What Is Vacation Rental Insurance Coverage?

Vacation rental insurance is commercial property insurance specifically designed to cover vacation rental properties. A vacation rental property is a second home you own that you rent out regularly to other people. Renting can be done through a property management service or a platform like Airbnb.  

Think of vacation rental insurance coverage like a homeowner’s policy on steroids. Typical homeowner policies will not provide the liability coverage needed for a rental property. Likewise, there may be exclusions for first-party coverage if the insurance company learns that the property is regularly rented out. 

A standard vacation rental policy will have two areas of coverage:

• First coverage: This policy protects your physical property from specific, named losses, similar to standard homeowner policies. These losses are usually weather-related (wind, lightning, hail), human-related (theft, vandalism), or a mixture of both (fire). 
• Second coverage: Protects against liability. A liability loss is as straightforward as someone tripping, falling, and getting hurt on the sidewalk while walking past your home to a guest slipping and falling down the stairs and ending up in the hospital with a broken coccyx. The liability portion of your insurance will help with their bills while defending you against any type of legal action. 

You also might realize that vacancy matters to an insurance company. If a house is vacant for too long and you file a claim, the insurance company can claim they had no insurable interest in an unmonitored, empty property and not pay the claim. If your home is vacant for half the year, you will want to look into a vacation rental policy that either has a vacant home rider or can switch between a vacation rental policy and a vacant home policy.

Cost of Vacation Rental Insurance

The average cost of a vacation rental policy is about 20% more than a standard homeowners insurance policy. In 2022, the national median cost of homeowners insurance was $1,775. So, the average vacation rental insurance cost is $2,130. Of course, the price may fluctuate some. When it comes to determining the premium cost for insurance, insurers will take into account the standard data you can expect like:

• Age of the home: The age of the home matters because it may have out-of-date wiring, making it more susceptible to a fire, or it may be built with harder-to-procure materials, making the cost of repairing it more expensive.
• Size of the home: Typically, the bigger the square footage, the more expensive your premium will be.
• Home location: The location is important, especially regarding the likelihood of a natural disaster. For example, according to the Insurance Information Institute, Florida has the most expensive homeowners premium, averaging over $2,400. There’s also a greater chance of a hurricane hitting Florida over Connecticut, where the average homeowner’s insurance is $1,600.
• Cost: The past is the best indicator of future performance for insurance companies. If you’ve had a claim in the last 3 to 5 years, you can expect your premium to be higher.

Now, the provider will factor additional considerations into the premium for a vacation rental policy. 

• How frequently do you rent the property out? Is it rented year-round, only during the summer, or only for six months? 
• Do you use any sort of background service to verify your guests? 
• Does your home have amenities like a pool, trampoline, or boat dock for guests? If so, the price will reflect these increased risks.

Obie is a digital broker specializing in landlord insurance and vacation rental insurance. Its comprehensive policies include an inflation guard to ensure your property isn’t uninsured. Get a quote online from Obie in minutes to start purchasing vacation rental insurance!

Different Types of Vacation Rental Insurance

It might be helpful to think of vacation rental insurance as a category of insurance. The specific policy type you purchase ultimately depends on how you use your property. 

Homeowner’s Policy

A homeowners policy may be enough if this is your second home and you only rent it out sometimes. Importantly, you will need to check with your provider to make sure you can rent it and that there is coverage when it is rented out. Some carriers will let you add an endorsement (also known as short-term rental insurance)  to your homeowner’s policy for a limited rental time. If this is enough coverage and you’re happy with it, this is probably the easiest and cheapest option. 

Landlord Policy

If your vacation rental is rented out year-round or often enough that homeowner’s insurance isn’t sufficient, look into a landlord policy. A landlord policy contains extra liability coverage for the rental of the property. The property portion can cover your contents; if the home is unfurnished, it can be limited to just the building. 

There are some important considerations when deciding if a landlord policy is right for a vacation rental. 

• Business interruption insurance: Most landlord policies do not contain business interruption insurance. If something happens and you cannot rent the property, no financial assistance will likely be available. 
• Premise liability: Landlord liability is usually only premise liability. This means there would not be coverage if something happens to a guest off-site. For example, if your rental home has bicycles or kayaks for the guests to use and they get injured while using these items but are off-site, the landlord’s policy wouldn’t cover their injuries. 

And to muddy the waters, some insurance companies offer a business owner’s policy for vacation rental properties but call it a landlord policy. The bottom line is to discuss your property, business, and needs with the carrier to determine which policy is right for you. 

