If Airbnb’s host guarantee is not meant to fill the gap caused by the business exclusion on your home insurance policy, then what good is it? Judging by some of the stories reported by hosts, the host guarantee is nothing more than a marketing tool and trying to make any claim for compensation through this program is nothing more than an exercise in frustration.

Related Article: Airbnb Host Guarantee: Peace of Mind or Absolutely Worthless?

It’s unclear as to what Airbnb was trying to accomplish with the Host Guarantee. It would appear that the program was implemented in response to their acknowledgment that standard homeowners policies do not cover damages caused by paying guests. But the implementation and administration of the program would lead most Airbnb hosts to conclude that it’s nothing more than a marketing gimmick.

Airbnb appears to confirm this conclusion in the Host Guarantee Terms and Conditions. Within section VI. Acknowledgments and Agreements by the Host, you will find this statement:

“Airbnb provides Hosts with the Airbnb Host Guarantee benefits described herein solely for the purpose of promoting use of the Airbnb Platform by building customer loyalty and strengthening customer confidence as to use of the Airbnb Platform.”

 

How do you protect your home?

If your homeowner’s insurance policy won’t cover you, and Airbnb’s Host Guarantee is about as watertight as a teabag, what is the solution? How can continue making money from renting rooms or your entire home without the risk of financial disaster hanging over your head?

This is an evolving area in the insurance business and there really aren’t any ideal solutions at the moment. There are, however, a few companies working on new products for what is essentially a new industry.

 

Vacation Home Insurance

For owners of vacation homes, there are special insurance policies designed to cover short-term rentals. Farmers Insurance is one of the largest providers of seasonal and vacation home insurance. The policy can be thought of as a combination of a homeowners insurance policy and a small business policy providing protection for typical homeowners risks as well as that assumed when renting the house to guests.  https://www.farmers.com/home/seasonal-vacation-homes/

But homesharing and vacation home rentals are two different things. If you’re renting out rooms in your house or your entire primary residence on Airbnb or VRBO, then the vacation rental policy might not be the ideal option. In fact, it may not be an option at all. {check this}

 

Business Insurance

Some insurance companies may offer an option to add a business insurance endorsement to a homeowners insurance policy. This would essentially negate the business activities exclusion from the policy. All of the largest homeowners insurance companies offer home-based business insurance so it might be an option to discuss with your agent or broker.

However, small business, home-based business, insurance is not designed to protect against risks from renting accommodation to guests. Even if this is an option, the coverage is likely to be inadequate and the premiums expensive.

 

Specialty Homeowners Replacement Insurance

The word “innovation” does not spring to mind when one thinks of the insurance industry. Insurance companies are slow to react when faced with new challenges such as those presented by the sharing economy.

Rather than seeing these challenges as an opportunity to brand themselves as innovative or progressive (pun intended!), they take a conservative position knowing it is very difficult for a new company to threaten their market position. Insurance is a highly regulated and protected industry and it’s no surprise that new entrants to the industry are few and far between.

However, two companies are aiming to fill the void with policies designed especially for short-term rentals.

Proper Insurance

Proper Insurance is a licensed insurance agency providing vacation home insurance backed by Lloyd’s of London. Their policy differs from traditional vacation home insurance in that it also provides coverage for short-term rentals of primary residences. Purchasing a policy from Proper Insurance means you are covered whether you are renting to guests or staying in your home – i.e. it replaces your existing home insurance policy.

Proper Insurance is an excellent solution for homeowners wish to rent out their entire property on Airbnb or VRBO while they stay elsewhere. It’s also a solution for people with secondary dwelling units (also known as month-in-law apartments) that have separate entrances and separate facilities from the main living space.

For people renting rooms on Airbnb, Proper Insurance may not be a good solution. Proper Insurance will not provide coverage where you have shared space with your guest. They require complete separation from the rented space and main living area. So unless you can lock off your guest accommodation from the main house, Proper Insurance will decline your application.

Slice Insurance

Slice in a new company based in New York. They provide on-demand insurance for short-term rental situations. This means that you only pay for their insurance coverage when you have Airbnb or VRBO guests staying at your home.

This is not a homeowners insurance replacement policy. It’s temporary insurance to cover the risk not covered by your homeowners policy. When you receive a booking through Airbnb, Homeaway, VRBO, OneFineStay or Flipkey, you go to your account on Slice, enter the details, and add coverage for that stay. Typical rates for Slice are $7 per night.

At the time of writing, Slice is the only company currently providing insurance protection for people renting out individual rooms. Slice is currently available in 19 states and Washington D.C. More states will be added soon.