Even when they follow your rules, Airbnb guests may cause damage to your most expensive asset. But the right insurance can protect you from potentially big out-of-pocket costs. Here's what you need to know.
Photo by Michael Discenza on Unsplash
As new homeowners with two young children, Mark and Star Stark were always on the hunt for ways to save or earn a few extra dollars. They’d heard about short-term rental listing services, like Airbnb and Vrbo, and thought that seemed like a relatively easy and stress-free way to turn their four-bedroom Calgary home into a money-maker. After advertising their place on Airbnb, the Starks got a message from a group of four adults who were coming to town for a family wedding. Feeling confident, the Starks gave them the booking, and on the appointed weekend, left to stay with Mark’s parents in another part of the city.
Within hours of their departure, the Starks heard from neighbours that busloads of people had begun showing up at their home. What ensued was a two-day party that police later described as a “drug-induced orgy.” The worst part was that even though they knew what was going on, the Starks couldn’t kick their guests out until the end of the rental term—because the guests were protected under contractual law.
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The final tab for clean-up of the damage topped $70,000, including a police-ordered hazardous materials crew. Because the rental was made through Airbnb, those costs were covered by the site’s automatic insurance coverage for hosts. But not every short-term rental platform offers host protection, which means if the Starks had listed their home elsewhere, they may have had to pay out of pocket. When you rent out your home, even if it’s a one-off, you’re generating income that is considered a home-based business, says Adam Mitchell, president of Whitby, Ont.-based Mitchell & Whale Insurance Brokers—and any damage or theft related to a home-based business is not covered by your standard home insurance policy.
Now, that doesn’t mean you should shy away from considering Airbnb as a way to boost your cash flow. Canadians made about $2.6 billion using their properties as short-term rentals in 2018, according to Statistics Canada. (The listing services’ fees amounted to another $196.6 million.) If you want in on the action, though, it’s worth the fairly small amount of time and effort it takes to protect yourself and your property. Here’s how.
When you sign your home insurance contract, you agree to keep your insurance provider up-to-date on the “material facts” of the home. That includes things like installing a swimming pool in the backyard, and how you use your home.
Running any kind of home-based business, including short-term rentals, introduces a new set of risks that need to be factored into your insurance coverage and premiums. “Renting out a portion of your home and not telling your insurance provider could actually void your policy,” explains Mitchell.
Failing to inform your insurer about your Airbnb side hustle means you are actually in breach of the contract — that’s legal speak for saying you broke the rules of the agreement and the insurer is no longer obligated to cover any claim you may make. “It’s insurance fraud,” Mitchell says.
If that’s not scary enough, your insurance provider may decide to cancel your policy. And that can have serious consequences.
There are three ways your insurer can react to not being informed of your short-term rental business:
Having to pay for the required additional coverage (known as a “rider,” in insurance language) is the best scenario. For most, this will mean an extra monthly fee that starts at $10 per month (and goes up, depending on the coverage and your needs).
But what if your insurance provider decides not to renew your contract? This may occur if the insurer now considers you a higher-risk customer. If it does, your insurer will send a letter advising you that they will not be renewing your contract at the end of your policy term. Thankfully, a non-renewal carries no stigma, but it does mean you have to shop around for a new provider, and appropriate coverage. (This is an excellent time to be upfront about your short-term rental business.)
Of course, the most severe situation is when an insurance provider chooses to cancel the policy before the end of your contract term.
While provincial law will dictate how and when an insurer can cancel your policy, most jurisdictions will consider a breach of contract as sufficient enough reason to cancel your policy. If you receive a cancellation notice, you’ll probably have trouble finding coverage from other standard insurance carriers, and will have to pay more for coverage through the “non-standard” insurance market, where premiums can easily jump by 10% to 50% more than what you originally paid for coverage. For those living in Ontario, where the median annual house insurance premium is $1,284, according to a 2018 study by JD Power, this could mean forking out an additional $642 per year on homeowners’ insurance. And this doesn’t include the additional coverage you’ll need to add on for your home-based rental suite business.
Before cancelling your policy, the insurance company must give you written notice, typically a week to 30 days prior to the effective date. If applicable, your insurer will refund any unused premium you have already paid. If this happens, you’ll need to work quickly to avoid becoming uninsured for even a short time. Call an insurance broker immediately, explain the situation and then be honest about what coverage you require. The key is to work quickly and not ignore the situation, as not having insurance on your home could you leave you open to catastrophic financial loss and even the cancellation of your mortgage contract (most lenders legally require you to carry home insurance as part of the mortgage loan agreement).
You can avoid this situation by being proactive. As soon as you think of renting out even a single bedroom in your house, start shopping for home insurance quotes that include a home-based business rider. Most insurers provide this coverage, which means you can shop around to get the right coverage for the best price.
