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?
State Farm 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. State Farm is not an innovative company.
What State Farm 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.
State Farm Homeowners Insurance and Airbnb Risks
What protection does your State Farm homeowner’s insurance policy provide should an incident occur while you are hosting Airbnb guests?
A State Farm homeowners policy has 2 main components:
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!
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 State Farm 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
State Farm 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 State Farm 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 State Farm 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 something low-risk. It’s not meant to cover a hospitality business.
There are several clauses within a State Farm home insurance policy where coverage for Airbnb rentals could be denied. Our review has been conducted on the standard State Farm homeowners insurance policy (form FP-7955). Your policy may be different depending on your state and any additional coverages that have been added by your agent.
State Farm Property Damage Insurance for Airbnb Rentals
In the property section of your policy, there is a clause called “other structures” or “dwelling extensions” that states:
“We do not cover other structures:
- not permanently attached to or otherwise forming a part of the
- used in whole or in part for business purposes; or
- rented or held for rental to a person not a tenant of the dwelling, unless used solely as a private garage.”
Should you own an additional dwelling unit, 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 State Farm 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.
State Farm 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. This clause clearly states that coverage will be denied if a loss results from business activities of the insured.
Coverage L refers to personal liability and coverage M refers to medical payments to others.
However, State Farm then complicated this matter by adding the following language:
“This exclusion does not apply:
…to the rental or holding for rental of a residence of yours:
(a) on an occasional basis for the exclusive use as a residence;
(b) in part, unless intended for use as a residence by more than two roomers or boarders;”
And for those homeowners who have a duplex, triplex, or additional dwelling unit, this clause would appear to allow coverage:
“This exclusion does not apply:
..when the dwelling on the residence premises is a two, three or four-family dwelling and you occupy one part and rent or hold for rental the other part;”
The exception to this exclusion was most likely referring to long-term rentals and not Airbnb-type rentals. However, there is no policy language that differentiates between short-term and long-term renters. So whether this exclusion could be used to deny coverage is unclear.
The next exclusion once again appears to deny coverage for “business” related activities.
Coverage L does not apply to:
(1) for your share of any loss assessment charged against all members of an association of property owners; or
(2) assumed under any unwritten contract or agreement, or by contract or agreement in connection with a business of the insured;
Your renting of rooms, a separate suite, or your entire house through Airbnb could be interpreted as an unwritten contract, i.e. you are assuming additional liability risk through your agreement to comply with Airbnb’s terms and conditions.
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 arising out of: (a) business pursuits;”
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. State Farm will probably claim that you are. State Farm’s definition of “business” in the first section of their policy doesn’t help clarify the situation. It says:
““business” means a trade, profession or occupation. This includes farming.”
Could your Airbnb hosting be considered a trade, profession or occupation? If you’re doing it to make a little money on the side, you would probably argue no. State Farm’s claims adjusters will argue the opposite. It’s another very grey area.
State Farm General Policy Conditions
There are 2 more clauses of your State Farm policy that you should give you cause for concern.
Prior to purchasing your State Farm Homeowners Policy,
“Concealment or Fraud. This policy is void as to you and any other
(3) When this policy has been in effect for 60 days or more, or at any time if it is a renewal with us, we may cancel:
(a) if there has been a material misrepresentation of fact which, if known to us, would have caused us not to issue this policy; or
(b) if the risk has changed substantially since the policy was issued.
We may cancel this policy by notifying you at least 30 days before the date cancellation takes effect.
What this means is that if State Farm 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, State Farm 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 State Farm agent to tell them about your Airbnb hosting. A number of Airbnb hosts report doing exactly this with rather alarming results. Most of them had their policies canceled.
Though they have not made any formal statements, it would appear that State Farm has decided not to
- Stop renting your spare space on Airbnb;
- Continue renting space on Airbnb but find a new insurance company, one that provides coverage for both homeowners and short-term renting;
- Keep your State Farm policy and find an additional policy to cover your short-term renting;
- Keep your State Farm policy and rely on Airbnb’s Host Guarantee and Host Protection Insurance for your hosting protection;
Read our article on insurance for Airbnb hosts and decide which option best fits your situation.