Protecting Paradise: How to Insure Your Second Home, Vacation Rental or Timeshare
Owning a vacation home or timeshare might sound like a dream escape from daily stress. Renting out your property can even help you foot the bill. But not having the correct insurance coverage can lead to trouble in paradise.
Second homes, vacation rentals and timeshares all come with different insurance needs. Talking over those needs with your agent will help make sure you can sit back and sip piña coladas without having to worry about what-ifs.
“Don’t think, ‘It won’t happen to me,’ because you really are opening yourself up to a lot more risk by having people you don’t know stay on your property,” says Janet Ruiz, spokeswoman for the Insurance Information Institute.
Insuring a vacation home
Any home that you own but don’t rent out to others is considered a second home. You would need to get an additional, full homeowners insurance policy and indicate to your insurer that it’s for your second home.
The policy would take into account the many of the same things as a policy for a permanent or primary residence, such as how much it would cost to rebuild the property, the value of the property’s contents, and how much liability coverage the property owner wants to have.
However it might cost more to insure a second home because there are more risks involved:
- Theft, damage and vandalism: The amount of time you plan to spend away from the property might increase your premium because vacancy puts your property at greater risk for these kinds of occurrences.
“The consideration is that you’re not there as much, and so you really want to be sure that you have a good security system, and also things like a leak and water detection system,” Ruiz says. “Water damage is one of the most common losses in the homeowners field.”
Modern smart home features, such as security apps and camera systems, make it easier to stay connected to your second home when you’re away and might even lower the cost of your premium, Ruiz says. Having a property manager who can check in on the house while you’re gone can also be helpful.
- Location: The beaches and forests that make vacation properties look so appealing can also put them at greater risk and result in higher deductibles. You will need additional insurance if your property is in an area that’s prone to flooding, earthquakes, wind, wildfires or other perils, according to the Insurance Information Institute. A beach house might be susceptible to storm surge flooding from hurricanes, whereas a ski house might be exposed to wildfires.
- Property type: The age and type of building materials used in a vacation home will affect the cost of insurance. It also depends on whether your home is a single-occupancy house, a condominium or a townhouse, according to the III. A condominium might cost less to insure than a stand-alone beach house, because a homeowners association maintains the property.
- Amenities: Having features such as a pool or dock on your property could increase your premium.
Other considerations to discuss with your agent include:
- Replacement cost versus actual cash value: Find out whether your policy will pay the full cost of replacing damaged property, such as your roof. A policy that covers only actual cash value will cover the depreciated value of your property.
- Coverage during unoccupied periods: Some policies do not cover a home during times when it is vacant. “People often don’t understand there is a reduction in coverage, says Darren Pettyjohn, co-founder of Proper Insurance, an agency that specializes in niche coverage. “It all depends on whether your carrier deems that unoccupied or vacant.”
- Liability: Make sure your liability insurance will remain in effect if the property is unoccupied. For example, if someone shows up to repair your property while you are away and gets injured, you would need liability coverage.
Vacation rental properties and insurance
These days, everyone’s running a bed and breakfast. Whereas vacation rentals were once the primary domain of beachfront condos and mountaintop ski chalets, websites such as Airbnb and VRBO have made it possible for anyone to rent out a spare bedroom or garage guesthouse for a few nights.
But the fact that residences are serving multiple purposes has created confusion over how to insure them.
“The million-dollar question is when you short-term rent out your home, is it a business transaction or not?” Pettyjohn asks.
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Until about a decade ago, most insurers did not consider this a business transaction. But with the growth of vacation rental websites, the market has exploded in the past few years. “Now that it’s everywhere, insurance carriers are absolutely considering this a business activity, and they’re starting to deny claims,” Pettyjohn says.
If you plan to rent out your primary residence for short periods on a regular basis, this would constitute a business. Standard homeowners insurance policies do not provide coverage for business activities conducted in the home.
Owners of the property would need to consider:
- How often do they plan to stay there each year?
- How often will it be vacant?
- How often will renters occupy it?
