When it comes to vacation rental insurance, we all must tackle this important question at some point, or pay the consequences: Am I properly covered? (You know what they say. If you have to ask the question…)
Here’s where we turn to the experts to find out what good coverage looks like.
Darren Pettyjohn has spent his entire professional career working in specialty insurance programs – from U.S. import bonds to marine cargo insurance.
He is the National Sales Manager of Proper Insurance, from whom I recently purchased an insurance policy for my vacation rental in Kauai. I finally, finally feel totally protected (after learning there were significant gaps in my coverage before Proper came along ?).
Proper offers a specialty insurance policy designed specifically for vacation rental properties, to replace a homeowner’s or landlord policy. I was so impressed with the specifics of their policy and coverage, I wanted to learn as much as I could. And, more importantly, share what I learned with all of you!
Darren was kind enough to write a piece for The Distinguished Guest. Read on to learn why homeowner’s and landlord policies are often insufficient, the gaps they leave behind, and whether specialty insurance might be right for you.
Take it away, Darren!
Let’s Talk Vacation Rental Insurance with Darren Pettyjohn
Specialty insurance, better known as program insurance, is a special insurance policy created to cover a unique risk or exposure that isn’t covered correctly by a commodity insurance product, like auto, home, and life insurance. These are not special or unique risks — you can buy them virtually anywhere.
So what is a special risk?
A special risk would be a sky diving company, a fine art dealer, or a winery. You can’t simply buy a commodity insurance product for these risks, you need something special.
Is a vacation rental really a special risk?
Some might say no and some might say yes. The founders at Proper Insurance say yes. This is why we created our specialty insurance program for short‐term or vacation rental properties.
Let’s dig into it why and how this is done!
Vacation rental owners, historically, have had three options for insurance: a homeowner’s policy, a DP‐3 landlord policy, or a hotel/motel business policy. Each of these policies leaves gaps or exposures for vacation rental owners.
Let’s examine these gaps.
Key Point: it’s important to understand that virtually all insurance companies use standard forms approved by the Insurance Services Office (ISO). There is a homeowner’s (HO), there is a landlord/dwelling (DP), and there is business (CP). The way these forms and coverages differ is through endorsement to them. Some endorsements reduce coverage, and some endorsements enhance coverage.
Homeowner’s policies or forms were created and designed for a property that is owner occupied, i.e., a primary residence.
It’s great for the protection of a primary home against property damage (fire, theft, water damage, etc.) and carries personal liability for the owner and his or her family, in the event they are personally found liable for bodily injury or property damage.
The problem? It excludes or does not cover business activity or renting of the home, if it’s not occasional and if the home is not used as the person’s primary residence.
Most vacation homeowners rent more than just occasionally, and the home is most often not their primary residence. These are huge gaps that simply can’t be ignored. If a renter damages your home, or claims bodily injury against you, the claim could be denied.
In fact, many homeowner’s insurance carriers are dropping insureds when they discover they are renting the home on a short‐term basis – typically 30 days or less at a time.
DP‐3 Landlord Insurance:
Landlord policies or forms were created and designed for a property that is rented to others, or that is “tenant occupied.”
There are a few key issues or gaps here.
First, a landlord policy carries what’s called “premise liability”, which covers bodily injury at the premise only. It does not extend beyond the premise.
So, say the roof collapsed on a tenant. This would be included in the bodily injury coverage for the owner. But what if the guest is injured on a bicycle or canoe provided by the rental? Or if the guest brings their dog, and the dog bites someone off-premise? Or the tenant assaults a neighbor?
Secondly, a landlord policy, like the homeowner’s policy, also has a business activity exclusion.
If a renter accidentally burns the vacation rental down, and the insurance carrier decides this person was a “guest” who paid you money to stay there for a weekend, and was not a “tenant/long‐term renter,” they could deem it a business activity, and deny the claim. It’s not worth the risk!
Hotel/Motel & Business Insurance:
Hotel/motel and business insurance is a business policy, so unlike the other options, it clearly does not exclude business activities.
