After two decades of growth in technology-stimulated holiday homes, it may be fair to say that rental property exposures have grown. Insurance companies no longer shun the market, technology is no longer seen as a mystery and even more governments are reaping the economic benefits of holiday homes.
While there are admittedly almost innumerable ways to break down rental property exposures and risks, we will look at four basic risk areas: (1) Insurance and adequate coverage; (2) Regulatory and state rules (especially taxation and zoning); (3) Personal responsibility and (4) Bad actors.
The last category, bad actors, usually gets the most pressure: but statistically, it can technically be the lowest risk. On the other hand, publicity about holiday home offenses – although rare – can drive government policy. A recent mass shooting in Pittsburgh at a vacation home has brought unwanted, and very possibly undeserved, attention to Airbnb.
Let us now take a look at our four categories to help you guide a less risky, more positive vacation rental business.
1. Insurance and adequate coverage
Early in the history of the holiday home, the use of homeowners’ insurance was generally prohibited, if the claim entailed a “commercial use”. Now that the domestic vacation rental market is generating more than $ 10 billion a year, the insurance industry has changed course. There are now several large companies that offer reputable vacation rentals.
Everyone who rents a property (including their primary or secondary home) should definitely have a specialized vacation rental policy. It is unwise to expect any guarantees from major hosting sites.
2. Regulatory and state rules
Many previous zoning rules failed to recognize the use of a seasonal occupancy. Interestingly, especially in more rural areas, there is also a conflict where the jurisdictions are responsible for their regulation: this uncertainty often blinds landlords. Not having an answer from local construction officials does not mean that it is not a problem: an insurance claim can be denied for not having done due diligence. For example, not being registered for a company permit or not having complied with the state’s building, health and occupancy rules or even fire requirements. Register communication with local officials. Many times, governments essentially renounce claims – even incorrect ones – and a written record of which department or official was contacted can prove “waiver”.
3. Personal responsibility
Many vacation rentals assume that some companies will protect a person from being held financially responsible in addition to “business” assets. Instead, depending on the laws of the state, a small “close” business can actually be no shield from personal responsibility at all. Partnerships (one of the most common ways to own holiday homes) may not only provide some personal immunity but may even create responsibilities between partners. The specific legal scenarios for the best form of legal ownership are beyond the scope of any article: it requires sound legal advice. It is also necessary, as a vacation rental company ages, to review previous legal decisions: probably at least once a year.
When it comes to having adequate insurance, a weak link is often on the “invited” to the property (guests of tenants). Regular checklists and registers help to show if “reasonably prudent” security has been used on site.
Another area of responsibility often strikes when the property owner cuts corners on security details, from security cameras to adequate lighting. It is virtually impossible to avoid liability for unknown hazards in a rental. Many times this has not only been the parties to the contract, but the invited guests. A contract that clearly addresses obligations and prohibitions (eg restricting parties or guests) will provide some protection. Code violations, on the other hand, are almost impossible to defend against.
Courts will not usually find owners responsible for third-party criminal activity. However, a consistent responsibility is not to maintain minimum safety or ignore known incidents. An owner who knew the risks and not just warned has been held liable for damages to third parties. This risk limitation does not mean that holiday home owners do not run the risk of all businesses: bad reviews. Monitoring your own social media can save your business.
Because bad pressure dogs holiday homes, being a good neighbor protects against neighbors calling the police or city hall. Speaking of dogs, learning general nuisance laws (such as noise reduction) will also help you explain to tenants what is expected of them and the consequences of breaking down. Posted rules. Ideally, this research will prevent investing in a risky place to begin with. Check crime statistics for the neighborhood. If an owner constantly waives or does not apply their own rules, this pattern creates risk: including having their license (if required) revoked.
Conclusion: The elephant in the home
You have probably also noticed that it was not mentioned Elephants of all risk: pandemic. The omission was intentional to score a point. The “real” risk culprit is often obvious only with 20/20 afterwards. While courts have generally made us aware of the consequences of force majeure and Gd’s actions, in order to invalidate contracts, few of us foresaw the risks of a pandemic that would affect travel and rental.
The biggest “risks”, to paraphrase FDR, are not knowing and not preparing.
If you own a vacation home, be sure to talk to them personal insurance team at BNC Insurance. We are here to help you!