Creating the Ultimate Insurance Stack for Your Short-Term Rental Business

This content is a part of SSTIR Crazy Month which is sponsored by Proper Insurance

Proper Insurance is committed to providing short-term rental owners with a comprehensive insurance solution. Call Proper today at 1-888-631-6680

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Navigating through the short-term rental insurance industry can make you feel like you’ve been swept into a tornado of misinformation and convoluted jargon. Terms such as host liability/guarantees, slip and fall, waivers, supplemental insurance, general liability, homeowners insurance, trip cancellation coverage, and more, all whip around in a confusing flurry.

Short-term rental property managers and property owners are left feeling lost on what to do as they sort through how to protect their business, shield their liability exposure and secure their income, or maybe they are so disoriented they just pick the first or cheapest policy they come across and hope for the best when a claim arises.

It’s time that we cut through this storm and provide much-needed clarity. Stripping away the complex terminology and complicated information until we're left with the core elements - the foundational pillars of insurance options for short-term rental managers and owners.

These four pillars — property manager insurance, short-term rental insurance for the property, damage waiver products, and travel insurance — serve a distinct purpose, together forming a solid structure that provides comprehensive protection for your short-term rental business.

We'll explain how these different types of insurance interact with each other and why having one doesn't make the others obsolete. Let's clear away the debris, reset the foundation, and start building a solid structure of insurance understanding to provide the ultimate peace of mind.

Table of Contents:

• The First Pillar: Property Manager Insurance
• The Second Pillar: Insurance for Property Owners and Hosts
• The Third Pillar: Supplemental Protection, Damage Waivers, Security Deposits, and OTAs (like AirCover)
• The Fourth Pillar: Travel Insurance for Guests
• Building Your Insurance Stack

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The First Pillar: Property Manager Insurance

As a property manager, your role revolves around managing properties for third-party owners. This responsibility comes with its own set of risks and liabilities, which is where the first pillar of our insurance structure comes in and the most complex structure of insurance in our short-term rental stack: property manager insurance.

If you are not a property manager but instead a property owner, you can go ahead and skip this section down to pillar two.

This type of insurance is designed specifically to cover the operational duties of a property manager. It's important to understand that this insurance package is not designed to cover the properties under your management. Instead, it focuses on protecting you from potential legal issues that may arise as a result of your management duties and property protection for things like office space/equipment, business autos, etc.

Note that this is the most complex structuring of insurance on the property manager's side. This can be the hardest part to get set up correctly and will take time to figure out because every business is unique with varying needs. Think of it as buying legal defense cost for your management business.

Short-Term Rental Property Manager insurance should include:

> General Liability

This is the base layer of protection that covers claims arising from accidents that cause bodily injury or property damage. If a client or visitor gets injured as a result of your actions or inactions with respect to your duties as a property manager, general liability insurance can cover legal expenses and compensation claims.

> Property Coverage

This is vital for situations where your business assets, like office equipment or machines, get damaged or stolen.

> Errors and Omissions (Professional Liability)

This protects you if a client claims that your advice or services resulted in harm to them either financially, emotionally or otherwise whether actual or alleged such as discrimination.

> Cyber Liability

In an increasingly digital world, cyber liability insurance is becoming more relevant. It protects your business in case of data breaches or other cyber threats.

> Workers' Compensation Insurance

If you have employees, this insurance is required by law. It covers medical costs and lost wages if an employee gets injured or sick due to their work.

> And More

Additional items you may want included would be items like commercial auto for any business-use vehicles; employment practices to protect you against employee complaints; tenant discrimination; employee benefits; excess liability; and more depending on your unique needs.

Furthermore, as a property manager it's a crucial step to require your property owners to name you as additional insured on their short-term rental property insurance policy. This provides extra protection and ensures all parties involved are adequately covered. Also, be sure to make it a business practice to collect the certificates of insurance from your property owners to confirm they have the necessary coverage and to have on file in the event of a claim.

Property manager insurance is a key pillar that supports and protects your role as a property manager. It's the first step in building a robust insurance structure for any short-term rental management business.

Suggested property management insurance partners: Wister, Northfield, Atlantic Casualty

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Examples of a claim

• A slip and fall injury occurs at a home you manage because you didn’t shovel the snow. As the property manager, maintaining the exterior of the property is part of your responsibility. This claim could be filed under your property manager insurance's general liability coverage.
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• Someone breaks into your office and steals electronics like computers, laptops, and monitors. You would file this claim with your property manager insurance.
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• A homeowner of a house that you manage gets sued for Legionnaires' disease contracted from their hot tub being improperly cleaned. The homeowner then sues you (the property manager) as they entrusted you with the operations of the property. You would file this claim with your property manager insurance.

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The Second Pillar: Insurance for Property Owners and Hosts

The second pillar of our insurance structure is directed at property owners and hosts. While property managers have their unique set of insurance needs, property owners and hosts require separate coverage that specifically caters to their responsibilities and the risks related to the property where the rental guest resides.

