insurance coverage for short term rentals?

Question

I just signed a contract for my first rental property on Christmas Eve.  Nice little bungalow in northern Cape May a block or two from the bay.  Has the potential of bringing in 2K in positive cashflow!

Now I'm in the due-diligence stage and wondering about insurance.  I've reached out for quotes on flood and standard home-owner insurance that the mortgage company is asking for, but I'm thinking about getting an umbrella coverage or similar to cover the rental business.  I'm not even sure where to start on this - I'll probably start calling insurance agents tomorrow, but thought I'd get the opinion of those of you who are further along this journey before I do.  What questions should I be asking?

Thanks in advance!

-Steve

John Mocker · Answer

Steven,

Sounds like you are in a flood zone based on the Mortgage Company requiring flood so lets tackle that first.  There are two options to consider:

1. FEMA - National Flood Insurance program (NFIP)

- Depending on age of property, you may need an elevation certificate (see if current owner has one)

- If the Flood zone changed recently, the rates may be grandfathered in

- Check the flood maps to make sure the building is in the flood zone or just part of the property

2. Private Market Flood

- have your agent quote as many as they can access.  I've found in some cases, just 1 or 2 will be lower than others

- some will allow you to insured higher limits than the $250,000 limit allowed in the NFIP

- some offer other optional coverages that may be important to you

Dwelling/Fire Coverage (aka Landlord coverage) will also be required by the Mortgagee.  It insures the Building, Contents, Loss or Rents, Detached structures, and Liability.  You should be getting quotes based on the Replacement Cost (cost to rebuild) of the Building.  This may be very different than the pruchase price of the property because it does not take into account the land value or the depreciation of the building.  Be sure to let the agent(s) quoting the policy know about the short term rental.  The minimum amount of days (ie one week, one month, etc.) and the total number of weeks it will be rented in a year would be important info for them to know.  Different Insurance companies will have different guidelines on this rental and you want to make sure that you are actually eligible for the policy.

Umbrella Insurance:  This type of policy provides coverage if the Liability limits of your underlying policies (Auto, Homeowners, Dwelling/Fire, Boat, etc.) are exhausted in a coverage claim.  It is usually sold in $1,000,000 increments.

I hope this helps get you started.  Feel free to PM me if you have any questions on any of the above info.