Many people mistakenly assume that a homeowners policy will cover them no matter what the occupancy status of their home is. But secondary and rental homes present a unique set of challenges for owners, insurance agents/brokers, and insurers to contend with when trying to protect them from harm.
Whether it is a weekend getaway, beach house, snowbird retreat, ski home, every second home has its own unique characteristics and usage patterns that need to be understood when designing an insurance policy and risk management plan. Here is some helpful Information.
Occupancy Is a Key Driver of Risk
The occupancy of a home refers to who is living in it and how often it is used. For example, an owner-occupied home is occupied most of the time by the owner, and a vacant home is not occupied at all. This risk factor is important for insurance companies to understand because a primary home that is occupied most of the time has a lower probability of experiencing a loss than a secondary home that has intermittent occupancy, tenant or renter occupancy, or is vacant. This is simply because it is much more likely that the warning signs of a possible disaster are identified when someone is present and the home is being used regularly than when it is unoccupied.
AIG Private Client Group conducted a benchmarking study of their “Family Office” clients, who are characterized by their ownership of multiple properties, and found that two-thirds of this client segment has experienced a claim.1
Agents and insurance companies need to be fully aware of the specific occupancy of a home to properly insure it. Each occupancy type requires a different insurance policy type. Many people mistakenly assume that a homeowners policy will cover them no matter what the occupancy status of their home is. To determine how an insurance policy will respond to a claim, the policy language must be fully reviewed and understood. Here is one example of some of the language from the Insurance Services Office, Inc. (ISO), HO-3 homeowners policy that speaks to this issue of occupancy.
Insuring Agreement:
“We cover … the dwelling on the ‘residence premises’ shown in the Declarations….”Homeowners Definitions:
“‘Residence premises’ means … the one family dwelling where ‘you’ reside….”2
The most important word in this language is “you.” If this language is contained in the policy, it can be used to deny a claim if the insured does not reside at the residence premises. Many people are unaware of this issue and are paying insurance premiums for a policy that will not respond when they need it.
Second Home Occupancy Types
The occupancy type of a second home will depend greatly on the intended use of the property by the owner. There are several different uses for second homes, which are listed below along with the risks that are associated with their occupancy types.
- Family vacation homes. Vacation homes are used solely by the family and friends of the owner of the home. These homes are generally occupied a small percentage of the year for vacations. When a vacation home is unoccupied, even a small loss can turn into a major problem because no one is there to identify it.
- Investment property. Homes that are purchased as an investment are intended to be sold for a profit. Owners of these homes may spend considerable sums to renovate them prior to selling. These homes are generally unoccupied, under renovation, and for sale during the owner’s involvement with them, leaving them open to significant risks.
- Long-term rental properties. Long-term rental properties are leased to tenants for months at a time. Leases are typically from 6 to 12 months in duration. When a homeowner rents a property to a tenant, they become a landlord to that tenant with a responsibility to maintain the home to ensure it is safe for the tenant. A dwelling fire policy is the appropriate policy for this type of home.
- Short–term rental properties. Short-term rental properties are rented to tenants for a minimum of one night but could be rented for a much longer time frame. The purpose of these properties is to yield a profit for the home owner by renting the property as often as possible throughout the year. This arrangement is classified as a business, and the insurance policy needs to cover the commercial aspects of this type of property.
- Homes under major renovation/construction. A second home might be an 1800s farmhouse in need of a major renovation or a custom home built from the ground up. The challenge with insuring these homes is the renovation or construction that will occur prior to the home owner moving in. The major risks to these homes include active construction risks (e.g., power tools, demolition, etc.), it is an unoccupied home/structure during construction, it is an attractive nuisance for passersby that could lead to vandalism or a liability concern, building materials may be left unattended, etc. These situations need special attention with respect to the insurance program.
Liability Risk at Second Homes
Liability insurance provides an important protection for home owners. This protection will pay legal defense costs and damages awarded by lawsuits brought on by an injury or property damage caused by some negligence. Second homes carry significant liability risks that could relate to swimming pools and spas, outdoor sport courts, and tenants or renters. Whatever the exposures are for a second home, they need to be considered in the underwriting and policy design process to ensure proper coverage is in place.
Water Damage
One of the most common claims is from water damage. When a home is not occupied full time and a hose on the washing machine or other pipe bursts, it can run for days and weeks causing much damage to your home and maybe others. Having a good plan and clearly marked shut off valves can help
Risk Management Strategies
Here is a quick overview of some of the strategies and technologies that are being used to protect second homes.
- Hire a property management company to monitor and preserve the property.
- Turn off the main shutoff valve for the water when the home is not in use.
- Be wary of social media posts that indicate a property is unoccupied.
- Ensure all doors and windows are closed and locked when the home is not in use.
- Remote controlled Thermostats
- Video Surveillance
- Risk Management Technologies
- Automatic water leak detection and shutoff valves