This is where the second pillar comes in: commercial homeowners/condo insurance.

Commercial homeowners/condo insurance provides coverage for damages to your property and personal belongings due to perils like fire, wind, water damage, and intentional or malicious guest-caused damage. It also offers liability protection if someone gets injured while at your short-term rental and extends beyond your property line.

It is important to be aware that there are several gaps in standard homeowners or landlord insurance policies when providing coverage for short-term rental operations. Therefore, it's advised to purchase a policy that explicitly states it covers short-term rental business operations like Airbnb and Vrbo — with the most superior coverage being a commercial homeowners policy like the one offered by Proper Insurance.

Essential types of coverage property owners and hosts need for their short-term rental:

> Property Coverage

This protects your physical property and personal belongings from damage caused by various perils, such as fire, wind, or theft and should extend to include no limit on guest-caused damage.

> Liability Coverage

If a guest gets injured, liability coverage can help pay for medical expenses and legal costs. It is advised to have commercial liability insurance so that it covers on-premise incidents and extends to off-premise situations, including accidents involving amenities and even assault and battery claims.

> Loss of Rental Revenue Coverage

If a covered loss prevents you from renting out your property, this coverage can help replace the lost revenue you would be receiving during that time.

Property owners and hosts need to have their own comprehensive insurance coverage in addition to the insurance the property manager carries (if applicable). This pillar forms the foundation of a robust insurance structure that protects the host’s short-term rental property, their business revenue, and liability exposure. At the end of the day, when a claim happens at the property, it is the insurance policy for that property that is the first to respond.

Suggested home insurance providers for short-term rental owners and hosts: Proper Insurance, Berkshire Hathaway, Auto Owners, Foremost, and American Modern.

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Examples of a claim

• A tree falls on your short-term rental home, resulting in enough damage that forces you to cancel your future bookings until the home is fully repaired. With the correct short-term rental insurance in place, the property damage from the fallen tree and the lost rental revenue from the canceled bookings can be claimed on your commercial home/condo insurance.
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• While exiting the hot tub at your short-term rental, a guest slips and falls resulting in a hospital trip and a head injury. This is a liability claim that you can file on your commercial home insurance.
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• Two people book your short-term rental for their annual vacation in mid-March but instead of relaxing by the backyard pool, they host a massive party for their college friends resulting in $50k in damage to your property and belongings. If you have the correct insurance in place, you can file the damage under your commercial home insurance and use your supplemental damage protection.

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The Third Pillar: Supplemental Protection, Damage Waivers, Security Deposits, and OTAs (like AirCover)

The third pillar of insurance for short-term rentals provides protection to the homeowner or host for damage that does not typically reach the property owner’s insurance deductible in the second pillar (commercial home/condo insurance).

This pillar includes supplemental coverage offerings like damage waivers, security deposits, and online travel agents (OTAs) like AirCover. It's important to note that supplemental coverage is not a replacement to property insurance (pillar two). Instead, it serves as an added layer of protection that complements your primary insurance coverage.

Common types of supplemental coverage for short-term rentals include:

> Damage Waivers

‍Provide protection against accidental damage caused by guests like a broken shower door. Depending on the company, it can also include intentional damage caused by a guest like a child drawing on furniture. Damage waivers provide a hassle-free solution to smaller scale guest-caused damage.

> Security Deposits

They serve as a financial buffer for hosts, providing funds that can be used to repair or replace damaged items. However, managing security deposits can be challenging and time-consuming and the extra upfront cost could possibly deter potential guests. Therefore, many hosts are transitioning to damage waivers instead of this antiquated model. Additionally, security deposits require the most guest involvement around host reimbursement.

> Online Travel Agents (OTAs)

Companies like Airbnb, Booking.com, and Vrbo:  offer their own coverage options included in the booking platform, such as Airbnb's AirCover. These services provide a hopeful degree of protection for hosts, covering situations like property damage and theft. The coverage provided by OTAs are commonly reviewed as unreliable and provide weak coverage at best. Although this supplemental protection is included with the larger booking platforms like Airbnb and Vrbo, it is still recommended to secure alternative damage waiver options.

Together with pillar one and pillar two, supplemental protection forms a robust structure that shields your business from the big risks and the small ones, ensuring peace of mind from the first dollar.

Suggested supplemental coverage providers: Waivo, Rental Guardian, Superhog, Safely

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Examples of a claim

• Guests have a dinner party at your short-term rental home. When your cleaners arrive at the house after the guest checks out, they discover broken chairs at the dining table, broken dinnerware in the sink, and a broken lamp resulting in $2,000 in damage. The damage is sub-deductible so you use your damage waiver or security deposit to replace the broken items.
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• A guest is doing their laundry after a long day out-and-about and decides to put more clothes in the washing machine after starting it. However, they can’t get the lid to open mid-cycle. They find a crowbar to pry open the lid causing irreversible damage to the appliance. (This really happened!)
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• Your guest, in a fit of rage after a sports-team loss, punches the television cracking the screen.
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• Soiled linens... You get it.

