The Importance of ‘Loss of Business Income’ for Your Short-Term Rental

Understanding Insurance Terminology: Different Types of Loss Coverage 

As you select insurance protection for your short-term rental business, understanding the differences between “loss of” protections should be a component of your considerations when comparing policies.

These concepts—Loss of Rent, Loss of Use, and Loss of Business Income— are the foundation for this understanding.

These “loss of” coverages are found in the fine print of an insurance policy but hold distinct differences that directly impact your business continuity and financial resilience during a claim. While some policies, such as the Proper Insurance policy, carry multiple “Loss of” coverages, most of our competitors only carry one of the three.

Loss of Use vs. Loss of Rents vs. Loss of Business Revenue

If you want to understand what would actually be protected in the event of a loss, it’s crucial that you understand the differences between these coverages. While they may sound similar, they are very different by definition.

Note: While some policies do carry multiple “Loss of” coverages, such as Proper, most only carry one of the three.

Loss of Use 

Typically found on standard Homeowners (HO) policies, Loss of Use coverage is used to put you into a temporary home should your current home sustain damage, which renders it uninhabitable for some time. 

The coverage limit, typically about 25% of your dwelling rebuild amount, would pay the cost of rent for your temporary housing, but this coverage does NOT offer any type of Loss of Rents or Loss of Income protection for a property. 

This is because standard Homeowners policies are built for personal use and therefore do not account for any type of income generation.

In fact, most of these policies forbid business use altogether, meaning if you haven’t upgraded your insurance coverage for your short-term rental from a Homeowners policy, you will want to verify your insurance coverage immediately, as your policy may be completely void, even with a Home-Sharing Endorsement.

Loss of Rents 

Typically found on standard Landlord/Dwelling (DP3) policies intended for long-term rentals, Loss of Rents coverage accounts for the ‘rental income’ you may lose should you have to remove your tenants from the property during the time of damage. 

The biggest difference here, and one that is so important to understand, is that Loss of Rents generally only pays ‘fair market value’ for your income loss. Fair market value is based on all rentals in the area and is typically capped at 12-mo.

So, if your neighbor’s long-term rental is making $2,000 per month, even though your short-term rental is generating 2-3x that, that’s fair market value.

This means that if your two-bedroom short-term rental home sustained damage covered by your policy, your insurance company would pay for the rental income you should have made during that time based on what your neighbors are generating on a similar long-term rental property even if your short-term rental is generating 2-3x that per month.

However, if you are short-term renting and rely on this income to help you meet your expenses, there are a couple of problems to consider.

Loss of Rents Considerations: 

• Active vs. Passive Income Classification: Insurance companies often classify short-term rentals as ‘active’ income, unlike long-term rentals, which are considered ‘passive.’ This classification can lead to instances where the Loss of Rents coverage may not apply to short-term rental properties due to specific policy stipulations. You will want to verify this with your current agent or call a Proper Insurance agent who can compare coverage with you over the phone. 
• Fair Market Value Calculation: Loss of Rents coverage calculates payouts based on the fair market value of rentals in your area, including long-term rentals. Since short-term rentals typically generate more than double the monthly income of long-term rentals, relying solely on Loss of Rents coverage will likely result in insufficient compensation for your short-term rental property. 
• 12-Month Coverage Cap: The coverage period for Loss of Rents is limited to a maximum of 12 months. In scenarios like a total loss where property rebuilding and restoration might take 18-24 months, this cap means that property owners could face periods without any income from their insurer, leading to greater potential financial strain.

Example: The average monthly rental rate for a 2-bedroom apartment in your area is $1,250/month x 8 months restoration period = $10,000 in Loss of Rent coverage.

Loss of Business Income

Found within most commercial insurance policies, Loss of Business Income coverage is standard and crucial for safeguarding against financial losses when operations are interrupted. 

This type of coverage compensates the business based on its net income, which is the profit earned after deducting operating expenses from the gross revenue. For example, in a short-term rental scenario, operating expenses could include utilities, property management fees, cleaning services, and maintenance costs. 

Example: If a rental generates $10,000 in a month in bookings (gross revenue), but the expenses for that month add up to $3,000, the net income would be $7,000. Loss of Business Income coverage would typically pay on this $7,000 figure, reflecting the actual profit lost during an interruption.

Loss of Business Revenue: The Strength of the Proper Policy

Loss of Business Revenue coverage is unique to the Proper Insurance policy and is especially beneficial if you rely on the income that your short-term rental generates.

The coverage provided with Proper’s Loss of Business Revenue protection is based on the total gross revenue you would have generated during the time of a covered loss, meaning the full amount of income before any deductions for expenses. This coverage is generally without a time limit, up until the specified limit of your choosing is met.

Proper’s Loss of Business Revenue is the best “Loss of” protection available on the market for a short-term rental business.

