November 5, 2020
A property manager’s entire business model depends on protecting their units. A unit forced off the market by damages or incidents means no bookings which means no revenue. But units can’t be protected against everything. The COVID-19 pandemic is a good example of this. In these kinds of scenarios, to make sure your business is covered, diligent property managers rely on the right insurance.
What is the right insurance for STR companies?
There are a number of glaring mistakes property managers can make in regards to insurance. One is relying solely on host protection insurance offered by platforms like Airbnb. While Airbnb’s policy does provide coverage up to $1 million USD, it only covers your property during an Airbnb stay and primarily relates to issues of liability, such as a guest getting injured on your property. The policy does not cover intentional acts where liability isn’t the result of an accident, accusations of slander or defamation of character, property issues, such as mould and bed bugs, and auto accidents.
Another potential misstep is only purchasing homeowner’s insurance. This type of insurance will cover your dwelling, your contents, and your personal liability in case a guest is injured while staying at your property, but it does come with limitations, says Joe Dalton, Vice President at Encore Insurance Services. This type of insurance puts a cap on the number of nights a year you’re allowed to rent out the property, and often the owner must live on site to mitigate any problematic incidents. If you break either of these contingencies, your coverage is void and you have to pay out of pocket.
Additionally, some property managers assume they’ll be able to get the same insurance deal as hotels because they operate on a similar business model. But this typically isn’t the case. “You don’t quite have the same exposure,” Dalton says, “because [in hotels] you’ve got a front desk and a concierge, and the threat at a high-end hotel of somebody getting in and setting up a meth lab in a room or run prostitution or drugs is a lot less likely to happen than in a high-end rental unit where somebody is doing self check-in and they’re going through an unsecured building.”
Dalton’s right. Short-term rentals lack many of the security processes used by hotels. As a result, they are a riskier option for insurers to cover, driving up the price of insurance premiums. And until recently, the availability of short-term rental insurance was severely restricted. “It was such a new industry segment,” Dalton says. As the industry has aged, more insurers are offering plans, giving property managers better options for their coverage. But it's still difficult to decide what type of insurance to pay for. Regardless of the insurer you go with, to make sure your properties and business are protected, these are the four types of coverage you need to have as a property manager:
Types of short-term rental insurance
General Liability Insurance
Similar to Airbnb’s Host Protection Insurance, general liability insurance covers you in instances where you’re liable to be sued. “The worry is that if you rent a unit to somebody and the guest falls off a balcony or hurts themselves or causes property damage to a neighbouring unit, that’s where liability insurance steps in,” Dalton says.
Airbnb’s insurance covers you for a single incident up to $1 million. If the cost exceeds that, and you don’t have general liability insurance, you’re forced to pay the remainder out of pocket. A few other booking sites, like Vrbo, provide similar policies, but sites like Expedia and TripAdvisor leave insurance up to the property manager to arrange.
In property insurance speak, “acts of God” refer to unpreventable incidents. According to Dalton, this covers any physical damage inflicted on the unit as long as the intent behind the damage wasn’t malicious. This includes floods, fires and other unforeseen accidents.
When selecting your property insurance, Dalton advises that property owners get coverage for property damage as broadly as they can to cover all types of circumstances.
Property Management professional liability Insurance
General liability insurance and property insurance are aimed at owners operating a business out of their property, but they don't fully cover a property manager who is handling properties that belong to clients. In this case, you need property management professional liability insurance. This insurance covers you in the event that a third party, such as a client, claims they suffered financial loss because your company didn’t deliver on its promised services.
“An example of that,” Dalton says, “would be the mismanagement of renting units. Say there’s a bunch of chargebacks for fraudulent bookings, the unit owner might have financial loss. The allegation in that case would be that the property manager didn’t properly vet the tenants that were coming in. Another one would be failure to book the units you’ve promised.”
Cyber insurance, Dalton says, tends to be unique to each business, but has become much more relevant since the pandemic expedited remote and online work. “As a property manager of short-term rentals where the bookings are done online exclusively, maintaining protection against a hacking incident or cyber extortion or a theft of third-party data is a particular risk that property managers want to protect themselves from.”
Stay protected while reducing costs
Paying insurance premiums can be expensive, but the costs of being caught by an incident without insurance can be astronomical. To protect your properties and business, you need to invest in the right coverage. This doesn't mean, however, that insurance costs should be eating up all of your revenue. Regardless of the insurer you go with, there are tricks to keeping your premium low. To find out how, check out part two of our short-term rental insurance series—coming soon!