Some homeowners balk at paying extra for home-based business insurance, particularly when the short-term rental site they’re listed on already offers coverage.
For example, Airbnb offers Host Guarantee coverage, where hosts pay nothing extra for up to USD$1-million in coverage for any damage or destruction to belongings or property caused by a guest booking. “It’s a great perk, but there are gaps in coverage,” Mitchell warns. For instance, many types of personal belongings aren’t covered, such as furniture, electronics, artwork, antiques and collectibles. These coverage exclusions are stated plainly on the website, but many hosts end up missing this information. “Without a separate home policy, a homeowner could leave themselves susceptible to serious financial risk.”
Plus, not all cases of damage or destruction are cut-and-dry. While the Starks could easily prove that the weekend guest booking was the cause of their home’s damage, some property owners may have a tougher time, particularly if the damage or theft occurs between bookings. Like all insurance coverage, Host Guarantee does require documentation, such as photos and receipts, and, in extreme cases, a possible walk-through with an Airbnb customer representative.
“Short-term rental coverage only applies when guests book and stay at your place, but what if that guest accidentally leaves your doors unlocked?” suggests Mitchell. “There’s no coverage for damage or theft to a rental suite if a guest isn’t checked in.”
Damage caused by a pet isn’t covered, either— and let’s face it, not all guests are forthright about bringing Fido on their vacation.
Then there’s liability coverage. This covers a homeowner in that rare event someone decides to file a lawsuit or claim against you for bodily injury or damage or loss of personal property. (Here’s an example of what might happen.)
Occasional landlords may feel safe if they use a short-term rental site that offers liability coverage, such as Airbnb’s Host Protection, or the USD$1-million in liability insurance offered by Vrbo and Home Away (which are owned by the same company). Through this coverage, homeowners can claim coverage for liability issues, like if a guest slips, falls and files a lawsuit. It would also cover any accidental injury caused by your rental guest—for instance, if they dropped a suitcase on the foot of a neighbour or another tenant in a condo building.
This site-specific liability coverage will also protect you against claims of loss or damage of a guest’s property, but only if that loss or damage falls within the Host Protection coverage limits. And there are loads of limits.
As an example, let’s consider any short-term rental guests staying in a Toronto suite. These guests have a high statistical chance of running into bed bugs, according to a recent Orkin study that put Toronto at the top of the list for the highest prevalence of these parasites, with Vancouver coming in at No. 4 and Hamilton at No. 7. Yet, Airbnb’s Host Protection coverage excludes damage due to bed bugs. Damage or health concerns due to mold are also excluded—a situation that could leave hosts in an expensive predicament should a guest have issues and decide to seek financial compensation.
What’s worse is that not all short-term rental sites offer liability or damage coverage.
“Many homeowners don’t realize that their standard home insurance policy typically offers CDN$1-million in liability coverage,” explains Mitchell. This protection covers you against any legal and financial claims made against you, but it doesn’t apply to claim made by a guest who paid to stay in your home or property. At that point, your insurer would expect you to obtain and pay the premiums on either a commercial insurance policy or, at the very least, a home-based business rider.
The upshot is that if you want to protect your financial security, you need to make sure the liability portion of your insurance contract covers any claim made by a guest to your short-term rental. To verify, simply read your policy or, better still, have a frank discussion with your insurance broker or agent. Make sure to ask whether the liability coverage in the policy would protect you from any situation that arises from your home-based business. Consider increasing this liability portion of the policy from the standard $1-million in coverage. If there’s a medical mishap, that $1-million will disappear relatively quickly, says Mitchell. Plus, it’s the cheapest, best protection a person can buy.
Once you have this confirmation, and you and your guests can rest easy at night.
If you own the property you plan to Airbnb, and have a current insurance contract, all you need to do is make a couple of quick calls. “Side businesses are encouraged,” says Mitchell. “You just need to be upfront.”
These calls may mean you pay a bit more for coverage, but you don’t risk a catastrophic financial hit should something go wrong.
Most homeowners should expect to pay an additional $120 more per year for basic home-based business coverage. The amount could increase depending on your particular circumstances.
Another option is to pay for month-to-month coverage. For example, Square One Insurance offers no-contract, no-obligation coverage starting at $40 per month, which covers personal liability as well as accidental damage to your home and property. It’s more expensive than adding annual coverage to your base homeowner policy, but may make sense if you plan to rent out your home only during certain months of the year.
When shopping for coverage, make sure you understand the limits offered by the insurer. Most insurers will have a threshold of days—the maximum number of days your rental suite can be occupied by a paying guest. Exceed this threshold and you will have to purchase commercial policy coverage. For many insurers, the limit is close to 120 days, but double-check with your provider to be sure.
Of course, no one loves to spend money on a side-hustle that may or may not work out, but when you consider what’s at risk, an extra $120 for insurance seems like a small price to pay.
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