Short-Term Rental Insurance: Protecting Your Investment

A standard homeowners policy is written for a home you live in, and renting it to paying guests can remove its liability coverage and part of its property coverage. Landlord policies are built for long-term leases and may not fit short stays. Airbnb's AirCover for Hosts adds up to $1 million of liability insurance and up to $3 million of damage reimbursement per stay, but the damage part is not insurance and both parts have exclusions. Before the first booking, get your insurer's written confirmation that your policy covers paying guests, or buy a short-term rental policy or an endorsement, an add-on that changes what a policy covers.

Why homeowners and landlord policies fall short

The National Association of Insurance Commissioners (NAIC), the group of state insurance regulators, warns that a home listed with any frequency will likely count as a home-based business under a homeowners policy, and homeowners policies usually exclude business activity or cover it only in part. The HO-3, the standard homeowners form drafted by Insurance Services Office (ISO), shows where the gaps are, in a version one insurer filed with Oklahoma regulators. Your own policy's wording decides, so read it.

• It insures the home you live in. The covered "residence premises" is the dwelling where you live, as listed on the declarations page. A house bought only for guests does not fit.
• Rental income can make it a business. The form defines a business as a trade or occupation, or any other activity done for money unless no insured earned more than $2,000 in total from such activities in the 12 months before the policy period began. Its liability coverage excludes injury and damage arising from a business, with exceptions for renting your home occasionally as a residence or renting part of it to no more than two roomers or boarders.
• Theft by guests is excluded. The form does not cover theft from the part of your home rented to someone who is not insured under the policy.

Example: you earned $9,000 from bookings in the 12 months before your policy renewed. Under this form, the rental now counts as a business, and a guest's claim that they fell on your stairs could fall under the business exclusion.

The NAIC lists a landlord policy as one option, covering the home, contents such as furniture, lost rental income after damage, and liability. The Texas Department of Insurance cautions that landlord insurance is mainly for traditional long-term leases and may not be appropriate for short-term rentals, so ask the insurer whether a landlord policy treats nightly guests the same as tenants.

What Airbnb AirCover for Hosts pays, and what it doesn't

AirCover for Hosts applies to stays booked on Airbnb and has two parts:

Three details change how far you can rely on it:

• Damage protection is not insurance. Airbnb's terms say they are not an insurance contract, although in Washington and Minnesota an insurance policy Airbnb bought backs its payments. Airbnb also subtracts what your own insurer or the guest has already paid.
• Six or more listings shift the liability claim. If you have 6 or more active Airbnb listings when a loss happens, the liability program may require your other insurance to contribute or may pay only after it, as excess coverage.
• State protections may not apply. Airbnb says the US liability program is sometimes written by a non-admitted insurer, one not licensed in your state, which may not be subject to state insurance laws and is not protected by the state guaranty fund that pays claims when an insurer fails.

None of it applies to stays booked off Airbnb; comparing Airbnb, Vrbo, and direct booking compares the three channels.

What Vrbo provides

Vrbo's $1M Liability Insurance covers owners and property managers for stays processed online through Vrbo checkout. It may cover a guest injured at your property or a guest who damages a third party's property, such as a neighbor's, but not damage a guest causes to your property. Vrbo says you may have to pay a 25% deductible if your own insurance does not contribute to the claim, so it works best as backup to a policy that covers the rental. For guest damage, you choose a damage protection level of $1,500, $3,000, or $5,000. Each guest either buys Vrbo's Property Damage Protection plan ($59, $89, or $119), which covers accidental damage, or provides damage security of that amount. At $5,000 or less, the security is the guest's card kept on file, not cash collected up front. To charge for damage against it, you must document and report the damage within 14 days of checkout.

Coverages a short-term rental policy should include

Whether you buy a dedicated short-term rental policy or an endorsement to your current one, confirm each of these in writing:

1. Dwelling and other structures, at the cost to rebuild, with the policy naming short-term guests as the property's use.
2. Contents, including the furniture, linens, and electronics you provide.
3. Liability that is primary, meaning it pays before any other policy, at a limit that meets any local minimum. Washington, for example, requires operators to carry at least $1 million of primary liability insurance unless every booking goes through a platform that provides equal or greater primary coverage.
4. Loss of rental income, which replaces bookings lost while covered damage, such as a fire, is repaired.
5. Theft by guests, which the standard homeowners form excludes from rented space.
6. Flood. The standard homeowners form excludes flood, surface water, and waves, and AirCover's damage protection excludes acts of nature, so near water, price a separate flood policy unless your short-term rental policy includes flood.

If you hold the property in an LLC, ask whether the LLC must be the named insured, the policyholder listed on the declarations page; setting up a legal entity for your short-term rental covers the entity side. For a long-term tenant instead of guests, rental property insurance for landlords covers landlord policies.

What drives the premium

The Texas Department of Insurance lists what companies consider in setting home insurance rates: the home's age and condition, its replacement cost, construction materials, where it is, local fire protection, your claims history, and your credit score. To compare short-term rental quotes, ask at least two insurers that write the coverage for the same limits and deductible, and give each the same facts about use: expected booked nights, whether you live there, and amenities such as a pool or hot tub.

What to ask your insurer before the first booking

1. Does the policy cover paying guests at this property for the number of nights you plan to rent?
2. Does rental income trigger a business exclusion in the liability coverage?
3. Are theft by guests and guests' own belongings covered?
4. Does the policy pay lost rental income after a covered loss, and how is the amount figured?
5. Is the liability coverage primary, and does its limit meet your city's or state's minimum?
6. How does the policy work with AirCover or Vrbo's coverage when both could pay the same claim?
7. Are a pool, hot tub, or other amenities excluded or limited?

For damage claims, Airbnb requires you to ask the guest to pay before it reimburses you; handling difficult guests covers disputes with guests, and starting an Airbnb business shows where insurance fits in the setup.