Getting Quotes
Just as it’s smart to get multiple quotes from lenders before purchasing a property, it’s also smart to obtain multiple quotes from insurance companies before you select one. Not only can the rates vary from one company to the next, but the coverage limits, exclusions, and claims process can vary meaningfully between companies. All of these factors should be considered when trying to find the right policy for you. You should plan to get quotes from at least two companies and ideally three or more to ensure you have a good sense of what different carriers are willing to offer.
For most companies, the standard quote will include a summary of coverages and the policy’s price. While that might be sufficient for someone seeking a routine homeowners policy, more is needed for savvy short-term rental owners. With insurance policies, the devil is in the details.
Read the Policy Before You Bind the Policy
To get a true sense of the coverages, limitations, and exclusions of a policy, you need to ask the agent for a copy of the policy terms to review before you bind the policy. It’s true, that reading an insurance policy is almost as bad as reading the tax code, but it is critical that you have an understanding of the policy details.
Many people don’t read much further than their declarations page, but that is potentially setting them up for a rude awakening if they find themselves needing to file a claim. Policyholders should understand not only their policy’s coverages but also its limits and exclusions. It’s often the limits and exclusions that cause the most headaches for homeowners – not the coverages.
If you don’t feel confident reading and understanding an insurance policy, you have two options. First, contact the insurance agent or sales rep and ask them to explain any aspect of the policy you don’t understand. They should be more than happy to do that, and if they aren’t, perhaps that’s an indication that is not the right company for you. If you’re really being cautious, you could send your questions via email so you’ll have your answers in writing. Alternatively, you could pay an attorney to assist you with going through the policy and help you understand it.
Thankfully, the work you put in coming to understand your policy will pay off in spades over time. Most policies are structured and worded somewhat similarly. Once you develop a general familiarity, it will become easier to read policies and your confidence will grow.
Loss Settlement
Although the name of this section may vary from company to company, the Loss Settlement section is the part of the policy that explains the rules the insurance company uses when determining how they will pay on claims. This is one of the most important sections of a policy to become familiar with.
Questions To Ask:
- Is depreciation factored into claim payments? For example, if a roof is 15 years old, will the insurance company decrease the claim payment because the roof was approaching the end of its expected life?
- Are there adjustments to loss payment according to the value of the insurance coverage compared to the value of the property (if you are under insured they may reduce the policy payout (see the section on dwelling coverage below).
- What is the timeframe for claim payment?
Dwelling Coverage
The dwelling coverage limit sets the maximum amount that the insurance company will pay towards your property.
You should strive to get your dwelling coverage as close to the appraised and replacement value of your property as possible to ensure you will have adequate coverage during a loss.
When properties are underinsured, many insurance companies will reduce the amount paid on claims in proportion to the gap between the dwelling coverage limit and the appraised property value. This could be a devastating blow for a homeowner suffering a loss.
Liability Coverage
Your policy’s liability coverage protects you financially if a guest is injured or incurs damages while staying at your property – and is a very big deal. There are hosts who’ve had multi-million dollar liability lawsuits brought against them and lost their cases. One major incident can have crippling financial consequences.
The liability coverage found in most standard homeowners policies frequently excludes liability coverage for business activities in a residence. Therefore, it is critical that any policy you are considering for your short-term rental does not have this exclusion, or has a rider that waives the exclusion.
High-net-worth individuals who own short-term rentals often get umbrella policies to provide additional liability coverage beyond what their standard insurance policy offers. Depending on the size of your portfolio, it may make sense to obtain a commercial, as opposed to a personal policy. As always, if you are getting a personal umbrella policy, be sure to ask about potential exclusions for business-related activities.
Questions To Ask:
- What are the liability limits of this policy?
- What are the exclusions associated with the liability coverage in this policy?
- Specifically ask about coverage for the business activity as a short-term rental.
Loss of Business Income Coverage
It is recommended to have loss of business income coverage equal to 12-24 months of your mortgage and expenses. Read this portion of the policy very carefully and ask as many questions as you need to until you are confident you understand how these losses would be settled.
Questions To Ask:
- Does the policy only replace the value of lost bookings on your calendar, or does it pay the full coverage limit regardless of the value of the bookings on the calendar that had to be cancelled?
- What are your duties in the event of a loss?
- What information will the insurance company expect prior to approving a loss of business income claim?
- How many days after a claim and its supporting documentation are submitted will the insurance company pay the claim: 30, 60, 90 days?
Wind and Hazard Coverage
Wind and hazard coverage is another part of your policy it’s important to understand fully. It is not uncommon for wind and hazard coverage to have a different deductible than the deductible for other types of losses.
Questions To Ask
- What is the wind and hazard deductible?
- Are there coverage limits, or can the wind and hazard coverage extend all the way to the policy’s dwelling limit?
- Are there any exclusions for the wind and hazard coverage?
Bedbug Coverage
Recovering from a bedbug infestation can be very expensive. Bedbug coverage can help cover these costs. Most insurance companies do not include bedbug coverage in their standard policies, but you may be able to get it added as an additional policy rider.
Questions To Ask:
- What are the bedbug coverage limits?
- What is excluded? For example, is the cost of an inspector coming out to asses the property covered?
- Does the policy deductible apply to bedbug claims?
