Nightly lets – the insurance conundrum

Louise Birritteri By Louise Birritteri
Uploaded 19 December 2017

Louise Birritteri of broker Inlet looks at some of the insurance issues arising from sharing economy property rentals.

Websites like Airbnb and HomeAway provide an easily accessible way to reach short term travellers looking for an alternative to more traditional hotels. The platforms appeal to both business travellers and tourists alike because of the range of different properties and accommodation they offer. But many also appreciate having the same level of concierge service they would find in a hotel.

This is providing real growth opportunities for both serviced apartments and independent host management companies who are catering for this market, who are optimising their revenues by taking bookings for nightly stays in the gaps between longer tenancies and opening up opportunities for homeowners with underused spare capacity to generate an income from their asset.

However, this type of innovation has created challenges for the insurance industry, where homogenised insurance products that have not been designed for these arrangements are generally unable to provide cover for the type of flexibility required.
If you own an entire serviced apartment block including the building, serving nightly guests throughout the year, then it's likely you will already have found specialist insurance catering for these long-term arrangements.

The insurance challenge comes where there is a mix of occupancy types within a building or home. Scenarios such as where:
• A homeowner's primary residence is used for short lets or nightly lets some of the time.
• A landlord who usually has private professional tenants but wants to let nightly between tenants
• A flat leaseholder is conducting short or nightly lets within a residential building block
All three of these scenarios cause insurance gaps to emerge:
• Home insurance products do not permit guests or commercial activities.
• Holiday home insurance products often do not provide full cover for property damage and liability protection for paying guests
• Landlord insurance products are usually confined to a specified tenant type under an assured shorthold tenancy agreement.
• Building insurance products for residential blocks may not permit short or nightly lets within the building.

Not only do these leave gaps in insurance cover for many operating in this space, but it means that if they do not inform their insurer of these activities they could find that they void their underlying policy meaning the insurer could refuse to pay out on any claims.

However, there are further potential repercussions. If an insurer finds out that a policyholder is letting out on a nightly basis and suspects they have been deliberately withholding this information, it could be treated as fraud and/or reported on the insurance industry claims and underwriting exchange (where insurers share information about policyholders). This could make it very difficult for the individual to get insurance again in the future.
This leaves not only the host exposed, but in the case of blocks of flats, it could leave the whole block exposed.

Residents' associations and management companies are beginning to wake up to this, particularly in London, where some blocks of flats are seeking to update their leasehold agreements to exclude short-term letting, due to both the insurance issue and the disruption which badly managed nightly lets can cause other residents.

Other noteworthy considerations are mortgages. Most residential and buy-to-let mortgages do not permit nightly letting and, therefore, special permission is required to do this. Often the mortgage lender will allow it provided that you have an appropriate insurance contract in place directly with the provider to cover this.

Serviced apartments, host managed companies and platforms have a great opportunity to make nightly letting work for their customers and other residents by providing strong comprehensive management.

By working with an experienced service company, many of these challenges can be overcome, processes can be developed for each apartment block to ensure that guests understand and operate within the house rules, such as leaving rubbish out in the correct place and time, and keeping noise levels down.

Insurance challenges can also be headed off before new nightly letting activity begins, by setting aside a few hours to ensure the right cover is in place and managing expectations with the home owner and/or residents' association or management company that it can be achieved with the right approach and a little bit of time.

The processes of informing the incumbent insurer may go a couple of ways. Many insurers will refuse to cover situations with nightly lets, but this is not the end of the road. If the insurer refuses to continue cover, then there will be other Insurers who will, so individuals may need to leave their existing insurer in favour of a more flexible new provider. Inlet can help support customers to find an alternative provider in these circumstances.

However, in many cases the existing provider will be happy to keep the policy active with nightly letting, but may impose restrictive clauses known as endorsements, which exclude cover in certain circumstances. Some examples of these exclusions are:
1. Fire caused by guests
2. Escape of water caused by guests
3. Theft without forced entry
4. Accidental damage & malicious damage by the guests (without forced entry)
5. Public liability and legal expenses for guests

People need to check these cover levels and if they are missing, it may be worth them supplementing their cover with top-up insurance cover such as that provided by Inlet, which covers these additional circumstances.

Some platforms also have umbrella insurance policies to provide cover for all users of the platform for these aspects of cover. Whilst this is a great service, it's worth noting that these insurance contracts are not between the host and the insurance company but are between the platform and the insurance company. Therefore, the individual host may not be a party to, or legal beneficiary of, this insurance contract, which most mortgage lenders will not find acceptable cover. They require an insurance contract that's directly with the home owner, so people need to make sure they cover this requirement with their mortgage lender and get the right cover. (All of Inlet's insurance products are direct insurance contracts with the host.)

The nightly letting market is still in its relative infancy, but it has great prospects for growth as it creates a win-win situation for travellers and hosts alike. But, for it to be a success, it will need to be underpinned by responsible behaviour and good practice which service providers operating in this space are well positioned to provide.

Louise Birritteri is CEO and founder of insurance broker Inlet.

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