First STR ... Liability Question

[Sarah Hylander]

Hi there! We are ready to buy our first STR, a bit nervous but mostly excited! I am sure this has been covered, but I still need to ask … how to we protect ourselves? Financing as a 2nd home, so do we create an LLC before purchase or after? Or does homeowners insurance cover most issues? Would love to hear your thoughts, horror stories, suggestions … thank you!

[Collin Hays]

Quote from @Sarah Hylander:

Hi there! We are ready to buy our first STR, a bit nervous but mostly excited! I am sure this has been covered, but I still need to ask … how to we protect ourselves? Financing as a 2nd home, so do we create an LLC before purchase or after? Or does homeowners insurance cover most issues? Would love to hear your thoughts, horror stories, suggestions … thank you!

A homeowners policy is not the proper way to insure your short term rental.  A short term rental is effectively a miniature hotel, and as such, it is a commercial enterprise.  Along with that come commercial risks of various kinds:  Lost income due to peril, liability, etc.  So you need to locate a commercial policy for a vacation rental. There are plenty out there.  If you are in Tennessee, Southpoint Risk is the gold standard. 

Claims can and do happen.  They are generally a peril claim (flood, fire, and hail), or a liability claim (guest injury).  In the event of a guest injury claim, you are likely being sued for negligence. Your commercial policy will cover this, up the amounts stated in the policy.  However, if you are flush with assets, a plaintiff attorney may sue for gross negligence.  A higher bar to clear, but with that, the plaintiff is seeking actual and exemplary damages.  And if you are successfully sued for gross negligence, it is unlikely your insurance will pay a dime, as gross negligence on your part is often a reason that they can deny payment.

What to do?  If you are self managing, it is imperative that you are doing a thorough risk management assessment periodically on your property, and making repairs to anything that is deficient.  It would be a good investment to pay for a risk manager to come out and do an assessment.  If you are sued, you need to be able to prove up that you did your due diligence in making your place safe.  If you can't prove that up, you could be in trouble.

If you are paying someone to manage your property, you are pretty much off the hook, as the responsibility to look after the property falls on them, since that is what you are paying them for.  We manage a couple dozen properties, and had a claim several years ago that resulted in a $250,000 settlement, paid mostly by our insurance, not the owner's policy.