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The Fourth Pillar: Travel Insurance for Guests

The final pillar in our insurance structure for short-term rentals is offering travel insurance to your guests. While the other pillars focus on protecting the property manager and the property owner, this pillar is all about ensuring that guests have peace of mind during their stay at your vacation rental.

Travel insurance is purchased by the guest and typically offered during the initial booking phase by the property manager or the property owner. It’s good practice for property managers and property owners to offer travel insurance as an option to guests, even though it cannot be required.

Here's why you may want to offer travel insurance for your guests:

> Coverage for Cancellations

Travel plans can sometimes go awry due to unforeseen circumstances like weather conditions or personal emergencies. Travel insurance can provide coverage for cancellations, including last-minute ones, ensuring guests don't lose their entire investment.

> Protection Against Accidental Damage

If a guest accidentally damages something while at the property, travel insurance can offer coverage to them versus losing their security deposit.

> Coverage for Lost Luggage and Other Travel-Related Incidents

Lost luggage can be a major inconvenience for travelers. With travel insurance, guests can receive compensation for lost, damaged, stolen or delayed baggage.

> Support for Your Strict Cancellation Policy

Offering travel insurance can reinforce your strict cancellation policy. When guests opt for travel insurance, they take responsibility for managing unexpected changes to their travel plans, which can otherwise lead to disputes over cancellation policies. This not only gives hosts an easier way to uphold their policies but also ensures a smoother resolution process.

Online Travel Agencies (OTAs) like Airbnb and Vrbo often provide guests options for travel insurance. However, for direct bookings, property managers and property owners may need to offer a travel insurance option since these bookings do not have the safety net of OTA insurance partnerships.

Travel insurance is an essential offering to complete any comprehensive insurance stack for short-term rentals. It provides guests with peace of mind and protection against unexpected events that could disrupt their travel plans. Together with the other pillars, it forms a solid structure that ensures all parties involved — the property manager, the property owner, and the guest — are adequately protected.

Suggested travel insurance providers: Generali Global Assistance, Red Sky Insurance, Faye

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Examples of a claim

• A guest books a ski trip to Vail six months ahead of time. Unfortunately, Vail doesn’t have enough snow for skiing, so they no longer want to travel to Colorado. Even though you have a strict 30-day cancellation policy, the guest cancels their trip 10 days ahead of their arrival date using travel insurance. The guest is refunded for their trip via trip insurance and the host gets to keep the money from the booking without disputes around the cancellation language in the rental agreement.
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• A guest books a ski trip to Vail six months ahead of time. Unfortunately, Vail doesn’t have enough snow for skiing, so they no longer want to travel to Colorado. Even though you have a strict 30-day cancellation policy, the guest cancels their trip 10 days ahead of their arrival date using travel insurance. The guest is refunded for their trip via trip insurance and the host gets to keep the money from the booking without disputes around the cancellation language in the rental agreement.
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• A red tide washes ashore in Florida two days before your guests arrive at your beachfront condo. The guest decides to cancel their trip as they will not be able to enjoy swimming in the ocean as planned. The guest is refunded for their trip through travel insurance and the host keeps the money from the booking.
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• Wildfires break out throughout the west coast causing significant smoke to engulf Montana. The guest has asthma and decides to cancel their trip to Glacier National Park. The host keeps the money from the booking and the guest gets refunded from their travel insurance. Win for the guest, win for the property manager and owner.

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How to Build Your Insurance Stack

Understanding and implementing the four pillars of insurance for short-term rentals is a critical component of a property manager’s and property owner’s business model.

Each pillar of insurance, while distinct, works in tandem to create a comprehensive protective network for the short-term rental operation. No single pillar is obsolete but instead, they complement and reinforce each other, addressing different aspects of risk and coverage.

With this foundational understanding, here are the next steps for implementation.

As a property manager you should:

1. Secure property manager insurance (pillar one) through a reputable insurance partner that can meet your unique needs and outline an effective mitigation plan.
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2. Partner with a commercial homeowners insurance company through their referral program so you can offer a solid recommendation for property insurance (pillar two) for your property owners.
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3. Add supplemental coverage (pillar three) and travel insurance (pillar four) into your direct booking process.

As a property owner you should:

1. Secure comprehensive commercial homeowners/condo insurance (pillar two).

2. Add supplemental coverage (pillar three) into your booking process.

3. Offer travel insurance (pillar four) to your guests. If you exclusively use Airbnb or other booking platforms, travel insurance (pillar four) is typically provided through them. However, if you book directly with your guests, you should build a travel insurance option into your booking process.

When you have the four pillars in place you have the least amount of potential exposure in your risk management plan and can have peace of mind over every angle of your short-term rental business.

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