Vacation home rental business calls for special focus

Vacancy risk, use of dwelling fire policy make this a different coverage world

By Dave Willis

The difficult U.S. housing market, together with an economy that's struggling to recover, are affecting the vacation home marketplace in a couple of ways.

"First, the market values of vacation homes are decreasing," explains Diana Matalka, assistant vice president-property products for American Modern Insurance Group.  "This is causing owners who may want to sell their homes to have to hold on to them longer. Some owners are looking for ways to make their homes more attractive to potential buyers, which means their homes may be undergoing renovations."

At the same time, the lingering tough economy has led to a drop in vacation rentals. "Owners need to make their homes or units more attractive to potential renters," she adds. "This is another reason some of them are looking to fix up their rental properties."

Owners are trying other tactics, as well. "For example, we've seen some who are becoming more flexible on the length of required stay," Matalka notes. "Also, owners are now more concerned about customer satisfaction, in hopes of increasing the rate of return visits." Growth in the number and use of online customer review Web sites makes this all the more important.

Other issues exist, too. "Owners need to think about environmental issues, such as oil spills or leaks, as these can impact their ability to rent the home out during vacation season," she says. "And of course, they need to make sure they have proper insurance coverage in the event of a disaster, such as a fire, windstorm or flood."

There also are exposures that come with a property being left vacant for a long period of time. The risk of property loss can increase. "Plus, there are issues with proper notification to the property management company if there is a loss and the owner is out of town," Matalka notes.

Insurance markets

All of these issues contribute to a relatively small market for insuring vacation rental homes. "Insurance availability is definitely a big concern," explains Jim Gontjes, director of product management for Foremost Insurance Company. Many insurance companies won't write vacation rental properties for any of a number of reasons, including the short-term nature of occupancies, possible extended periods of no occupancy, their requirements for supporting business, and the way the property is titled.

"Vacation rental properties can be rented on a daily, weekly or even monthly basis," Gontjes says. "This can create added risk for insurance companies, as short-term tenants do not have the familiarity of the dwelling. At the same time, if property is unoccupied for periods of time, there is an added exposure to losses and/or a possibility of coverage gaps."

Many residential insurers also require supporting business. "They want to have the auto or primary home insured with the property," Gontjes adds. "Such supporting business may not be an option, particularly if the vacation rental is located in another state. Also, many carriers won't write policies for properties that are titled in the name of an entity, such as an LLC, a trust, or some other arrangement."

Where carriers are willing to write the properties, other challenges exist. "Depending on where the home is located, some markets are getting very tight," Matalka notes. "Not many carriers still want to write risks in coastal areas." The closer the home is to the coast, the tougher it is to get coverage that includes wind.

"Inland states have more markets, but then the issues of short-term occupancy or extended vacancy come into play," she adds. "Some specialty carriers are actually targeting these risks with multiple products, including DP-1, DP-3, and even a homeowners product." These markets may offer both short-term and occasional rental coverage, she says.

Serving owners

When an agent learns a property is a rental property, it's time to dig deeper. "Ask the landlord about the length of tenancy," Gontjes advises. "If the property is being used as a vacation rental, they run the risk of coverage gaps. Agents need to know the use, and then thoroughly understand the carrier's underwriting criteria and policy offerings to be able to accurately address the exposure."

Matalka says that vacation rental homes probably will be insured on a dwelling fire policy, but there may be exceptions. "In some situations, for instance, if the home is only rented occasionally, it may be eligible for a homeowners policy," she explains. "Either way, agents need to make sure the policy has vandalism and theft coverage, in addition to the basic perils such as fire."

It's important to understand the nature of dwelling fire polices, she adds. "On these policies, remember that coverages are usually not packaged as they are on a homeowners product," she explains. "Some coverage may need to be purchased separately." Examples include personal property, loss of rents and landlord liability.

In addition, she says, many policies have a clause for reduction in coverages if the home is vacant for an extended period of time. "The agent or broker will need to make sure the policy allows for vacancy," she says. "And if the home is located in a coastal area, make sure you obtain flood and wind coverage."

A good first step, Gontjes says, is to find an insurance company that targets the business. "Some companies may make an exception to an agent for one situation," he says, "but they may not accept more business in the future. Having a stable carrier that specializes in this business and provides coverage offerings that address the exposures is important for long-term success."

To build a business, find key referral sources. "Work with property management companies that help landlords find and screen potential tenants and handle maintenance," Gontjes explains. "Also, real estate agents that promote vacation rentals are a good resource for new business."

Matalka concurs. "Always look for ways to expand your network," she says. "Advertise on vacation rental Web sites, and know the prime time to advertise for the season in your particular location.

"Make sure your agency has access to a variety of insurance carriers that will let you meet potential client needs," she adds. "Take time to explain the benefits of the insurance you are selling to the customer, pointing out how you have worked hard to meet their unique vacation home needs. And finally, survey existing customers for feedback, share positive feedback with prospects, and ask satisfied clients for referrals."

The author

Dave Willis is a New Hampshire-based insurance freelance writer and regular Rough Notes magazine contributor.