Is Your Vacation Home or Rental Property Adequately Insured?
By Robert Pyle
Isn’t that the American dream? Work hard, buy a vacation home that you can enjoy any time you want and rent out for substantial income when you’re not using it to cover some if not all of the costs.
Sounds great in theory, but there are often hidden
Insurance companies view second homes as riskier to insure than primary homes since they’re vacant for a solid portion of the year. That makes them susceptible to break-ins or sustained damage in the event of a leak or fire, which can make second homes expensive to insure.
Your insurance rates are also going to be impacted by the home’s location, among other factors. You may need additional coverage — like flood insurance or more robust dwelling coverage — if the residence is in a tropical area prone to hurricanes.
In the area where my rental property is located, the flood map was redrawn, and suddenly, every member of our homeowner’s association had to prove we had flood insurance. We never needed it before. Every year, they would hassle us. If we didn’t prove we had flood insurance, we would be forced to purchase a really expensive policy. Then a few years later, the flood maps were redrawn again, and we didn’t need flood insurance.
Most second homes are used as vacation homes. Since life isn’t a year-round vacation for most folks, your second home is going to be vacant much of the time. For insurance companies, the home’s vacancy is itself a risk, and insurers will rate you higher (meaning they’ll increase your insurance payments) based on vacancy alone. Here are some reasons why:
Vacant homes are more likely to be burglarized
They’re more likely to have hazards (like leaks, fires, or infestations go undetected
They’re more likely to be vandalized
Liability risk is also considered when rating vacation homes. For example, if your next-door neighbor’s kid sneaks onto your property, uses your pool, and gets injured or drowns, you could be saddled with liability for legal expenses for not securing your property well enough.
Conversely, if your home has a groundskeeper, or is in a gated community or HOA with security cameras that could potentially lower rates on your vacation home.
Insuring your rental property
If you plan to rent out your vacation home during the period of time you’re not there, your carrier will likely increase your rates, or they may require you to get special rental property insurance. Certain rental services like Airbnb offer their own insurance, but the coverage is limited to liability expenses.
Not having a rental property properly titled or properly insured is one of the most frequent risks we see our clients make.
For example, a new client of ours purchased a rental property and had the property titled in his name with minimal insurance coverage on the property. He assumed the couple who rented his property had adequate renter’s insurance that would cover any damage or liability issues that occurred.
The problem with this assumption is that if anything happened on our client’s rental property – a slip caused by an unlevel foundation, an electrical fire caused by old wiring, or roof damage caused by a windstorm – he would be liable. His personal assets were at risk. To correct the situation, we recommended that our client connects with his insurance broker and estate attorney to separate the risk of the rental from the rest of his assets. How? By placing the property in an LLC and insuring it with separate homeowners and umbrella policies.
Today, about five percent of Americans own second homes. Of those, it is estimated that 60 percent have some rental exposure.
There are numerous pitfalls concerning insurance coverage for these homes. For example:
· Most short-term vacation rentals are insured as secondary or seasonal homes
· Property owners may fail to inform their insurance agents that they are renting their homes
· Insurance agents may fail to tell the insurance company about the rental exposure
· Concealment, misrepresentation, or failure to notify the insurer of a change of actual occupancy can result in the denial of a claim, lengthy legal battles, and immediate cancellation of coverage and unavailability of replacement insurance
The following types of policies are commonly used for vacation rentals, and each has serious gaps in coverage:
· Commercial (Business) Insurance policies: typically only available for multi-family dwellings with five or more units
· Residential Dwelling policies: limited coverage for personal property and usually actual cash value (ACV)
· Homeowners policies: business liability exclusion and limited personal property coverage
· Combination policies: limited personal liability and personal property coverage
There are several other specialty insurance programs designed for short-term vacation rentals, and each one is unique. Most online booking companies have also partnered with insurance vendors such as CSA Travel Protection, Rental Guardian, Proper Insurance, INSURE stays, and CBIZ. However, none of these vendors provide comprehensive coverage for the homeowner’s “non-business” related Property or Personal Liability exposures.
You may have found that getting insurance for your second home is a little more difficult to acquire than the insurance you bought for your primary home. As we’ve already discussed, the unique risks associated with seasonal homes may make it difficult to find an insurer to cover you.
