The risks of short term rentals – get the right cover
Ensure you’re still insured when you list your property on Bookabach or Airbnb
The advent of platforms such as Airbnb and Bookabach have been a boom for property investors: often more lucrative than standard rental agreements, they can maximise their financial returns on these investments, even if the property remains empty for significant periods of time. Known as rent arbitrage, it provides an easier way for investors to capitalise on higher daily rental rates compared to a fortnightly or monthly rental cost.
There are fundamentally different risks to using these platforms and renting your property out in the short-term. Aside from the typical local government crackdown on these types of arrangements, there are insurance considerations which you may not have taken into account. Some insurers consider short-term guests uninsurable, so the first step you should take is to ensure your policy extends to cover these types of holiday bookings.
What’s the insurance issue with short-term stays?
Unlike when you enter into a long-term rental agreement, there is usually limited vetting done on the person or people staying in your property. Airbnb and Bookabach do cursory checks and of course there are in-app reviews and ratings systems, but those stopgaps pale in comparison to the detail, depth and reference checking required to get a regular lease or residency tenancy on a property in most places in New Zealand. Even if you’re renting out a room in your main residence, insurers will still need to be notified – as this is also seen as an inherent risk above and beyond what a normal dwelling policy is designed to cover.
For this reason, you will find most insurers will tell you that your home and contents policy also isn’t suitable for home sharing situations. When you think about it, inviting strangers into your home for profit is an inherently risky thing to do, and as such could invalidate your insurance. Others might tell you that you are insured, but come claim time, you’ll discover that you’re unexpectedly out of pocket – for example your standard home and contents policy won’t cover you for items stolen by individuals allowed in the home. Additionally, your standard home and contents policy won’t cover you for intentional damage caused by guests. This all means that if anyone who has a key steals or damages your belongings or anything else in your home, you’ll have to foot the bill yourself.
What about landlord insurance – doesn’t that cover short-term rentals?
A landlord insurance policy will typically provide cover for the above scenarios, but these will also generally come with associated landlord obligations. As mentioned above, these obligations include things like reference checks, credit checks, regular inspections and rental history detail. Upholding your landlord obligations would be virtually impossible for holiday rentals, particularly so for international visitors – but without these checks in place, the insurer may deny any claim arising from a situation involving a short-term tenant.
How do you ensure a short-term rental is insured ?
Like most things, some risks and expenses can be managed by choosing the right insurer and the right insurance policy.
Most short-term and holiday accommodation insurers recommend a commercial insurance policy to ensure you’re covered for a variety of scenarios. Unfortunately for most investors, these policies can cost thousands of dollars, and can be surplus to requirements with features that aren’t necessary for private rental arrangements.
The good news is, that while scarce, there are insurance policies designed specifically for holiday homes and other property types that are rented out on a short-term basis. In addition to providing cover for your holiday home and its contents, a holiday home policy extends to cover intentional damage and theft by paying guests. Unlike other policies, when the home is occupied by guests as a holiday home, the landlord obligations do not apply. Loss of rents is also covered, with the policy allowing for the lost income to be calculated using a combination of factors. These include losses associated with confirmed future bookings, and rent received in the 12 months preceding loss or contamination damage. As for meth contamination, it is covered in connection with the manufacture or distribution of methamphetamine at the home.
In the past, there has been confusion about whether holiday rentals are covered by the Earthquake Commission (EQC) for earthquakes and other natural disasters. As a general rule, provided that it is your intention to live in or holiday at the property in question, then you will be covered under the EQC Act, having paid an EQC levy as part of your insurance. Importantly, if the home is purely a commercial enterprise that is not used personally by you or your family, you will need a commercial insurance policy as outlined above, which will cost you a lot more.
What about liability?
As with other rental properties, health and safety legislation applies to short-term rentals the same way that it applies to other landlords. You have a duty to make sure your property is safe, which includes installing working smoke alarms and providing protective gear for any equipment that might be used by guests, such as lifejackets for kayaks. It also means that as a landlord, you could be liable for an injury or accident suffered by a guest at your property.
Some holiday rental platforms, such as Bookabach, will provide property owners with liability cover as long as certain booking conditions are met. As good practice and for peace of mind, however, if you are renting your property you should make sure that your primary holiday home insurance policy includes adequate liability insurance .
So, what about provider insurance and guarantees?
Importantly, the Airbnb ‘Host Guarantee’ is not an insurance policy, so it should not be treated as such when ‘claiming’ for loss or damage to your property
Bookabach’s ‘Owner Protection’ does provide a locally supported ‘backup’ insurance policy. This covers owner’s liability and property damage protection and just like Initio, is underwritten by NZI (IAG New Zealand Ltd). In order for cover to apply, however, the guest booking must be booked and fully paid for online through Bookabach. Most importantly, a current house insurance policy also needs to be in place in order for this backup policy to apply.
What is best practice then for holiday home landlords?
It’s always best to have a proper holiday home insurance policy in place in the first instance. To protect you from any losses, damages, theft or other issues at your house or your bach, you need a tailored policy that understands how you use and rent out these spaces. In doing so you’ll be covered… just in case.
How can initio help?
Initio has designed a holiday home insurance policy for houses that are rented to short term guests. It is a residential insurance policy understands the use of the property and includes cover for things like loss of rent, contents, meth and liability. It’s your best protection when listing your property on platforms such as Bookabach and Airbnb.
Learn more about initio holiday home insurance
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