Is Your Policy Really Protecting You? How to Know If You’re Misinsured

What Does it Mean to Be Misinsured? 

Today’s gig and sharing economies represent a significant historical shift, challenging the slow-moving insurance industry to adapt quickly. This forces traditional insurance agents to rely on established policies designed for traditional risks in order to meet client needs and retain their business (aka their commission). 

However, traditional insurance products were never designed to protect someone who is using a personal asset for an income generating business. 

Therefore, the policy is unequipped to handle the complex, multi-layered risks introduced by hybrid personal and business use of property like Airbnb, Vrbo, Uber, HipCamp, Swimply, and more. 

This mismatch between the insurance you were offered and purchased, and the actual risks that you face is what leads you to being misinsured, leading you to think that you have insurance for what you are doing but you do not. 

While the coverage might seem to work on the surface, it fails to protect against the full scope of risks that, leaving massive gaps in necessary coverage for sharing economy workers like Airbnb hosts, short-term rental owners, Uber and rideshare drivers, and app-based delivery drivers like Dashers. 

Being misinsured stems from a lack of understanding about the risks associated with these specific ventures and the different types of coverage available from traditional avenues of insurance like purchasing from your local agent.

How Does Someone Become Misinsured? 

Being misinsured is the result of miscommunication, mismatched expectations, and misunderstanding between all parties involved.  

This could happen due to misinterpretation of policy terms and conditions or the evolving nature of insured assets. 

A common scenario might involve a property owner assuming their Homeowners (HO) insurance would cover listing their home on Airbnb, only to later discover once a claim is denied that their policy doesn’t account for business use, which makes their policy null-and-void of providing any coverage at all. This leaves the owner completely on the hook for all costs associated with the claim, which could easily exceed $1M in the instance of a liability claim.  

Another example could be an insurance agent or broker that prescribes the wrong policy because they don’t understand the full scope of risks that the insured is facing.  

Unfortunately, being misinsured is happening more frequently and is leaving people with a false sense of security until they experience a claim. They may believe they are fully protected, only to face a large financial hit when their coverage fails to respond as they had expected. 

This issue highlights the importance of thoroughly understanding insurance policies through self-guided education to ensure that the coverage aligns with your specific needs and circumstances. The problem with this is that accurate insurance education is hard to find. Many insurance companies are more focused on selling their policies on price instead of coverage, leaving their insured even further in the dark.

Who is at Fault When Someone is Misinsured?  

Insurance is a contract, and making sure that all sides are on the same page can prevent surprises during the time of claim. Ultimately, misinsurance happens because of a disconnect between what’s needed by the insured and what’s provided by the insurer. 

To further understand how this happens and avoid later frustrations, it’s important to understand the roles and responsibilities of the parties involved when an insurance policy is purchased. 

Roles and Responsibilities  

Insurance Companies 

Traditional large-scale insurance companies create blanketed policies that are meant to cover a broad spectrum of clients, but these products aren’t typically tailored to the unique and evolving risks of each individual client.  

For example, a Homeowner’s policy may have been perfect for someone living in their home, but when that same home is turned into a short-term rental, it enters a different category of risk and becomes an active income generating business.  

Insurance companies rely on standardized language that’s difficult for the average person to interpret, which is where the role of broker or agent comes in. 

Brokers and Agents 

Brokers and agents are tasked with guiding clients through understanding their insurance options, after all, it is their job to do so. However, with a large variety of clients and policies to manage, they often rely on standard solutions that they understand best. 

For example, a traditional Homeowner’s insurance might seem like it will work for short-term rentals, but this can lead to gaps in coverage when the policy wasn’t designed for all of the risks of a host. Same goes with traditional Landlord insurance policies which were designed for long-term rentals with their own unique set of risks. Using a Landlord policy to protect a short-term rental is mismatched coverage that leaves the host vulnerable to things like guest-caused damage, theft, liability off-premises, and more essential protections that are excluded.   

Policyholders 

The policyholder ultimately bears the most responsibility in this triangle.  

While the policyholder’s decision was likely guided by an agent or broker, it is the policyholder’s name that is ultimately on the binding contract, which is between the insured and the insurance company (StateFarm, AllState, etc.).  