Business Owner’s Policy 

A business owner’s policy (BOP) combines multiple types of coverage, all bundled into one policy. These policies are commercial property, general liability, and business interruption insurance. There are three scenarios where this will either be your best policy for a vacation rental or required. 

First, if the insurance company determines your property is primarily a business, then you can expect to need this policy. Second, a BOP is the best option if it is rented out year-round and you want a higher liability limit and business interruption insurance. Third, you will want a BOP if you need more than premise liability.

If you’re considering getting into rental properties and becoming a landlord, ensure you are up to date on the market in your state. For example, did you know that some states are better suited for landlords than others? Learn more in our guide.

Benefits of Insurance for Investors

Claims can come in many different forms. Some are commonplace like a wind storm damaging the roof of your new property or causing a tragedy. For example, this unfortunate accident:

Carrying vacation rental insurance has other benefits for the investor. It helps in your advertising to let clients know you are adequately insured. Many will require proof of insurance if you want to work with a platform like VRBO or a property management system. 

If you are looking for a loan, even if you need hard cash, being able to show you’ve got insurance on the property will make it easier to procure the loan. Indeed, most banks require you to insure the property if you take out a loan. 

Tips for Choosing Vacation Rental Insurance

Choosing insurance can feel overwhelming. Here are some tips to help simplify the process and keep you focused on your needs.

• Make sure your policy has no exclusions for your business. For example, while a homeowners policy carries liability coverage, the limits are typically very low, and it will have an exclusion for business use. Renting your property is considered business use. 
• Ask about the coverage provided. Specifically, find out what type of coverage is offered, the limits, and if there is an exclusion for vacant homes. 
• Consider the cost of the investigation, defense, legal fees, and, if you are found negligent, settlement, and payouts. Some policies will offer $50,000 in liability limits or even $300,000. A liability limit of $1 million is not much more costly than $500,000, but it provides much better protection. 
• Find out how the company handles its claims and response time for property losses. For example, when I started in the insurance industry I worked second shift on the weekends for commercial claim reporting. We didn’t get many calls but when a business owner had a major loss, like a fire, at 11 p.m. on a Friday having someone to speak with who could immediately get the process started was a major relief for them.

Stay informed during the quote process to ensure the policy you purchase fits how you want to use the property. 

FAQs

Does renters insurance cover vacation rentals?

What is the difference between Airbnb and a vacation rental?

How is vacation rental insurance different from vacation insurance?

Bringing It All Together

When developing your investment strategy, don’t forget the insurance! It is one of the safest and smartest ways to do so. Vacation rental insurance just makes sense: it can help if your vacation home is damaged and will help guests if they get injured while using your property. Why let what-ifs and worries live rent-free in your head when you could purchase insurance and sleep peacefully?

The post Vacation Rental Insurance: A Guide for Real Estate Investors appeared first on The Close.

What is Commercial Property Insurance?

So, what is commercial property insurance? To keep it simple: commercial property insurance is a small business policy that will repair or replace your damaged property in an emergency or unforeseen issue. Insurance is divided into third-party coverages (think liability) and first-party coverage. First-party coverage takes care of what your business owns when damaged in a loss or stolen. Commercial property insurance is a first-party coverage without liability protection for your business. 

If you are a typical real estate investor and own one or more commercial buildings–think a brick-and-mortar business or a strip mall where you rent out office space, then you’ll want commercial property insurance. Before purchasing a policy, you should understand a few terms. Insurance companies sometimes use “real property” when referencing a commercial building. Your investment property will come with a valuation. Valuation will be either actual cash value (ACV) or replacement cost value (RCV).

• Actual cash value (ACV): ACV considers the property’s depreciation when calculating the total payout if a claim is filed. 
• Replacement cost value (RCV): If your policy is written with RCV, the insurance company will pay the true cost to replace or repair your property.

Let’s say there is a significant wind storm, and your building has damage to its roof and siding. If your policy has RCV, the insurance company will pay whatever the cost is to restore your building to its pre-loss state. Alternatively, if it is an ACV policy, the insurance company will factor depreciation into the roof and siding cost, which will be removed from the payment issued to your company.

A big part of understanding commercial property comes down to its usage: is this property’s primary use for a business or as the personal residence of the owner? This means that commercial property can include residential property if you are renting out multiple units, such as a five-unit apartment. However, homeowners insurance is strictly a personal policy for a residence that is not being used for a business, whether that’s a home-based business or a rental unit, and the owner of the property resides there.

