Shared from the 3/25/2018 San Francisco Chronicle eEdition

Net Worth

Insuring homes is complicated for hosts of short-term rentals

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Liz Hafalia / The Chronicle

Rodolfo and Karen Cancino turned a bedroom in their S.F. house with a separate entrance into an Airbnb rental.

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Liz Hafalia / The Chronicle

Airbnb host Karen Cancino, who rented out a bedroom in her San Francisco house 234 days last year, looks over insurance paperwork. She writes off her commercial liability policy as a business expense.

In a groundbreaking announcement, Fannie Mae said last month it would accept Airbnb income on certain mortgage applications. But for hosts, getting the insurance Fannie requires is just as confusing and complex as ever.

Under Fannie’s pilot project, borrowers who rent their primary residence on Airbnb can use their hosting income to qualify for a mortgage when they refinance with three lenders including giant Quicken Loans. If the pilot goes well, Fannie will expand the program within 90 days.

The problem: Borrowers whose loans are backed by Fannie Mae must have insurance that covers the home from fire and other hazards, but standard homeowner policies don’t usually cover customers who regularly rent out their primary residence on Airbnb or other short-term rental sites.

“The insurance industry as a whole hasn’t come to terms with the concept because they don’t know how to charge for the particular risk,” said Kelson Herman, a broker with Riskguard Insurance Solutions in San Francisco. “From what I’ve seen, the majority of homeowners who are already doing Airbnb have not told their carriers. They are running the risk that they may not have their claims paid, because standard homeowners policies don’t cover Airbnb. The ones who are getting into it now are a little more careful, they are asking carriers beforehand.”

People who rent a home or apartment to long-term tenants can get a landlord’s policy, but this generally does not cover short-term rentals in your primary residence. Some specialty insurers offer policies that cover short-term rentals in your home, and a New York City startup called Slice is offering “pay-peruse” insurance that covers homeowners only when they have a paying guest.

But “standard homeowners and renters insurance policies are designed for personal risks, not commercial risks,” said the Insurance Information Institute, a trade group. “If you plan to rent out all or part of your home on a regular basis, many companies will consider this a business use and you may need to purchase a business policy — specifically either a hotel or a bed-and-breakfast policy.”

If you rent your home on a one-off basis, such as when the Super Bowl comes to town, many insurers “will extend your coverage to the renter” with sufficient notice, it added.

Insurance companies, lenders and Airbnb all urge customers to discuss short-term rental activity with their agents, but many hosts are afraid that if they do, the policies will be canceled or not renewed — or they assume they’re covered by Airbnb.

Airbnb provides free host protection insurance, which covers liability claims up to $1 million, subject to certain exclusions, if a guest sues a host for bodily injury or losses to the guest’s property. But it does not cover the host’s house, which is what lenders require.

Airbnb also provides a free “host guarantee” that covers damage to the host’s home or property caused by a guest, up to $1 million, subject to numerous terms and conditions. But this is not insurance, and Airbnb states that it “should not be considered a replacement or stand-in for homeowners or renters insurance.”

Fannie Mae said it “requires borrowers to maintain hazard insurance on properties securing our mortgage loans,” and that financial institutions must ensure that borrowers “are informed of the insurance coverage that is required to take part in this initiative.”

Quicken Loans said it suggests all clients talk to their insurance agent to make sure they have appropriate coverage. “Many insurers look at home sharing differently, so instead of putting a blanket policy in place that could overcharge someone who may already be covered, we work with insurers on a case-by-case basis as it relates to mortgages that use Airbnb income,” a Quicken spokeswoman said in an email.

Airbnb host and artist Eugenia Pardue of Portland, Ore., refinanced her loan with Quicken under the new program. As part of her divorce decree, Pardue had to sell or refinance her home by March 2019. Airbnb accounts for about half her income, but four other lenders rejected her because they could not include it on her loan application. By including her Airbnb income, Quicken was able to refinance her loan, which was a huge relief. Pardue said Quicken never mentioned insurance.

After talking with me, she called her insurance agent, Dominic Scott of American Family Insurance, to make sure her policy covered Airbnb activity. She said Scott told her it would, as long as it’s her primary residence. When I called Scott to confirm, he said, “I’m not going to verify anything for you.”

A spokeswoman for American Family, which doesn’t do business in California, said in an email that she couldn’t discuss an individual customer, but “I can confirm that customers with a homeowner’s policy have coverage for this purpose if it happens a few times a month, and they should talk with their insurance agent about that coverage. If it happens more than that, the customer should talk with their insurance agent to discuss their options.”

So what options do hosts have?

Herman sells homeowners policies from two specialty carriers — Aegis and American Strategic Insurance — that cover short-term rentals in a primary residence. “Usually those carriers will accept you as long as you don’t have a ton of claims and you’re not in a high fire-risk area,” he said.

Karen and Rodolfo Cancino of San Francisco turned a bedroom in their house with a separate entrance into an Airbnb and rented it out 234 days last year. In addition to her homeowners policy from Nationwide, she purchased a commercial liability policy through Scottsdale Insurance (part of Nationwide) for the Airbnb. The business policy costs $949 a year, but “I write that off as a business expense. It’s a safety thing for me,” Karen Cancino said.

Slice offers on-demand insurance to Airbnb hosts that supplements their homeowners insurance. With a website or smart-phone app, they turn it on when they have a guest, and turn it off when they don’t. It provides up to $2 million for bodily injury or property damage that occurs during a rental. The insurer is Great Lakes Insurance, a subsidiary of Munich Re. Slice says the average cost is $8 per day.

“If any claim were to happen because of home-sharing activity, we are the only people they deal with,” Slice spokeswoman Emily Kosick said.

Some name-brand insurance companies are testing insurance for people who rent out space in their homes, but not in California. They want to experiment in smaller states with less-stringent regulation, Herman said.

Allstate offers a “home-sharing” product called Host Advantage in some states excluding California. Farmers and USAA said they are exploring home-sharing solutions. Progressive said it’s offering “on-demand” insurance through Slice.

CBIZ sells a commercial insurance policy to people who rent out an entire second or vacation home to short-term tenants on sites such as Airbnb or VRBO. But this policy doesn’t cover people renting out rooms in their primary residence.

Foremost (part of the Farmers Insurance Group) offers a similar product for vacation rentals, only it’s a personal, not commercial, policy. Herman said it’s about twice as expensive as a homeowner’s policy.

Anyone considering insurance for a short-term rental should find out what it covers and what is excluded. They should ask whether the carrier is admitted or not admitted. Admitted carriers are regulated by the state and participate in a guarantee fund that pays claims, up to a limit, if an insurer fails. Non-admitted (also called surplus) carriers do not participate in the fund and are not regulated to nearly the degree of admitted carriers. Airbnb’s host protection insurance is non-admitted.

People who have a personal umbrella policy, which provides added liability insurance on top of their homeowners and auto insurance limits, should find out if the umbrella extends over the short-term-rental insurance, Herman said.

Kathleen Pender is a San Francisco Chronicle columnist. Email: kpender@sfchronicle.com Twitter: @kathpender

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