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What kind of insurance do you need if you’re renting out your home?

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 | August 24, 2017
What kind of insurance do you need if you're renting out your home?

If you’re thinking about renting out a room or your entire home to make some extra money, you’re not alone. One of the biggest home sharing businesses, Airbnb, has 640,000 hosts in 40 countries and every continent except Antartica.

For a majority of Airbnb hosts, it’s a way to afford their home — 53 percent say that hosting helped them stay in their home, according to Airbnb. Forty-eight percent say the income is used to pay regular household expenses like rent and groceries.

Short- or long-term rentals of a spare room, entire house or a second home need insurance in case something breaks, is stolen or the home is damaged or destroyed. The home insurance policy you already have may cover rentals, or extra coverage may be needed.

Here are some of the insurance needs when renting out your home:

One-time events

Renting out part or all of your home for a one-time event shouldn’t warrant anything more than the current homeowner or renters insurance policy you already have. If a convention is in town and hotel space in the area is tight, renting out your home during a one-time, major event shouldn’t require you to buy extra insurance. Your existing policy will likely be extended to the renter.

The caveat is that you’ll need to alert the insurer about the coming tenant, even if it’s just for a weekend.

Some insurance companies may require you to buy an endorsement, also called a rider, to your policy to provide you broader coverage with a renter.

Short-term rentals

If you’re renting out your home for two weeks or less per year, it’s considered a short-term rental. It can be split into two weeks, seven weekends per year or however else to reach 14 days.

Your homeowners or renters insurance policy should cover short-term rentals, though they usually require that you notify the insurance company. You shouldn’t have to pay extra for insuring a short-term rental. Again, some insurance companies, however, may require buying a rider on your existing policy for the extra coverage.

Another option is to require your guests to have their own homeowners, renters or personal liability insurance so that anything that happens on your property is covered by their own policy. A personal homeowners policy often has minimal liability coverage of up to $1,000 for damage to the property of others, so your guest would have coverage up to that limited amount from their existing insurance. $1,000 may not be enough to cover damage to your home, however.

If your city has laws or restrictions against short-term rentals, your insurer could deny coverage on your standard policy for a short-term rental claim if you’re violating the law.

Is your home now a business?

Even short-term rentals can be considered a business if you’re renting out your home regularly. Businesses require business insurance policies because you’re now taking on commercial risks that go beyond the personal risks a homeowner insurance policy is designed for. After all, more people in your home equals more potential problems and thus more risk.

The IRS considers a personal home a business if it is rented out for more than 14 days per year. The rent must be included in the owner’s income, and tax deductions will be limited because it’s a personal home.

A home can be defined as a business if it brings in more than $2,000 in annual income, according to the National Association of Insurance Commissioners, or NAIC. Policies can differ, however, and income as high as $15,000 per year can be allowed before a home is considered a business.

If your home becomes a business, don’t expect a standard homeowners insurance policy to provide any coverage for this business. You’ll need to buy a business policy, such as a hotel or a bed and breakfast policy.

Some insurance companies sell home-sharing liability insurance that can be bought on a month-to-month basis. Check the policy carefully for exclusions.

Long-term rentals

A long-term rental of six months to a year, such as renting out your unused summer home or an investment property, will probably need a landlord or rental dwelling policy.

Landlord policies cost about 25 percent more than a standard homeowners policy. They provide coverage for physical damage to the home caused by fire, lightning, wind, hail, ice, snow or other covered perils. Any personal property you leave for maintenance or a tenant to use, such as appliances or a lawnmower, is also covered.

If a guest gets hurt on your property, a landlord policy will have liability coverage for their medical expenses and any possible legal fees. Loss of rental income may also be provided if you can’t rent out the property while it’s being repaired after a covered loss.

Since you’re now a landlord, your insurance will only cover the property and your contents. The renter will be responsible for their own belongings, and may want to get a renters insurance policy.

Program protections

Peer-to-peer networks, as Airbnb, HomeAway and other booking sites, usually offer their own insurance programs for hosts.

HomeAway doesn’t provide insurance coverage for hosts, but recommends they buy a customized policy through an insurance broker.

Airbnb provides $1 million in liability coverage and $1 million in damage reimbursement. It reimburses hosts for property damage caused by guests due to accident or fault if the guest doesn’t reimburse the host.

Whatever type of insurance you consider for your rental home, start by asking your insurance agent about your existing policy and how it would be affected by a rental.

One possible poor outcome is that if you’re renting out your home more than occasionally, the insurer may drop your coverage, according to the NAIC. That’s one option that would be a strong vote against renting out your home or even a spare bedroom.