Louise Birritteri: mind the insurance gap if you are a vacation rental host

ShortTermRentalz spoke to Louise Birritteri, CEO of Inlet, to discuss the insurance gap in the emerging short-term rental market.

The massive increase in usage of platforms such as Airbnb and HomeAway to access alternative accommodation to hotels and guest houses has been well documented over the last couple of years. But what perhaps has not been so well covered, and flown under the radar, are the risks to the property owners associated with this sort of short term rental due to the lack of appropriate insurance cover.

It may come as a surprise to many who are active in the short-term rental market that their standard home insurance policy is unlikely to cover them for theft, damage or liability caused by their tenants. So, whilst short term rentals offer property owners a great opportunity to earn extra revenue, this can all be jeopardised by not having suitable insurance.

The rapid emergence of the short term rental market has caught the insurance industry on the hop – and it’s one they are struggling to adapt to quickly. Homogenised insurance products that have not been designed for these arrangements are generally unable to provide cover for the type of flexibility required. This leaves an ‘insurance gap’ in the market.

This gap has been created by three circumstances:
• Home insurance products will not provide cover for commercial activities.
• Holiday home insurance products often do not provide full cover for property damage and liability protection for paying guests
• Landlord insurance products are usually confined to a specified tenant type under an assured shorthold tenancy agreement.

Not only do these leave gaps in insurance cover for those people renting out their rooms or whole properties (and even driveways!), but it means that if they do not inform their insurer of these activities they could find that they void their underlying policy meaning the insurer could refuse to pay out on any claims whatsoever regardless of who caused them.

And, there are further potential repercussions. If an insurer finds out that a policyholder is letting out on a short-term basis and suspects they have been deliberately withholding this information, it could be treated as fraud and/or reported on the insurance industry claims and underwriting exchange (where insurers share information about policyholders). This could make it very difficult for the individual to get insurance again in the future.

Many insurers will refuse to cover situations with short term lets, but this is not the end of the road. If the insurer refuses to continue cover, then there are other insurers who will, so individuals may need to leave their existing insurer in favour of a more flexible new provider.

However, in many cases the existing provider will be happy to keep the policy active with short term letting, but may impose restrictive clauses known as endorsements, which exclude cover in certain circumstances. Some examples of these exclusions are:
1. Fire caused by guests
2. Escape of water caused by guests such as a tap left on
3. Theft by a guest
4. Accidental damage & malicious damage by guests (without forced entry)
5. Public liability and legal expenses for guest injuries

This is where Inlet’s host insurance fills these gaps.

Some sharing platforms, such as Airbnb, have guarantees. Whilst this is a great service, it’s worth noting that these are not insurance policies and you are reliant on the goodwill and practices of the platform. This can be useful for small incidental issues, but the guarantee would not cover large risks such as a house fire (the Airbnb guarantee covers $1m worldwide, so there is not enough money in the pot for this type of issue), so should not be considered an alternative to host or homeowner’s insurance.

Other noteworthy considerations are mortgages. Most residential and buy-to-let mortgages do not permit short-term letting and, therefore, special permission is required to do this. Often the mortgage lender will allow it provided that you have an appropriate insurance contract in place directly with the provider to cover this.

As you can see, there is more than meets the eye when it comes to renting out a room or property if you are a private homeowner. And that situation can get potentially more complex if you are a landlord.

A survey of 1,500 landlords across the UK, conducted by the Residential Landlords Association (RLA), showed that seven per cent are now using Airbnb, or similar sites, to offer their properties on short-term lets with one in three (36 per cent) saying they have done this as a direct consequence of the increasing tax burden they face under the new buy-to-let regime.

One of the key trends we have observed, especially in London, is landlords renting out rooms or whole properties through sharing economy platforms when they are faced with a tenancy gap.

This can occur when a tenant moves out and the landlord hasn’t got a tenant lined up to move in straight away. They are offering the property for short-term rental, often making more in this period than they would when it is rented on a longer term contract.

It also occurs when a landlord wants to sell a property. In most cases, buyers do not want to inherit sitting tenants, so landlords are often left with a previously rented out property standing vacant for what could be a few months while the sale goes through. By offering these properties for short-term rental they are able to mitigate some, or all, of the rental loss during this period.

We are also seeing landlords renting out properties on a short-term basis full-time in other areas of the UK. The attractive returns to be earned from this approach being a direct response to the new tax regime that landlords are facing where buy-to-let mortgages can no longer be offset as expenses.

In all of these scenarios there is a risk that a large chunk of landlords will be blissfully unaware that their commercial well-being could be threatened by the lack of appropriate insurance.

As with the privately-owned market, landlords need to inform their mortgage lender and existing insurance provider that they are participating in short-term rents. From our conversations with the leading insurance providers, most landlord policies will not cover short-term rentals and mortgage lenders are only likely to be happy if appropriate insurance is in place.

The good news for landlords is that there are now a number of insurance products available on the market, including those from Inlet, providing cover for these sort of short-term rentals.

Without a doubt, Airbnb rental platforms have made it easier for homeowners and landlords to rent out rooms or whole properties but it could leave them with a massive headache if they do not have the right sort of insurance cover in place.

Anyone seeking more information about Inlet’s insurance products can visit www.in-let.co.uk.