UNDERSTANDING INSURANCE AND THE TRANSFER OF RISK
Modern insurance dates back to the 1600s and a coffee shop in London owned by Edward Lloyd, today the Lloyd’s of London insurance market.
Shipping voyages financed by venture capitalists to and from the New World brought the promise of gold and tobacco, but they were anything but a guaranteed return on investment.
Thus the birth of insurance where underwriters at Lloyd’s would guarantee the voyage and cargo for a premium. If the voyage were successful, the underwriter would keep the premium; if not, the underwriter would pay a claim.
Simply put, the venture capitalist wanted to transfer their risk to an underwriter or insurance company for a guarantee or contract.
This same concept holds today for shipping, fire, life, auto, and even short-term vacation rental insurance.
Short-Term Vacation Rentals Come With a High-Risk Level
First, you must protect the physical asset (building & contents) from many perils such as fire, wind, water damage, theft, vandalism, damage from a guest, and so much more.
Next is the unforeseen liability of owning a hospitality or nightly accommodation business.
And lastly is the protection of the asset’s income, which is crucial for any business or investment.
Domestic homeowner’s and landlord insurance policies were never intended to comprehensively insure a vacation rental business, even with the addition of home-sharing endorsements.
Proper Insurance offers the only policy to fill all the gaps in coverage and deliver a comprehensive product.
Proper Insurance Guarantees More
In 2014, we worked with Lloyd’s of London to construct the most comprehensive insurance policy ever offered to vacation rental property owners. It wasn’t easy as vacation rental owners have traditionally had three options when insuring their property; you can purchase a homeowner’s policy, a landlord policy, or a commercial policy.
The truth is, you need components of all three.
The insurance challenge has always been multiple uses of vacation rental properties. Personal, tenant, business, and unoccupied uses.
Even with home-sharing endorsements, homeowner’s insurance policies only apply to owner-occupied properties, not secondary or investment properties. So BUYER BEWARE, as many insurance agents, do not fully understand this concept.
Landlord or dwelling insurance policies are for tenant-occupied properties; a tenant lives or resides at the property. But vacation rentals have guests who do not reside at the property; they are guests for a few days or a few weeks. This changes everything as a landlord policy does not carry comprehensive liability, nor does it cover damage caused by a tenant. If a landlord has a tenant that seriously damages the property, the landlord keeps their deposit and sues the tenant; they don’t call their landlord insurance carrier. Therefore, vacation rental owners should not rely on landlord insurance.
Commercial or business insurance policies were designed for businesses, not residential or personal properties. While they carry comprehensive liability and all-risk protection for property, they are fundamentally miswritten for a vacation rental.
The Proper Insurance policy starts with commercial coverage as it has the horsepower needed to fill all the coverage gaps. Then we add conditions from a homeowner’s and landlord’s policy and top it off with a dozen or so specialized coverages.
When you add it all up, you end up with one policy designed to fully replace the current vacation rental policy. An approach that is second to none from a coverage standpoint in the industry.
It All Boils Down to Risk Tolerance Levels
We’ve all been asked to purchase the protection plan at checkout for a low-ticket item such as a coffee maker or humidifier, and the answer is always no.
The reason is risk tolerance. Most consumers are willing to pass on the protection plan and ‘risk’ the $49-$99 it would cost to replace the item should something go wrong.
Your most significant risk in life is driving your car, as you could hit and injure someone, and your second biggest is owning a vacation rental.
So it would be best if you didn’t drive without comprehensive insurance, nor should you run a vacation rental business without it either. Let’s look at a small sample of under-discussed risk examples of owning a vacation rental:
Intentional or malicious damage from a guest. Although rare, Proper has paid several six-figure claims from unruly guest damage. There is a misconception that this would fall under vandalism coverage, but it’s inaccurate, as seen in this well-documented news story.
Invasion of privacy. Most would not think of this as a risk, but it is. Proper has defended multiple invasion of privacy claims. Guests and neighbors can sue; even if it’s frivolous, it still needs to be defended, and legal expenses add up quickly.
Bacterial disease. Many vacation rentals have swimming pools and hot tubs, and virtually all have showers and bathrooms. Unfortunately, bacterial rashes and skin infections are common, and so are lawsuits if it occurs at your vacation rental. We are a litigious society, and people will sue for about anything.
Assault and battery. When guests get assaulted on vacation, they often sue everyone, including the short-term rental owner. That is why virtually all insurance contracts exclude assault and battery, as they are expensive to defend.
Water damage limits. Because water damage is so costly to insurance companies, we see many cap coverage at a fixed amount, which leaves the remaining costs on the property owner.
Actual cash value vs. replacement cost. This is often found with roofs as wind and hail damage is typical. Instead of getting a claim check for the replacement cost of your roof, you get one that takes out depreciation.
There are dozens more examples we could cover, so that is why we have Super Agents. Make sure to ask more questions, as we want you to feel good about upgrading to Proper Insurance.
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