Business Owner’s Policy (BOP) 

While there are other types of commercial property insurance, the only one that matters for a real estate investor is a business owner’s policy or BOP. This policy gives your business several layers of protection by combining general liability insurance, property insurance, and lost business income into one policy. Any investor with an actual property management office should consider a BOP since it includes premises liability. 

What Does Commercial Rental Property Insurance Cover?

Commercial property insurance covers your property up to the agreed-upon limit. This property falls into two different categories.

• Buildings: This can be an apartment complex, a commercial building, or a multifamily unit. If you own several homes that you rent out, some insurance companies will let you get one policy for all of them, and then each home is simply a listed location of coverage on the policy. In that scenario, you will want to look into getting a blanket policy for your properties.
• Contents: Contents can be the furniture or equipment (like office equipment) that your business owns. Friendly reminder: there’s no need to insure anything owned by tenants of your property.

Keep in mind that commercial property insurance almost universally works on a named peril basis. Named peril means coverage is only provided for losses named in the policy. Some common types of commercial property named losses are fire, wind, and theft.

Real estate investors looking for quality commercial property insurance quickly should check out Obie. Obie is one of the only providers that lets you get a quote online in minutes. It has lots of great added protection built into its policies, like an inflation guard to help offset the rising cost of construction if you have to file a claim. Get a quote from Obie today.

Commercial Property Insurance Cost

When it comes to what you’ll end up paying for insurance, there are so many factors that it is difficult to give anything other than an estimate. Insurance broker Insureon reports that real estate investors pay approximately $430 monthly for commercial property insurance. So, when estimating the costs of your real estate business, it is reasonable to assume you’ll pay over $100 monthly for property insurance. 

There are multiple data points insurers will focus on to determine your premium, but the more common ones are: 

• Location: Location matters for several reasons. Living costs–including labor and materials, are higher in some zip codes than others. Since the insurance company has to handle that expense, the location will be factored into their determination. The location also matters because if your property is in an area that is prone to flooding, hurricanes, tornadoes, or wildfires, the insurance cost will be higher than if you are investing in property in a region that typically does not experience natural disasters. 
• Property: the age and condition of the property matter to insurers. When was the last time the electric wiring was updated or the roof was replaced? Be prepared to answer specific questions like this and give an accurate figure for the property’s value. Some insurance companies have a property limit of $5 million, so you may have to shop around if you own multiple properties or an expensive building. 
• Claims: If your business has filed a claim in the past, even if it was due to a natural disaster and beyond your control, the insurance company will consider that. 
• Deductible: The deductible is the amount you agree to pay out of pocket whenever a loss occurs. The higher the deductible, the lower the premium, and vice versa. So, if your deductible is $1,000 and you have a loss of $15,000, the deductible amount is subtracted from what the company will pay. The insurance company will then pay you $14,000.

Insurance companies will inspect the property to ensure it is in the shape and condition you report. They may send someone out in person, or companies increasingly use drones. Regardless of the method, the company may not tell you anyone is coming to inspect the property.

At the end of the day, commercial rental property insurance coverage isn’t going to be cheap. But, it is a necessary expense because the cost of not being insured poses a greater risk to the viability of your business. 

Is Commercial Property Insurance Right for You? 

Real estate investors need insurance to protect their property, but what is the right type of commercial insurance for rental policy? The right policy for you may not be a standard commercial property insurance. It depends on the type of investment you have made.

Commercial property insurance is right for you if you: 

• Own a commercial building (restaurant, strip mall, or a warehouse)
• Own multiple homes that you rent out under a rental company
• Own multiple properties in different zip codes

Commercial property isn’t the right choice if you:

• Are a real estate agent and only list property. For that, you’ll need errors & omissions insurance.
• If you are a homeowner looking to rent your old home, you’ll want a landlord insurance policy. 

Frequently Asked Questions (FAQs)

How do you calculate commercial property insurance?

What are the two types of property insurance?

Is commercial property insurance required?

How do I get commercial real estate insurance?

Bringing It All Together 

As a property investor, you’ve probably heard the phrase “protect your investment.” Typically, that means you diversify your portfolio. But, it is also crucial to protect your investments with commercial property insurance. Whether it is a building, a condo, a multiunit complex, or the contents inside of the property management office, commercial property insurance plays a critical role in a robust business model.

Have other questions about commercial insurance? Let us know in the comments below!

The post What is Commercial Property Insurance? A Complete Investor Guide appeared first on The Close.