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What Type Of Policy Do I Need If I Occasionally Rent Out My Second Home?

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 | August 9, 2018
Thinking of renting your second home? You'll need insurance for that.

You’ve decided to start renting out your home to make some extra money, meet some new people, or cover the costs of a second property. Whether by necessity or choice, by choosing to rent out your home, even occasionally, you are now a “part-time landlord.”

What does this mean for your homeowners insurance? Do you need a separate policy? How do you protect your home, your renters, and yourself in the case of an incident during your rental period?

If you’re not already thinking through these questions, you should consider them before you start renting. Personal insurance oftentimes cannot be used for commercial purposes, which means renting out your home could leave you vulnerable and uninsured.

Does my homeowners insurance cover it?

Your average homeowners policy typically won’t cover the property if you’re renting it out. This is because insurance companies consider renting a “commercial use” of your home or condo.

When you’re making money, it starts to change the way liability works. Renters also have different risks than homeowners do, and you and your insurer have to take on more responsibility. Plus, second homes are often vacation homes. Insurers typically consider vacation homes riskier because they may be in potential disaster areas, like hurricane or flood zones. So, in most cases, homeowners will not cover your rented property—and you’ll likely need an additional landlord policy.

In rare cases, some providers will allow a rider on your homeowners policy for “occasional rental.” However, if you’re renting out a vacation home, this rider likely wouldn’t apply.

Even if your homeowners policy does cover a second home rental, you might not want to include it. This can drastically raise your premium on your main insurance as opposed to purchasing a separate policy at a lower rate.

Types of rental policies 

In most cases, your existing homeowners insurance will not provide adequate coverage for renting out your home to guests. In fact, renting it out could jeopardize your personal insurance coverage. Luckily, there is supplemental insurance coverage designed specifically for renting out your home to guests.

Landlord insurance

In most cases when renting a second home, you’ll need a landlord or rental dwelling policy. Landlord insurance typically covers:

  • Property damage: caused by tenant, natural disasters, fire, vandalism, theft
  • Liability: if someone is injured on your property due to your negligence as landlord
  • Loss of income: if your second home becomes uninhabitable due to natural disaster, you will be reimbursed for appropriate loss of income during that time

There are three types of “landlord dwelling” policies: DP-1, DP-2, and DP-3.

DP-1 is the most basic policy. It’s a “named perils insurance” policy, meaning it only covers those perils that are specifically listed in the policy. This usually covers only the basics like vandalism, theft, and minimal liability. It’s typically the most affordable, but it’s also highly restrictive. It’s also “actual cash value,” which means it pays replacement costs with depreciation.

This is usually only recommended if you’re renting out to someone you know and trust and if you would have the funds available to cover any potential costs.

DP-2 is also named perils, but it’s slightly more expansive than DP-1. It can also cover risks like fire and windstorm.

DP-3 is the most comprehensive policy. It’s considered “open peril,” which means it covers almost all perils unless explicitly declared otherwise.

We usually recommend the DP-3 policy to any part-time or full-time landlords, because it offers you the greatest amount of protection against renter disturbances, natural disasters, and other threats.

DP-3 also covers “full replacement costs” as opposed to “actual cash value.” This means that you’d be paid out the present-day cost for repair or replacement regardless of depreciation.

Add-ons for landlords

You can also get other add-on coverage and endorsements. For example, you could get landlord contents insurance, which would protect your own contents in the home even while renting it out. This can help protect your contents from damage and theft—whether caused by your tenants or other parties.

Keep in mind that most homeowners and landlord insurance doesn’t cover flood and earthquake. These are usually additional policies that you’ll need to purchase, especially if you’re in a moderate- or high-risk zone.

Note: If you’re working with AirBnB or a similar service, they’ll usually have certain additional guarantees in their terms. For example, AirBnB has a “host guarantee,” which offers up to $1 million to a host for property damage caused by renters. However, this isn’t insurance, so it doesn’t cover cash, rare articles, or personal liability.

Umbrella policy

You’ll also want to consider an umbrella policy. This gives you more personal liability coverage, which can be useful if someone is injured while on your property. This is especially important for rental units, because you are responsible for the health and safety of your tenants.

You can add an umbrella policy to your landlord insurance policy, or you can purchase it separately. You’ll usually get a discount if you bundle your umbrella, landlord, and homeowners insurance together.

Renters insurance

As a landlord, you are within your rights to require your tenants to hold renters insurance. This ensures that they are also protected against liability and property damage. This puts more responsibility in the renter’s hands, so they can’t immediately come after you if something goes wrong within the four walls of the house. 

Make sure you look over their renters insurance in comparison with your landlord insurance to make sure all liability and property damage is appropriately covered. For example, if your landlord insurance doesn’t protect against fire, you might want to ensure that their renters insurance would cover that.

However, you typically wouldn’t require renters insurance if you’re renting out a vacation home for short periods, like a weekend stay. In this case, you need to ensure that your landlord policy is enough.

Business insurance

Depending on how often you rent out your second home, you may also need business insurance because you’re making money off of your rental.

Learn more about insurance for small business here.

Conclusion

Not sure if your second home rental requires landlord insurance?

Contact an InsuraMatch agent about your specific needs.

We will make sure you, your renters, and your second home are fully protected against damage and liability!