Amenities Coverage
Do you offer amenities to your guests such as stand-up paddle boards, bikes, kayaks, golf carts, a hot tub, etc.? If so, you are exposed to additional liability claims if a guest gets injured while using the amenities.
Questions To Ask:
- Does the policy liability coverage extend to amenity items?
- Does the coverages follow the amenities if the guest takes them off the property? For example, if a guest takes a paddle board out onto the lake and has an incident, are you still covered even though the paddle board was no longer at your property when the incident happened?
- What are the coverage limits?
- Are there any standard exclusions for this coverage? Examples of possible exclusions are exclusions for golf carts, motorized watercraft, etc.
Liquor Liability Coverage
Do you leave a bottle of wine for your guests? What if your prior guests leave liquor behind and it isn’t noticed by your cleaners? Whenever your guests consume liquor you provided you are exposed to a liability for accidents that might arise after they consume the alcohol. Liquor liability coverage protects you from that liability risk.
Questions To Ask:
- Does the policy require you to have a liquor license in order to have liquor liability coverage?
- What are the policy limits?
- Are there any policy exclusions?
Squatters Coverage
What if you have a guest that just won’t leave? Squatters coverage can help cover the legal costs of getting the squatters removed.
Questions To Ask:
- What is the limit of the coverage?
- What items are covered – legal fees, court costs, sheriff, etc.?
- Does the deductible apply to this coverage?
Covered Perils
The list of potential perils that could impact your property is nearly endless, but here’s a few you may choose to ask about:
- Fire
- Forest Fire (well worth asking about if you are in an area with the potential for fires)
- Lightning
- Explosion
- Earthquake (typically not covered, but supplemental policies are usually available)
- Earth movement (typically not covered)
- Collapse
- Mold – Coverage can vary DRAMATICALLY from one policy to the next.
- Theft
- Nuclear or Radiation Incidents – Nearly universally excluded
- Acts of Terrorism – Likely excluded
Flood Insurance
As far as insurance goes, a flood is any water that enters your home from the outside. It doesn’t matter if that is water from your sprinkler system, a rain or storm event, flash thaw events, or a broken water main in the neighborhood. ANY water that does not originate in your home is considered flood water and it doesn’t matter if you live in a flood zone or not.
Flood damage is not covered by standard insurance policies almost universally. Flood coverage is available through FEMA for owners in the United States, but coverage is limited to a maximum of $250,000.00. If you would like additional coverage you may have the option to purchase a supplemental flood insurance policy from third-party providers.
Some locations, such as areas at high risk for hurricanes may have limited, or no, access to insurance companies willing to offer supplemental flood insurance. If you are considering purchasing a property in a high-risk area it may be worth doing some research into your flood insurance options prior to closing on a property.
Wind and Hazard Coverage
Wind and hazard coverage is another part of your policy that is important to fully understand. It is not uncommon for wind and hazard coverage to have a different deductible than the deductible for other types of losses.
Questions To Ask
- What is the wind and hazard deductible?
- What are the coverage limits, or can the wind and hazard coverage go all the way to the policy’s dwelling limit?
- Are there any exclusions for the wind and hazard coverage?
Bunk Beds
Bunk rooms are extremely popular in short-term rentals as a way to maximize occupancy. They typically aren’t an issue for insurance companies, but you must make your insurance agent aware that you have bunk beds because it may affect your policy cost slightly due to the potential for a child or guest to be hurt.
Docks
Does your property have a dock? Many policies exclude coverage for docks. If you have a dock you need to know whether policies you are considering will cover a dock or not.
Questions To Ask.
- Are docks covered?
- Are there coverage limits for docks?
- Are there any exclusions for coverage related to docks?
Vacancy Provisions
You may have vacancy coverage, but have you read the fine print? Sometimes there may be limitations to vacancy coverage for items like broken glass or frozen plumbing if the property has been vacant for over a certain period of time.
Questions to Ask:
1. Are there limits or exclusions to coverages if the property is vacant for an extended period of time. For example, if the property is vacation for greater than 60 days?
Surveillance Exclusions
There may not be coverage, or coverage may limited for any bodily injury, property damage, or other suits resulting from electronic or mechanical surveillance devices such as cameras. Be sure to ask the agent and check the fine print of your policy.
Duties After A Loss
There will be a section in your policy that clearly explains your duties in the event of a loss. Failure to comply with your policy’s rules can create trouble with your insurance company during the claims process.
Typically the duties after a loss include:
- Notifying the insurance company promptly of a loss
- Securing the property from further damage.
- Depending on the type of loss, you may also be required to file a police report and provide a copy to the insurance company.
These duties can vary from one policy to another though, so it’s important to compare the policies you are being quoted and understand what your responsibilities would be.
Non-Renewal of Policy Terms
Hopefully it never happens, but there are instances where an insurance company may choose not to renew your policy. It’s important to understand how much advance notice the insurance company is required to give you. This will be spelled out in your policy and can vary from as little as 10 days to 30 or more days. If there are issues with your property that make your current carrier decide not to renew your policy imagine how stressful it might be to find new coverage in a short amount of time.
Conclusion
Shopping for homeowners insurance can be a daunting task, but it pays to understand the details of your policy and any potential limitations or exclusions that may apply before you purchase coverage. Armed with the answers to these questions can help you make an informed decision and ensure your home is properly protected against loss or liability claims.