How to Avoid Underinsuring Your Rental Property

Your rental property is a significant investment and one of your greatest assets. It’s vital to protect your property, business and its contents with adequate short- or long-term rental insurance. However, recent research found that many rental owners lack sufficient coverage. Nearly two of every three homes in America are underinsured, meaning the property is protected to an extent but doesn’t have sufficient limits or coverage features to cover the full expense of a potential claim. What’s worse, the average underinsurance amount is over 20%, with some being underinsured by as much as 60%.

Don’t let your rental business suffer the damaging — perhaps devastating — consequences of inadequate coverage in the event of a loss.

Coverage Elements to Consider When Insuring Your Vacation Rental

Short- and long-term rental insurance offer financial protection in the event of an unexpected disaster or accident involving you, your property or your guests. However, each insurance policy consists of several different types of coverage. You must review each form of coverage included in your policy to ensure you’re adequately insured for your specific risks. Here are some key coverage elements to look for:

Dwelling coverage is the portion of your insurance policy that can offer compensation for the cost of repairing or rebuilding the physical structure of your property if it’s damaged or destroyed by a covered event (e.g., fire, windstorm, vandalism). To secure adequate dwelling coverage:

• Ensure you have enough coverage to compensate the full cost of rebuilding your home in the current market, including construction expenses (e.g., labor, materials) and the associated costs of making sure your property is compliant with any new or updated building codes. Many owners make the mistake of only purchasing enough coverage to compensate the real estate value of their property, which is typically far less than the cost of rebuilding.
• Don’t forget any important features of your rental property’s structure when determining its rebuilding cost. Examples include flooring, countertops and the type of or quality of materials used throughout the structure. Further, avoid making a rough estimate when determining the rebuilding cost. Be as exact as possible and consider getting assistance from a qualified property valuation expert to ensure a correct calculation and adequate coverage.
• Be sure to recalculate the cost of rebuilding your property and review your coverage needs whenever you make changes. such as renovating the bathroom, remodeling the kitchen or adding a garage.

Business property coverage is the portion of your insurance policy that can provide reimbursement for the cost to cover the physical structure of your home and everything in it. Not only are things like furniture and fixtures covered, but this usually coverage extends to 100 feet outside the home. To ensure adequate personal property coverage:

• Review your policy to ensure you have the best form of coverage for your unique needs. There are two forms of personal property coverage — replacement cost and actual cash value. Replacement cost coverage can offer compensation for the cost of replacing your stolen, damaged or destroyed property with a brand-new version (as long as it’s similar in kind and quality) following a covered event. Actual cash value coverage can offer compensation for the depreciated value of your property. This value is determined by the age, condition and expected remaining useful life of your property prior to the covered event. Be sure to weigh the pros and cons of each form of coverage before making a final selection.
• Maintain an up-to-date property inventory checklist (be sure to include photos) of all your belongings and their original value, as well as an estimate of their current value. This practice will help you better determine just how much coverage you need to fully protect your personal property. However, keep in mind that certain high-value items, such as jewelry, collectible items and fine art, won’t be covered with a typical rental insurance policy and will require specialized coverage.

Loss of use coverage is the portion of your insurance policy that can help pay for temporary living expenses and rental income if you have to stop your business operations while your property is being rebuilt or repaired due to a covered event. If you rely on a homeowners or landlord insurance policy, you’d likely learn that the damage or losses are not covered. In addition, you’d also have to go without your rental income until the damage could be repaired. This could create financial difficulties — especially if you rely on your rental income to meet your day-to-day expenses. Fortunately, most vacation rental insurance policies automatically include a loss of income component. If the property is damaged and if that damage is covered under the terms of your policy, the insurance company will pay you the amount of income you would otherwise have earned. with no time limit.

General liability coverage is the portion of your vacation rental insurance policy that protects vacation rental owners’ personal assets in the event of most types of lawsuits brought by a renter. If a renter files a lawsuit against you for damages because of injuries sustained at your property, you shouldn’t have to worry about your personal home, retirement accounts or other assets being vulnerable to a court judgment or legal expenses. It’s vital that you have adequate liability coverage tailored to your specific risks. Otherwise, a liability claim could wreak serious havoc on not only your assets but also your wellbeing.

Keep in mind that various property features (e.g., hot tub, pool) can also increase your liability risks and require further protection. You may even want to consider purchasing personal umbrella insurance, which can provide additional compensation if your liability coverage is exhausted following a covered claim.

Don’t forget that some events, including overland floods and earthquakes, are not always considered covered events on your policy. If you live in an area that has an elevated risk of these catastrophes, you’ll need to obtain additional, specialized coverage.

We’re Here to Help

If you’re relying just on your homeowners insurance, landlord insurance or a host liability policy to provide you with coverage, you could be exposing yourself to serious risks. There are a variety of factors to consider to ensure your home is properly insured. Connect with a CBIZ Vacation Rental Insurance team member today and request a free quote.

This blog may contain scenarios that are provided as examples only. Coverage is subject to the terms, conditions and exclusions of the policy issued. The information provided is general in nature and may be affected by changes in law or the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information.

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