For many people who own more than one home, offering a home for short-term rental is a real consideration. The price associated with renting a home during “the season” on the East End, as an example, makes for a potentially profitable venture. And while rentals can be lucrative they can also create problems that few homeowners stop to consider.
Renting your home for any reason is an insurance “red flag” that should trigger a detailed consultation with your insurance broker or provider. The reason: the exclusions and limitations for renting your home throughout a typical homeowner insurance contract. In a worst-case scenario, renting your home could actually void your protection. This isn’t to say that you can’t acquire the protection needed; rather, the standard homeowner policy may not be the right vessel.
• Is this your primary residence?
• What is the length of time of the rental?
Homeowner insurance policies are written by companies with the express understanding that the home is being used as a residence. Problems may arise when the home is a rental, not a residence.
There are important definitions in a homeowner policy. Insured location is defined, in part, as residence premises. Residence premises is defined, in part, as the one-family dwelling where you reside. But the word “residence” is not fully defined. And that is where things get murky. Black’s Law Dictionary defines residence as: Living or dwelling in a certain place permanently or for a considerable length of time. The place where a man makes his home, or where he dwells permanently or for an extended period of time.
But what if you rent your home instead of “dwelling there permanently”? The old adage was that you could rent some of your home all of the time or all of your home some of the time and still be protected under a standard insurance contract. While that adage remains largely accurate, there are notable exceptions, and the devil is in the details.
Perhaps the most important question is, “Is the home your primary residence?” If not, that may be the biggest red flag of all. The issue goes back to the definition of “residence.” Some insurance carriers have found, and courts in some states have concurred, that not residing in the home for extended periods of time may void all coverage—since actual use of the home is not consistent with the understanding of “residence”— the basis for the homeowner policy form.
We recently witnessed a claim denial due to this issue. The homeowner lived year round in Europe and initially intended to use their home as a secondary residence. Circumstances changed and the homeowner decided to rent the home year round and failed to communicate this change to the insurance company. The insurance company denied the claim and cited the definition of “residence” in the policy.
If the home is your primary residence and is occasionally rented, then by most accounts the insurance policy will extend coverage. What exactly is “occasional”? That’s another good question, with no specific answer. Renting your home for one week would seem to safely fit the definition of an occasional event. Renting from Memorial Day to Labor Day on the east end, while less clear, is still also generally viewed as “occasional.” Renting for a longer period than that is unlikely to be viewed as occasional.
I recently interviewed claims managers at major companies responsible for property insurance and was surprised by their lack of clarity and consistency on this issue. What was clear was that each company looks at this issue closely at the time of claim.
Our conclusion: Homeowner insurance policies are designed for your residence and are not ideal for rentals. Speak with your broker or company and provide the specifics of your situation to be sure your insurance matches up with the way your home is being used.