AirBnB – Uber Déjà Vu for Insurance Companies
What is a Short Term Rental?
Short term rentals have become an increasingly popular alternative for travelers seeking affordable accommodations. Often, travelers find short term accommodations in private residences. By far the most popular platform for travelers to find short term rentals is Airbnb.com. For that reason, this article refers generally to “Airbnb hosts” and “Airbnb guests,” but the principles also apply to other short term rental situations.
In the insurance context, this brings up two major risks: (1) potential injuries to guests and (2) potential property damage to host’s residence or theft of host’s property. The Insurance Information Institute (“III”) recommends a host contact his or her insurer before renting out part of the property. The III notes some insurance companies may allow policyholders to use their property as a rental for a one-time, special occasion such a local sporting event, as long as the insurer is informed about it ahead of time, while other insurers may only allow this type of arrangement if certain other criteria are met, such as the purchase of a business policy—specifically either a hotel or a bed and breakfast policy.
The Business Pursuits Exclusion: A Potential Hurdle to Coverage under Homeowner’s Policies
A coverage exclusion for liability for injuries or damages to third parties arising out of “business pursuits” is commonly found in the liability section of a homeowner’s policy. The term “business pursuits” denotes “a continued or regular activity for the purpose of earning a livelihood such as a trade, profession, or occupation, or a commercial activity.” Indus. Indem. Co. v. Goettl, 138 Ariz. 315, 318–19, 674 P.2d 869, 872–73 (Ct.App.1983). Both regularity and the profit motive must be present for an activity to constitute a business pursuit. See id. A business pursuit may be considered continuous and regular even though it is temporary. Farmers Ins. Co. of Arizona v. Wiechnick, 166 Ariz. 266, 268, 801 P.2d 501, 503 (Ct. App. 1990). If a business pursuits exclusion does not contain an express time limitation, it will preclude coverage for injuries arising out of a business pursuit regardless of when the insured engaged in such activity.
Indus. Indem. Co. v. Goettl, 138 Ariz. 315, 318, 674 P.2d 869, 872 (Ct. App. 1983).
One Arizona court recognized homeowners’ insurance policies are designed to insure “a homeowner against the hazards arising out of the operation and maintenance of his home…certain risks are specifically excluded because they are not embraced within the course of a homeowner’s normal activities.” The court went on to note business related activities “present additional risks over and beyond the ordinary and usual hazards to be found in the operation and maintenance of a home,” and those risks generally “are not within the contemplation of or intended to be within policy coverage.” Kepner v. W. Fire Ins. Co., 109 Ariz. 329, 330, 509 P.2d 222, 223 (1973)
When the business pursuit exclusion uses the phrase “an insured,” it only applies to a business pursuit of the insured in question. United Servs. Auto. Ass’n v. DeValencia, 190 Ariz. 436, 438, 949 P.2d 525, 527 (Ct. App. 1997). For example, if the injury to the third party is caused by a minor child of the named insured, the business pursuit exclusion would only apply if the insurer could show that the minor child was individually engaged in a business pursuit when the child committed the injurious act. Id. However, if the exclusion uses the phrase “any insured,” coverage is excluded if the injury arose from any insured engaged in a business pursuit, even to innocent co-insureds. Am. Family Mut. Ins. Co. v. White, 204 Ariz. 500, 508, 65 P.3d 449, 457 (Ct. App. 2003).
Accordingly, the existence of a business pursuits exclusion could potentially exclude a homeowner from coverage for injuries to Airbnb guests. Whether a business pursuits exclusion would apply in a particular case would require a specific analysis of the policy language and the facts of the particular case.
Potential Limitations to Property Coverage
Although the business pursuits exclusion is discussed above in terms of liability coverage, insurers also have the ability to limit property damage coverage to exclude property damages to the premises caused by business guests and/or to exclude property damages to buildings used in whole or in part for business.
Moreover, there are numerous other potential limitations on property coverage if a homeowner’s property is stolen or damaged in connection with an Airbnb rental. For example, homeowners’ policies often exclude or limit coverage for business property. This presents a unique situation in the context of short term rentals, where there may be substantial overlap between personal property and business property. The property located in the rented out room, such as the bed, furniture, linens, and towels, while traditionally considered personal property, could be considered business property if it was purchased for and used for short term rental guests.
It is also common to see exclusions for property damage arising out of theft and vandalism if the property has been vacant for a certain period of time. This could apply in situations where a host has a property other that his or her residence which the host uses solely for short term rentals. If the host is unable to book the property for a certain period of time, and the property is vandalized, coverage could potentially be excluded.
The above examples do not constitute an exhaustive list of the property damage coverage issues which may arise in the short term rental context. As stated above, whether any exclusions or limitations on coverage would apply in a particular case would require a specific analysis of the policy language and the facts of the particular case.
The two sections above assume the typical short term rental situation where the owner of a single family residence rents out a room or space to a travelling guest. Further issues can arise in situations where the property is subject to condominium or homeowner’s association rules and regulations. Even more issues can arise where the host is a renter who is subject to specific requirements under the rental agreement and the property is insured under both a renter’s policy and a landlord’s policy.
Since its inception in 2008, Airbnb has grown to a multimillion dollar company, with Wall Street Journal valuing it at $25.5 billion in June of 2015. As society and technology evolves, so will both insurance products and legal insurance issues. Until an insurance policy clearly addresses Airbnb-type hosts and guests, it will be important for insurance companies to conduct a thorough factual investigation into any losses happening in conjunction with a short term rental, as well as any policy language which might apply.
ABOUT THE AUTHOR
Lena Pond is a graduate of the Sandra Day O’Connor College of Law at Arizona State University. She specializes in insurance defense, insurance coverage disputes, insurance bad faith, professional liability, and general civil litigation. Contact her at 602.386.5654 or email@example.com.
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