Homeowners might be surprised to learn that they may need a commercial policy to cover the use of their home as a vacation rental, says Bryan Geon, corporate counsel for vacation rental manager Vacasa. Some insurance companies may allow a homeowners or renters policyholder a short-term rental. Others will require a rider to the existing policy.
“It’s best to work with an insurance company or broker who understands vacation rentals and is not trying to sell you a policy that may not be the best fit for your situation,” says Geon, noting that this is a general suggestion and not intended to be specific legal advice.
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Some policies allow you to rent out your home a certain number of days each year without needing any extra coverage. It’s known as “occasional home rental,” such as if you only rent out your home when there’s a major event in your area, but not on a regular basis. Some insurers even offer a home-sharing liability policy that you can purchase on a month-to-month basis.
“If you are renting it out, you want to be sure the people on your property are also insured,” Ruiz says.
Insuring a short-term rental can be challenging because there are three different uses of the property:
- Short-term rental: This is defined as renting a property to someone for 30 days or less. It’s no different from running a hotel or bed and breakfast.
- Personal use: This is the time when you stay on the property when you’re not renting it out to someone else.
- Periods of unoccupancy: This is when there is no one in the home because it is between rentals.
“Fundamentally, the only way to get coverage for all three periods of use is via a business policy. It has the horsepower to cover everything,” Pettyjohn says. “You can’t bring a homeowners or landlord policy up to a business policy. It doesn’t work. You’re going to find gaps in your coverage no matter what.”
Property owners have three options for insuring short-term rentals:
- Homeowners policy: These policies are designed for owner-occupied properties and might not provide full coverage if you plan to rent out the property.
- Dwelling landlord policy: These policies are designed for properties occupied by a long-term tenant, meaning someone who lives on the property. Landlord policies generally cost about 25 percent more than standard homeowners policies, according to III.
Dwelling landlord policies provide property insurance coverage for physical damage to the structure of the home caused by fire, lightning, wind, hail, ice, snow or other events. They also offer coverage for any personal property you leave onsite for maintenance or tenant use, such as appliances, lawnmowers or snow blowers. The policy also includes liability coverage, in case a tenant or guest gets hurt on the property.
Most landlord policies provide coverage for loss of rental income if you are not able to rent out the property while it is being repaired or rebuilt due to damage from a covered loss.
You might be able to purchase a landlord dwelling policy and ask your insurer to try to rewrite the policy to cover business activity, although that could result in some coverage exclusions, Pettyjohn says.
Another consideration is that a landlord policy carries liability that applies only on the premise. So if a vacation rental guest brings a dog, and the dog bites the neighbor off premise, there’s no coverage.
- Business policy: These are designed for traditional businesses, such as coffee shops and grocery stores. These policies carry commercial general liability, which does extend off premise.
The catch is that a business policy is not designed for a home, which means the policy is more expensive and costs about 40 percent more than a homeowners policy, on average. So if your homeowners policy is $1,000, a business policy might cost $1,400.
“It’s the owner’s choice,” Pettyjohn says. “If they want good coverage, they’re going to pay more.”
One benefit is that your insurance may be tax deductible as a business expense.
If you do choose to rent out your property, Ruiz says the most important consideration is to contact your insurance company and let them know what you’re doing. “Sometimes people don’t want to do that because they’re afraid of some consequence,” such as the insurer raising their rate or cancelling the policy,” she says. “However insurance is meant to protect you from losses and put you back where you were. So it’s really important to contact your insurer and let them know what you’re doing and find out if your insurance covers it so you don’t have any big surprise if and when there is a loss.”
How to insure a timeshare
Even though you technically own a portion of a timeshare, it’s unlikely you will need a separate policy in addition to your existing homeowners or renters policy.
“Generally speaking, you don’t own the property. It’s like a hotel you have to pay for on a regular basis,” Ruiz says.
As long as your homeowners or renters policy carries personal liability, that coverage will follow you anywhere you go.
“You get the limits of your homeowners or renters policy and the perils they’re covered for when you travel,” Ruiz says. “The location of belongings doesn’t matter, as long as they’re in your custody, care and control.”