Vacation Rental Damage Insurance vs Security Deposits

At first glance, vacation rental damage insurance can seem like a great prospect: homeowners can provide guests with a convenient and easy way to cover themselves in the event they or someone in their party accidentally damages your property, and homeowners can save time collecting, managing and returning a myriad of deposits. But is damage insurance all that it’s cracked up to be? And can it effectually replace the psychological impact of a security deposit?

Money Talks

When I speak of the “psychological impact” of a security deposit, I refer to the fact that a deposit, by its definition, is a sum of money that potentially will be returned. That promise of the imminent return of all of their money creates an incentive for vacationers to take extra special care of a property.  Some homeowners feel that there’s just no better deterrent to bad vacationer behavior than the threat of losing real $$$. We can’t stress enough the importance of requiring a security deposit for the protection of you and your home, whether you offer damage insurance or not.

Here are some things to consider if you’re thinking about offering damage insurance:

• Though convenient and a reduced up-front cost for vacationers, damage insurance policies can be problematic for homeowners. The policies are generally under the name of the vacationer and require the vacationer to “fess up” to any damage and initiate the damage insurance claim. Even if the policy is in the homeowner’s name, the vacationer’s name must be provided, and the vacationer must be willing to cooperate with the insurance company throughout the life of a claim process.
• Many damage insurance policies provide flexible coverage amounts based on a home’s value and/or the homeowner’s need. This can often result in coverage up to 10 times more than the average security deposit collected. The caveat is…
• Most policies are accidental damage protection only. This means homeowners could not be covered for things like:
  • Extra guest fees
  • Smoking or pet damage
  • Excessive cleaning fees
  • Violation of the lease agreement (i.e., occupancy overages, late departure, etc.)
  • Loss of rental income while repairs are being made
  • Damage committed by intoxicated guests
  • Theft
  • Inclement weather

• Most damage insurance policies do not recognize the value of the property owner doing the repairs themselves, which diminishes the value of the insurance.
• Homeowners who unknowingly submit a claim to an accidental damage-only policy for damage done deliberately or intentionally could be committing fraud.

Ways to Further Protect Yourself

Differentiate in your lease or rental agreement what you consider normal wear and tear and what you consider damage. Be reasonable.

Have clauses in your lease that clearly communicate what constitutes the withholding of a security deposit and how much.

Some homeowners require both a security deposit and damage insurance. Whatever you do, always state in your lease that neither one limits a vacationer’s liability for damage to the home.

If you must make a deduction from a security deposit, always confirm the amount with estimates, invoices/statements or receipts for the costs you incurred.

Be careful not to confuse damage insurance with homeowner insurance. While damage insurance is used to protect your assets from damage by vacationers, homeowner insurance protects your whole property from natural causes, theft, and also any harm that may come to your guests while staying on your property. Watch for an upcoming blog post with more on homeowners insurance.

Lastly, you don’t have to do background checks or employment verifications, but having a consistent screening process helps ensure that potential guests are a good fit for your home right from the start. Then make it a habit never to rent to anyone you don’t feel entirely comfortable with. When renting out your home to strangers, the most important psychological concern is for your own peace of mind.

Tell us about your experiences with damage insurance and how you protect yourself and your rental.

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