Loss of Business Revenue Benefits:

• Unlimited Time Frame for Coverage: Proper’s Loss of Business Revenue does not have a time limit, allowing for more flexible and extended coverage periods.
• Customizable Coverage Limit: The coverage limit for Loss of Business Revenue is a dollar amount that you select during the quoting process with your Proper agent, directly reflecting your desired duration of coverage (e.g., equivalent to 6 months or 24 months of revenue. This duration is up to you). This approach provides a tailored fit to your specific needs, allowing alignment between the coverage period and the financial protection desired. 
• Revenue-Based Compensation: Proper’s Loss of Business Revenue protection is directly based on the actual revenue generated by the property during the affected period (keeping in mind the seasonality of this industry) up to the chosen coverage limit. This ensures that the payout aligns more closely with the loss incurred during that season of short-term renting. 

This is the most common way to calculate Loss of Business Revenue. However, it is at the discretion of the adjuster to use the method that best approximates the actual loss sustained.

Example: If a rental generates $10,000 in a month in bookings (gross revenue), Proper’s Business Revenue coverage considers the entire $10,000 generated from bookings without subtracting operating costs.

The Proper policy is custom-written for short-term rentals as a Commercial Homeowners policy, so not only do you get the added benefit of commercial coverages like Commercial Liability and Loss of Business Revenue, but if the property doubles as your primary home, we’re able to include Loss of Use protection as well. 

Proper’s Business Revenue Protection in Action 

Understanding the value of Loss of Business Revenue protection becomes even clearer when we examine real claims that we’ve received and paid at Proper Insurance.  

These examples underscore the importance of a robust short-term rental insurance policy that adequately covers the property damage and highlight how unexpected events can also severely affect rental income and, in many cases, cost even more than the actual damage claim itself.  

“In an otherwise horrible situation for these hosts, having comprehensive insurance lessened the overall financial impact and emotional burden of the claims,” said Graham Anderson, Proper Insurance’s Director of Claims. “All the time, we hear that hosts wish they had more business revenue protection when a substantial covered loss happens at their property.” 

Pipe Burst in Colorado Ski Home 

A ski property in Colorado suffered substantial financial loss due to a burst pipe. The physical damage to the property totaled $23,000—a figure that, while not insignificant, pales in comparison to the $117,000 loss in business revenue incurred during the repair time of only a few weeks over the course of their peak season.  

Single Family Home

Covered Damage Total: $23,000

Business Revenue Paid: $117,000

Sanibel Island Bridge Closure Following Hurricane Ian 

The aftermath of Hurricane Ian presented a unique challenge for short-term rental properties on Sanibel Island in September 2022. While the hurricane inflicted relatively minor water damage to several properties insured by Proper Insurance, the broader impact stemmed from the destruction of the bridge. The bridge collapse transformed these minor damage claims into protracted two-year ordeals, primarily due to the severely limited access and consequent delays in repairs. 

Condo 1	Covered Damage Total: $4,000	Business Revenue Paid: $26,500
Condo 2	Covered Damage Total: $2,700	Business Revenue Paid: $45,000 (limit reached)
Condo 3	Covered Damage Total: $2,700	Business Revenue Paid: $27,800
Condo 4	Covered Damage Total: $21,000	Business Revenue Paid: $87,500 (limit reached)
Single Family Home	Covered Damage Total: $3,000	Business Revenue Paid: $58,900 (limit reached)

When does “Loss of” Coverage Kick In? 

It’s important to note that any Loss of coverage does not kick in unless there is covered damage to your property. This means that for Loss of Revenue to trigger, you must have an active property claim (theft, fire, etc.) that your insurance company is paying. 

However, if you have the wrong insurance for a short-term rental operation, your entire policy is likely null and void, meaning you would receive no coverage for the actual cause of loss (repairs, rebuild, etc.) or business income protection.  

Instances such as booking cancellations from guests due to personal reasons or when bookings drop due to unfavorable weather conditions are considered ‘Loss of Market’ situations. These do not qualify for Loss of Business Revenue coverage and are not protected under typical insurance plans. If this is something that you are concerned about, it may be worth offering your guests that book directly with you the option to purchase Travel Insurance for their stay.

Understanding this distinction helps in setting realistic expectations and planning accordingly for comprehensive risk management for your short-term vacation rental property.

How To Know If You Have Business Income Protection

You can take the time to review your policy or simply ask your current agent to confirm the below in writing for your records. 

If I regularly entrust my property to a paying Airbnb, Vrbo or short-term rental guest and my property sustains covered loss damages which renders my property inoperable, do I have Loss of Business Revenue protection? If so, what is the limit of insurance?  

Alternatively, the Proper Insurance agent in your area would be more than happy to provide a free coverage comparison between the short-term rental insurance policies you are considering and/or review the policy you currently have for your short-term rental. We are only a phone call away from answering any questions you have about securing comprehensive protection for your short-term rental business that includes our unique Business Revenue coverage.

Upgrade to the Proper Coverage 

The importance of Loss of Business Revenue coverage is undeniable. It helps to preserve the financial security of a short-term rental business and the peace of mind of the host.  

All short-term rental owners are encouraged to review their insurance policies annually and consult with experts to ensure that their coverage meets their needs. 

To upgrade to our unique Commercial Homeowners policy, contact the Proper Insurance agent in your area at 888-631-6680 or submit a quote. The Proper policy is designed to completely replace your Homeowners (HO) or Dwelling/Landlord (DP3) policy with more comprehensive coverage, uniquely protecting the property, liability, and revenue of your short-term rental business.