Why your home insurance coverage may not be enough if you rent out on Airbnb - and what to do about it

Emmet Pierce

insurance coverage for AirbnbIt may sound like a great idea to rent out a room in your home to travelers to make extra money, but if you don't have the proper insurance, you're taking a big financial risk.

Airbnb and your home insurance policy

Renting space in your home to vacationers often is called "home sharing." San Francisco-based Airbnb is an online marketplace that links travelers with rental opportunities. The company says it operates in 190 countries and has 800,000 rental listings worldwide.

A potential problem for people who share their homes in this way is homeowners and renters insurance policies typically have clauses that allow carriers to deny claims related to commercial activity, says Loretta Worters, spokeswoman for the nonprofit Insurance Information Institute.

That means people who rent space to vacationers through Airbnb or by similar companies may need to purchase commercial policies designed to cover hotels and bed-and-breakfast businesses, Worters adds.

What does a standard home insurance policy cover?

Homeowners policies allow you to file claims for losses that occur to the structure of the home or its contents. You're compensated for loss of use of the home, if it must be repaired or rebuilt.

These policies also include liability coverage in case you or members of your household cause damage to other persons or their property.

For example, if someone slipped on your porch and was injured because you forgot to clean up spilled water, your policy would cover that person's medical expenses, up to the limits of your coverage.

If you were taken to court over the matter, the policy would pay for your attorney. Without the policy, your assets, such as property and investments, could be seized in court to compensate the injured person.

Renters policies are similar, but they typically don't cover the structure of rental dwellings.

Before you take part in home sharing, "be sure that you have an insurance policy designed to take on the risks," says Karl Newman, president of the Seattle-based Northwest Insurance Council, an insurance industry trade association.

For example, a standard homeowners or renters policy protects you and members of your household. A commercial policy designed for hotels or bed-and-breakfast businesses extends coverage to everyone who uses the dwelling - and would also cover Airbnb guests in your home.

Insurance exclusions for Airbnb rentals

The Airbnb website, under "terms of service," says the company isn't responsible for and disclaims liability related to any and all listings and accommodations. An Airbnb spokesperson couldn't be reached for comment.

That means any bookings you make with guests to rent out space in your home are at your own risk.

How much does additional insurance for Airbnb coverage cost?

If your insurer requires you to buy a hotel or a bed-and-breakfast policy to maintain coverage, typically it will cost about 25 percent more than a standard homeowners policy, Worters says.

According to III, the nationwide average annual homeowners insurance premium was $978 in 2011, the most recent year for which statistics are available.

If the homeowner were charged an additional 25 percent for a policy that provided coverage for a hotel or bed-and-breakfast, he or she would pay about $1,223 per year.

Such policies cost more because the risk to insurers is greater. Airbnb guests invited into your home represent an unknown risk.

"What if someone slips and falls?" Worters asks. "Will you have a huge lawsuit? That's what insurance companies are afraid of. "

What to tell your insurer

Some home sharers might be tempted simply not to disclose their rental activities to their insurance carriers. However, the truth likely will be discovered by claims adjusters if you end up filing an insurance claim, says Jay Gandee, owner of the Jay Gandee Agency of American Family Insurance in Phoenix.

To give clients "peace of mind," Airbnb offers its users a free "host guarantee." Airbnb says this is not an insurance policy, however, and isn't meant to take the place of homeowners or renters insurance.

According to the Airbnb website, the guarantee provides protection for up to $1 million in compensation, if guests cause damage. However, the guarantee has a number of exclusions. Things that aren't covered include:

  • Cash and securities, such as stocks and bonds.
  • Rare artwork.
  • Jewelry.
  • Pets.
  • Your personal liability.

To make sure you're fully protected, Airbnb recommends you contact your insurance provider.

Airbnb and local laws

The Washington Post reported in September 2014 that many U.S. cities ban residents from renting out private homes for periods of less than 30 days.

The Airbnb website says it is important for its users to make sure they don't violate local laws. It notes that in many cities, "you must register, get a permit, or obtain a license before you list your property or accept guests."

That is true in Portland, Ore., where the city government officials recently agreed to issue permits to residents who want to earn extra money by renting out space in their homes.

In July 2014, Portland officials approved an ordinance to allow Airbnb-style businesses to operate within the city. Residents can rent out one or two bedrooms of their homes for periods of less than 30 days, if they first buy a $180 city permit and agree to home safety inspections.

The San Francisco Chronicle reported in September 2014 that Airbnb had resolved a dispute over its operation in San Francisco by agreeing to collect a city transient occupancy tax -- a fee imposed on short-term rentals - of 14 percent from its users in that community.

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