However, if you have a clean claims history, decent insurance score, and your home isn’t a literal shack on the beach, you should be able to find a carrier to insure you. Farmers Insurance, for example, writes specific specialty homeowners insurance policies for seasonal and vacation homes, and just about every other major carrier has similar offerings.
If your vacation home is located in a coastal area and you’re not able to find insurance on the private market, you can get coverage through your state’s FAIR Plan, which is last-resort homeowner’s insurance with limited amounts of coverage. FAIR Plans are typically pretty expensive for the coverage that you’re getting, so try to avoid this at all costs.
How to save on vacation home insurance
There are several ways you can make your second home insurance costs more affordable:
Install security cameras or staff your property with armed guards.
Install high tech risk-prevention systems, like water leak sensors.
Fit your home with a central burglar alarm or smoke detector.
Buy a vacation home that’s part of an HOA community.
Have a property manager.
Vacation rental insurance for owners needs to cover the building(s), contents, rental income, and commercial liability. The building and contents insurance should be special form all-risk insurance with replacement cost valuation. The rental income insurance needs to be “actual loss sustained” with no time limit. The commercial liability insurance should be for the vacation rental and include coverage for amenities such as hot tubs, swimming pools, exercise equipment, rec area, small watercraft, bicycles, and more.
Other things that your insurance should cover include sexual assault, violence, common areas, and more. Unfortunately, most insurers neglect to provide coverage for these areas. It’s important to understand that if a guest were to be assaulted on your property, you could be held liable. By having a comprehensive insurance policy in place, you can help avoid the extreme costs involved in a liability claim or lawsuit.
Vacation rental insurance for owners is more affordable than you think
The key is to have an insurance policy that can replace your current policy, but also add the income and liability protection needed for a business. For this, a vacation rental owner needs a specialty insurance product. The only way to accomplish this is to start with a commercial business policy and then enhance and endorse it to meet the needs of the home. Because renting a vacation home on a short-term basis is considered a business activity, this is the only way for it to be comprehensive. There are insurance carriers who can provide this coverage for an average of 30% more than a standard homeowner’s policy. Because the coverage replaces the current coverage and is not supplemental, it’s only an added total cost of 30%.
Make sure your vacation rental’s business income is insured
If your property is damaged by a guest or if it requires repairs, then you likely can’t rent it out on VRBO, Airbnb, or even on your own until repairs are completed. For some property owners, this can add up to a lot of lost revenue. For example, if your property is normally booked at $150 per night and repairs leave your home uninhabitable for a month, that’s $4,500 in lost business revenue. Without a commercial vacation rental insurance plan, you’ll be left writing it up as a loss.
It's human nature that otherwise responsible people aren’t going to be as careful on vacation as they are at home—especially when it comes to renting someone else’s property.
What if renters cause more damage than covered by a security deposit? A client of mine is going through that right now with a rental property that he and his wife own. The management company of my client’s development is suing all the renters for damage done to my client’s unit--and my client is facing $3,000 in outstanding damage fees as well.
Another client had a different issue. They had a new refrigerator delivered by Lowe’s. Lowe’s installed it, but in the process, Lowe’s forgot to shut the water off. All that running water caused in a hole in floor of their rental property and the downstairs ceiling below it. Lowe’s finally compensated my client for partial damages and the cost of hiring a contractor. But they didn’t reimburse them in full, and he and his wife spent hours and hours on the phone trying to get the situation rectified.
Put all vacation and rental properties in an LLC
Finally, form an LLC to purchase your vacation and rental properties, rather than having them in your name. Forming an LLC is not complicated in most states including Colorado, but please use a qualified attorney, and don’t try to do it yourself with an online app. The LLC will provide substantially more protection for you and your family than having the properties in your name.
Conclusion
Bottom line: People who are otherwise honest, responsible people in day to day life tend to let their guard down on vacation. It’s human nature. An appliance that would normally last 20 years in a primary residence may last only five to ten years considering the wear and tear it endures in a vacation property. As with hotels, people don’t treat rental properties with the same care that they treat their own property. They’re not going to pay attention if water’s leaking or the toilet floods. Believe me, if the toilet overflows in a property you own, you’re going to run as fast as you can to get towels and ask five other people to do the same. But, if you’re a renter and the toilet overflows, the attitude is typical, “Don’t worry, it will dry on its own. It’s not my problem”
If you or someone close to you has concerns about insurance gaps in their vacation or rental properties, please don’t hesitate to contact me. I’m happy to help.
Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.
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