Darren Pettyjohn is the Co-Founder of Proper Insurance. Proper offers a custom-penned insurance product designed for vacation rental property owners. The insurance is all inclusive, replaces a homeowner’s or landord insurance policy, and includes coverage for building(s), contents, business income, and commercial/business liability.
Over the past five years, short-term rental regulations and ordinances have been at the forefront of the discussion surrounding the vacation rental, or short-term rental, industry. The days of operating a rental and somewhat flying under the radar and avoiding attention from local and state legislatures are long gone.
Virtually every community in the U.S. is now passing or updating ordinances in relation to short-term rentals. One common thread found in many of the new regulations or ordinances is a stipulation about vacation rental insurance.
STR property owners have three options for insurance; a homeowner’s policy, a landlord policy, or a commercial policy. All of these policies automatically carry both property and liability coverage. The property coverage is for the structure itself and contents inside of it, and the liability coverage is for bodily injury or property damage the insured could be found legally liable for. Each policy was designed and written for a specific occupancy type.
Here’s what each type of insurance policy looks like:
Homeowner’s policy: Homeowner’s insurance is designed for a property that is owner-occupied, in other words, a policy for where one lives or resides. The structure or building(s) need property protection as well as all your stuff, things like dishes, linens, clothes, furniture, electronics, or also known as your personal property. Homeowner’s insurance automatically includes personal liability which is detailed in the next section.
Landlord policy: Landlord or dwelling insurance is designed for a property that is tenant occupied. If someone owns a property and rents it out to a tenant, this would be the type of insurance to purchase. It also protects the structure or building(s), includes landlord furnishing’s if necessary and automatically includes premise liability which is also detailed in the next section. It’s important to understand short-term rental guests are not tenants of a property as it’s not where they reside/live. This is part of the problem with insuring vacation rentals on a landlord policy.
Commercial policy: Commercial insurance is designed for a property that is being used as a business and is structured differently than a homeowner’s or landlord policy. Businesses typically need more protection as they generally have a higher level of use and are open to the public, so liability is always a concern. They also cover the structure or building(s), business personal property or stuff, but add in lost business income and commercial general liability, which is the last type of liability explained below.
And here’s the breakdown of the different types of liability insurance found in each of the above policy options:
Personal liability: This type of liability is found in all homeowner’s insurance policies and protects the insured against claims of bodily injury or property damage they could be found personally liable. It specifically excludes any coverage for bodily injury or property damage arising from “business activity.” Most insurance policies define a “business” as something that results in more than $2500 of financial compensation during the 12-month policy period. If a short-term rental produces more than $2500 compensation, then personal liability would not respond to any short-term rental claims.
Premise liability: This type of liability is found in dwelling insurance policies, or landlord polices, and protects the insured, typically a landlord, against claims of bodily injury or property damage they could be found legally liable. It also excludes “business activity,” coverage is limited to the premise only, and it does not provide coverage for “personal and advertising injury,” a.k,a slander or invasion of privacy. Premise liability is limited in scope.
Commercial general liability: This type of liability is found in business or commercial insurance policies and protects the insured against claims of bodily injury or property damage they could be found legally liable. It does not exclude “business activity” and extends beyond the premise, i.e. dog bite off premise. Unless excluded, it also provides “personal and advertising injury”. It’s the most comprehensive liability insurance one can purchase.
Finding a specialty insurance policy tailored for your short-term rental is the smart idea. It’s also recommended that you meet with someone who specializes in vacation rental homeowner insurance and that understands local regulations regarding insurance.
From a regulation standpoint, it’s clear that lawmakers are primarily concerned with liability insurance. Lawmakers want to guarantee that any guests will be protected if they’re staying at a short-term rental property.
Insurance Requirements and Local Ordinances
Regarding regulations, having an insurance requirement is one of the positive pieces of legislation that city councils can craft to regulate short-term rentals in their area.
Here are a few examples of what insurance regulations look like in different parts of the U.S.:
Monroe County, Pennsylvania – Ordinance No: 2017-03: Each owner shall maintain a minimum of $500,000 in liability insurance on the STR for the full duration of their license term and provide proof of the same to the township.
City of New Orleans, Louisiana – Ordinance No: 27204: Attest to the following and furnish the necessary documentation upon request of the department of safety and permits; That the property has current, valid liability insurance of $500,000 or more.
City of Tuscaloosa, Alabama – Ordinance No 8738: Every person in the city or its police jurisdiction who wishes to obtain a license to conduct a short-term rental business pursuit to Section 7-200 must provide proof of the following insurance coverage: (1) A rider on a homeowner’s policy that expressly covers short-term rentals and provides a minimum of one million dollar ($1,000,000.00) liability and personal injury coverage; or (2) A commercial insurance policy covering short-term rentals at the permitted address that provides a minimum of one million dollar ($1,000,000.00) liability and personal injury coverage.
A common thread in many of these ordinances is while they make declarations, they’re still fairly vague.
For example – Monroe County’s ordinance states you need liability insurance and proof of it. There are 3 types of liability insurance and various ways of providing proof. Clear, concise wording of regulations can help prevent any confusion and make them easier to abide by.
If we were to rewrite Monroe County’s ordinance, here’s how we would bring more clarity to it:
Each owner shall maintain on the Short-Term Rental(s), for the full duration of their license term, a minimum of $500,000 in “commercial general liability” insurance and the owner shall provide proof via a “certificate of insurance (COI)”.
Overall, Proper Insurance believes commercial general liability insurance is one of the strongest and smartest safeguards a homeowner can have for their rental property.
A Commercial Liability Insurance Requirement Is Good for The Industry
A legal short-term rental insurance requirement is good for homeowners, property managers, and the city. It creates a safeguard for all homeowners and tenants and eliminates non-professionals. It also comes with more strict insurance carrier underwriting, which may include property inspections, smoke alarms in all bedrooms, fire extinguishers, chimney cleanings, type of wiring, railings on all stairways, and generally a higher level for standard of care.
If an owner is unwilling or unable to get commercial general liability insurance, then they should not get a permit. Other hospitality entities including bed and breakfasts and hotels carry commercial general liability. Short-term rental properties should be no different.