This article is brought to you by Steadily. Read our editorial guidelines for more information.
Investing in real estate involves risk, and having the right insurance coverage is essential to protect your rental property investment. Just as every property is unique, your insurance policy should also be tailored to your property type, location, length of tenancy, etc.
Understanding the nuances of coverage for short, medium and long term rentals is especially important, as the wrong type of policy can cause your claim to be denied by an insurer. Indeed, the risk of a long-term tenant is perceived differently than that of a short-term rented property, such as an Airbnb or a vacation rental. So how do you know if you have the right cover in place? In this article, we’ll take a closer look at each type of insurance policy and its main differences.
Disclaimer: This article discusses insurance coverage in general as it relates to what is common in the insurance industry. Each carrier’s policy is different and it is the insured’s responsibility to review their policy for coverage, terms and conditions.
Short term rental insurance
Short-term rental insurance is designed to provide coverage for properties that are rented out on a short-term basis, generally for a period of less than 30 days. This type of insurance is often used by landlords who rent out their homes on vacation rental platforms like Airbnb and VRBO.
Short-term rental insurance typically includes property damage, theft, and liability coverage. This means that if a customer damages your property or steals something from your home, your insurance policy will cover the cost of repairs or replacement. Additionally, short-term rental insurance often includes liability coverage, which can protect you from lawsuits if a guest is injured on your property.
Some short-term rental insurance policies may also include coverage for loss of rental income if your property becomes uninhabitable due to damage caused by a covered event. This can be especially important if your rental property is a major source of income for you.
Many short-term renting hosts rent a second home that was previously covered by a home insurance policy. It is important to note that home insurance covers the properties of specific risks such as fire, lightning and hail, but home insurance policies specifically exclude “commercial activities”. And since most STR hosts don’t live in their rental properties, coverage limitations likely apply. If your insurance company learns that your home is not actually occupied by you (or the policyholder) and instead the property is damaged by a tenant, they will almost always deny your claim.
There is one exception where your homeowners insurance may cover your short term rental, and that is if you are also living on the property. If you have a multi-family property and you live on the premises, your landlord’s insurer may offer a “unit or residence rented to others” endorsement. This endorsement will increase your premium, but will likely be less expensive than purchasing a new line of insurance.
Most insurers offer fairly affordable plans, considering the coverage included in short-term rental insurance policies. Plus, you can get a free quote from each insurer to determine how much you’ll need to pay each year.
The average cost of short-term rental insurance varies between $2,000 and $3,000 each year in the United States However, this range can increase up to $9,000 per year if your rental home is in popular tourist destinations like Florida or California.
It is important to note that short-term rental insurance policies are not universal. Depending on the insurance company, policy options can vary widely and the specific coverage you need may vary depending on the location of your property and how long it has been rented.
Medium Term Rental Insurance
In insurance, there is technically no mid-term range. The policies fall under either short term or long term rentals. Carriers generally consider anything less than six months old to be short term. However, some carriers extend this to include anything less than 12 months old. This type of insurance is often used by landlords who temporarily rent their house or apartment, such as business travelers, traveling nurses or people in the process of moving.
The type of insurance policy will depend on the carrier you are working with. Coverages for mid-term rentals are similar to short-term rentals, including property damage, theft, and liability.
A good comprehensive policy will include three key protections:
1. Property damage – This covers any property damage caused by fire, water damage, vandalism, theft, irresponsible tenants or other things that could damage the physical structure of the property. Not all policies are created equal – some basic policies only cover named perils like fire, lightning, smoke and hail. Other policies are broader and cover everything unless it is specifically listed as an exclusion on the policy. Virtually every policy these days includes a COVID-related exclusion.
2. Loss of rental income/protection of rental income – In the event of an event that renders your property uninhabitable, such as a fire or a burst pipe, this coverage provides a temporary reimbursement of rental income that replaces the rent a landlord would receive as usual if a tenant occupied their property. Insurance companies will check your finances to substantiate the amount of rental income, so a landlord won’t be collecting $1,000 a month on a property that was previously rented for $500.
3. Responsibility – Covers all medical or legal expenses and settlements, such as lawsuits, bodily injury claims and settlement costs, that may arise if a tenant or visitor were to be injured on the premises.
Additional coverage you may wish to purchase to better protect your investment:
- Flood insurance covers flood damage that almost all policies exclude. This is often a separate policy, but can usually be purchased from your same agent.
- earthquake insurance covers damage caused by earthquakes that almost all policies exclude. This can be purchased in the same way as flood insurance as a separate policy.
- Guaranteed income insurance covers partial or full rent payments if the tenant is unable to pay, which many landlords experienced during the height of the pandemic. This is still a separate policy.
- Personal Property Coverage covers your furniture if you rent a furnished rental unit. This is usually available in every homeowner’s policy, so all you have to do is increase the limit high enough to cover your furniture. If you don’t have a furnished rental, you can still carry a small amount of personal belongings for appliances and other things you might keep at home.
Keep in mind that the amount and type of additional coverage varies from insurer to insurer.
Long-term rental insurance
Usually called “owner insuranceor “rental insurance”, these home policies are intended for people who rent their accommodation to others on a long-term basis. New homeowners often confuse homeowners insurance with homeowners insurance, but there are key differences between these two types of policies.
A standard home insurance policy protects against property damage and liability, but it only applies when the owner lives in the residence. If you rent the accommodation, the home insurance will not cover the resulting damage.
A landlord can get away with buying a home insurance policy if the insurance company doesn’t know they are renting it out to others, but when the company starts investigating the first claim, they will find out that they are rented to someone else, and they could deny the claim and void the policy.
Your standard homeowner’s insurance policy will have similar coverages mentioned previously: home, liability, rental income protection, certain damage to tenants and structures other than the main dwelling, such as sheds, detached garages, etc.
You may also consider additional coverages, such as an umbrella policy, which provides additional coverage on top of what is covered by homeowner’s insurance.
When it comes to choosing the right type of insurance for your needs, you need to know what is covered and what these policies do not cover. The only way to know for sure is to read the terms and conditions of the policy you select. This may vary from policy to policy and insurer to insurer; however, some of the most important homeowner’s insurance exclusions include the following:
- Tenant’s property. Most policies do not cover the tenant’s property, and many landlords require or encourage tenants to obtain their own policy for these items.
- The renter’s or owner’s car. The same applies here, as the renter must seek their own coverage.
- Homeowner’s insurance does not cover repairs to major systems.
- It does not cover damage caused by the landlord, for example if a landlord causes damage to the rental itself.
- It does not cover anything that fails due to normal wear and tear or lack of maintenance.
Long-term homeowners insurance typically costs around 25% more than traditional homeowners insurance. The average price for a policy is around $1,070 nationwide, depending on a number of factors including geolocation, property condition, replacement cost, and more.
To learn more about short, medium and long-term rental property insurance, visit Steadily.com for a no-obligation quote. Steadily has a team of homeowners insurance experts who can provide licensed insurance advice to rental property owners.
This article is brought to you by Steadily
Steadily is the highest rated rental property insurance provider in the United States. Get coverage online in minutes for all property types and policy lengths, including short-term rentals. Visit steadily.com to get a free quote today.
Note by BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.