However, it’s significantly more expensive than a homeowner’s or landlord policy and carries many coverages a vacation rental does not need, like signage, property in transit, refrigerated products, sales’ persons samples, and much more.
Yet it does not tailor or endorse coverage that may be relevant to a vacation rental. It excludes water craft liability and liquor liability, and carries a vacancy clause if the property goes 60 days unoccupied.
Key Point: What about a bed & breakfast policy? While more specialized, it too, is not tailored to vacation rentals. Typically, the owner must be on-site, it’s guaranteed replacement cost as many B&B’s are historic buildings, it carries food liability coverages, and it is terribly expensive.
It’s apparent there is a market for a special insurance policy designed specifically for short‐term vacation rental properties. One that is a combination of a homeowner’s, a landlord, a business, and a B&B policy.
The problem? It didn’t exist. A few carriers had tried to endorse a homeowner’s policy and landlord policy for vacation rentals, but this still left too many gaps. Domestic insurance carriers are traditionally slow to adapt to new markets and often don’t want to get involved with specialty insurance, as it’s seen as very high risk.
In short, an insurance company needs to collect more premium than it pays out in claims. The higher the risk, the higher the premium.
A hotel/motel is higher risk than a primary home, both from a property and liability standpoint. So it makes sense that a hotel/motel policy is more expensive than a homeowner’s policy. It’s that simple.
Building a better vacation rental insurance policy program: 4 areas of coverage all vacation rental owners should have
We knew we had a market and a need for a specialty vacation rental insurance program.
Because Proper is a Coverholder at Lloyd’s of London, we are approved to submit business into the Lloyd’s market. But instead of submitting a single risk, i.e., the Empire State building, we submitted a program – a policy that all vacation rental owners could purchase.
We were able to create a policy that covers all the exposures of a vacation rental. And we able to get very competitive rates, typically just about 35% more than a standard homeowner’s policy.
Let’s look at our policy’s coverage.
As the owner of a vacation you need to insure 4 specific areas; your building(s), contents, income, and liability.
This would be similar to a homeowner’s policy. You need to insure the actual property itself – the building(s). We were able to get the highest coverage form, (special, all‐risk), with replacement cost valuation (new for old) in the event of a claim. And since it’s written as a business, there is NO business activity exclusion.
This means at the time of a loss it doesn’t matter who is staying at the property. It can be you the owner, your friends or family, or paying guests. Because it’s written as a business, it just doesn’t matter.
This also would be similar to a homeowner’s policy. Contents is all your stuff at the rental: furniture, electronics, linens, dishes, etc. We enhanced this coverage form to match that of the building, (all‐risk, replacement cost).
But we knew theft would be an issue with vacation rentals, so we put NO limit on theft. Meaning theft is covered to the full limit of your contents.
Business Income Coverage:
This would be similar to a hotel/motel business policy. Income coverage is written as “actual loss sustained”, not fair market value as found in a landlord policy. We know how much revenue vacation rentals generate, and it needs to be protected.
We also know that it can be 18‐ 24 months before a vacation rental would become whole again after a total loss. So we put No time limit on business income. You are only subject to the limit you choose.
This also would be similar to a hotel/motel business policy. It carries $1,000,000/$2,000,000 in commercial general business liability. This is the highest form of liability a business can purchase.
Except we have a few key endorsements to tailor it to vacation rentals. We remove the watercraft liability, so canoes, kayaks, paddleboards, boats 10 HP or less are all covered, from a liability standpoint. It covers pools, spas, bicycles and so much more.
We even remove the liquor liability exclusion. Yes, that means if you wanted to furnish a few bottles of wine at the rental for your guests to enjoy on their stay, you are covered!
I would like to personally thank Darren for breaking down vacation rental insurance into these easy-to-understand terms. If you have questions for Darren about vacation rental insurance, please comment below and he will happily answer them for you! Otherwise head on over to the Proper Insurance website for a easy online quote.