As a policyholder, it’s important to understand how activities—such as using a home for short-term rentals or using your personal car to Uber—changes your risk exposure. When there is a change in how property is used, the coverage needs to change too.

The Answer…

The answer to the question of who is at fault is a bit grey. Brokers and agents might not fully grasp the evolving risks or have the appropriate solution to offer from their affiliated insurance company, and policyholders may not always know how to ask the right questions or spot gaps in coverage buried among nuanced insurance jargon. 

Understanding your own risks and clearly communicating them with your agent is the best way to avoid being misinsured.

Steps to Avoid Being Misinsured: Aligning Risks with Coverage 

The best way to avoid being misinsured by asking the right questions and clearly communicating your risks and needs with your agent. 

Here are some practical steps you can take to protect yourself and align your policy with your risks: 

1. Understand Your Activities and Risks

Before you start shopping for insurance you should think through how you will be using your property or vehicle. Switching from personal use to business use (like Airbnb or ridesharing) changes your risk exposure, and traditional policies may not cover these hybrid uses. Then do your best to visualize potential risks such as injuries and property damage. You can also consider if you will need business income coverage during a claim which is important if you rely on this income to make ends meet.

2. Communicate Clearly with Your Broker or Agent

Be transparent about how you will be using your home or car when speaking with your broker or agent. We often talk to clients that say they hide what they are doing so their insurer doesn’t drop their coverage. However, as discussed in this article, even if your coverage is in place at the time of a claim your policy could be found null-and-void if the policy has an exclusion for what you are doing, like the commonly found business activity exclusion. We always say that the wrong insurance is the same as no insurance, so be sure to provide specific details and ask targeted questions about coverage to make sure that you are not paying for coverage that won’t show up for you. 

3. Clarify Coverage and Review Exclusions

Ensure your policy covers the intended activities including personal use, business use, and if you anticipate that the property will sit vacant for a period of time (like during the off-season). Then review the exclusions in depth in the policy. Don’t be afraid to ask questions if you don’t understand the policy language. It’s important to know what isn’t covered so there are no surprises at the time of a claim. 

4. Anticipate a Detailed Underwriting Process

Be prepared for the insurer to conduct a thorough underwriting process, particularly for active income properties like short-term rentals. Ask if the coverage has been tailored to your specific risks like your backyard pool, the dock at your waterfront lake house, the trail that’s at the end of your neighborhood, etc. It’s important to know that the underwriter may ask you to adjust your property to limit your risks, like adding a handrail, securing your deck railing, etc.

5. Ask About Additional Requirements

Certain activities, like operating a short-term rental that has amenities that take your guests away from your property like a bike or kayak or a golf cart, may require additional safety measures or policy endorsements/enhancements. It’s important to confirm these requirements upfront and make sure that your policy includes off-premises liability.  

6. Review and Update Coverage Regularly

If there’s any change in how a property is used or amenities that are being provided, it’s important to communicate that to the insurer. Ensure the coverage adapts to these changes to avoid being misinsured.

Opt for a Specialty Policy 

Finding the right insurance coverage in the sharing economy can be tricky if you don’t know your choices beyond relying on your local agent and the coverage of traditional policies. That’s where specialty insurance comes in. Specialty insurance products are designed to address the unique risks you face because they were written specifically for those unique risks.  

For short-term rental owners, this means a policy that provides protection for business activities, liability, and revenue loss all in one comprehensive policy that completely replaces the inadequate options of Homeowners and Landlord policies. 

In fact, this approach is what inspired our name: Proper Insurance. 

At Proper Insurance, we built the most comprehensive policy for short-term rentals so you can feel confident in your short-term rental insurance coverage. Whether it’s protecting against guest-related injuries, guest-caused damage, or revenue loss during a claim, our policy is tailored specifically to meet the challenges of short-term rental ownership.  

With Proper Insurance, you don’t have to hope that your outdated, piecemealed coverage is enough—you can be sure that your risks are properly aligned with your coverage every step of the way.

Get the Right Insurance for Your Short-Term Rental

To make sure your insurance aligns with the needs of your short-term rental property, give us a call. Our agents are experts in short-term rental insurance that can outline the gaps in your current policy, identify your property’s biggest risks, and offer you coverage tailored to your needs.