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How to Insure Vacation Income Property and What it's Going to Cost
Definition: Vacation Income Property (VIP)
Vacation Income Property (Vacation Nightly Rental) is a secondary home that is used for both personal use by the owner and rented out more than 2-3 times per year to other vacationers or tourists. Unlike a normal rental property that is leased out to the same family for 6 months or longer a VIP is normally rented out for 1-14 days, much as a hotel or motel room would be.
Why Doesn’t a Homeowner’s or Landlord Policy Provide Coverage for a VIP?
Homeowner’s policy language limits coverage for the home and liability on the premises when there is a business involved, unless they know in advance of a claim what the business is and coverage has been endorsed to the policy to cover the exposure. Having a nightly rental business operating out of your home is completely different from renting your home to the same family for 6 mo. or a year, which is what a landlord policy is designed for. Using your home as a Vacation Nightly Rental is like using your car as part of a taxi business; business coverage and premiums are based on the rental occupancy.
Claims can easily be denied based upon change of occupancy from purely residential usage. Insurance companies simply do not offer coverage for business exposures they are not getting a premium for; that’s why they create exclusions! Neither a homeowner’s policy nor a landlord policy is designed for the commercial exposure of a hotel/motel like commercial occupancy. Policy language further limits usage as a rental beyond “occasional” usage which is generally defined as 2-3 times per year. Even the IRS defines this as a business once your home is rented out more than 14 nights per year. Beyond the substantial risk of your home not being covered due to an excluded occupancy is the greater financial risk of a liability claim not being a covered loss.
How to Insure Vacation Income Property & What’s It Going to Cost:
A special policy needs to be purchased that will cover your liability as a Vacation Nightly Rental, Loss of Business Income (should the home burn down, your income stops but not your mortgage payments), and the Dwelling and Contents when used as a Vacation Income Property. Few of these homes will qualify for acceptance in the Admitted market but coverage is readily available in the Excess and Surplus Lines markets (where most commercial insurance is written). Premiums for Vacation Income Properties depend on Location (Distance to the nearest Fire Station & the Protection rating of that Fire Dept.), Amount of Liability needed (usually 1 million or more), Amount of Business Income, Contents value, Loss of Income coverage and the Size, Age, and Construction Type of the home as well as the number of bedrooms advertised for rental. As most of these homes are located in areas where the fire protection level is much less (often volunteer ) than a city, and given the nightly rental occupancy, the rates one can expect to pay for Property and Contents, Medical, Liability and Loss of Business Income, including all Excess and Surplus Lines fees and taxes, are typically 1-2 times the rate of a personal use only home.