THE BIG UNEASY: Insuring the Houses of the Rising Sun
A full moon ascended over the Crescent City as delegates descended upon New Orleans this week for the Vacation Rental Managers Association Annual Conference.
Risk couldn't have been too far from anyone's mind as we made landfall at about the same time as the remnants of Hurricane Patricia, once a monster out-sizing Katrina that had degenerated into a comparatively docile meteorological beast.
Still, the sight of torrential rain lashing the boardwalk, heavy winds bending palms and debris strewn along the iconic riverfront summoned disturbing recollections.
That's right. We touched down in the land of the Mississippi swamp blues in the middle of the pouring rain. Wrong city I know, but it's impossible to get that tune out your head.
At any rate, there we were in the week leading up to All Souls Day in a town where the Saints are known to go marching musically through the French Quarter and athletically down the field at the Superdome a few blocks away.
Nawlins' eerie dark side was on full display.
The Walking Dead
Soiled, tattered clothing. Blood. Exposed, decaying flesh and eye sockets bereft of any sign of life were everywhere, and that was just the conference delegates crawling back into the exhibit hall the morning after the night before on Bourbon Street.
More frightening than the spooky voodoo vibe and the zombified tourists however was the extent to which it appears investment homeowners and property managers alike are lost and perhaps misguided with respect to insurance and risk management.
Ironically, in a town with more nicknames than your average minor league hockey team, it seemed people were calling a number of different and unique short term-furnished rental accommodation models by the same name.
It's becoming apparent that each operating model has a distinct tonality, cadence and riffs as unique as the spectrum of intoxicating sounds emanating from the bayou. Skiffle, Zydeco, Dixieland, Bounce and Ragtime….they're all infectious, irresistible and lift your spirits…so just calling them all Jazz is an injustice to music.
There is a house in New Orleans…
In a similar vein, be it independents on the Airbnb platform, home exchange member programs, vacation rentals, luxury villas or corporate lodging, the temptation on the part of insurers is to oversimplify, call a dwelling a dwelling and a peril a peril and throw a re-labeled, off-the-shelf product at the problem and hope no one notices.
Unquestionably, the insurance industry long ago figured out what matters in insuring a straight up house.
However, in NOLA this week, despite overcast skies, we saw a new sun rising that challenges all stakeholders to fully grasp the implications of how owners, property managers and paying guests interact with one another and utilize a dwelling under the various models to deliver responsive products.
A retired couple that periodically rents out a room in their home to backpackers is one thing. An out-of-state investment property that is neither a primary residence nor a seasonal dwelling that has been entrusted into the care of a property management company for the exclusive purpose of income... is another thing altogether.
I'll have the turtle soup. And make it snappy.
Meanwhile, insurers were concocting and serving up generous portions of Cajun style legal nightmares with a side of blackened case histories au gratin, sending everyone running towards the first policy on offer.
Simply endorsing a homeowner's policy to override the exclusions that preclude commercial use is probably not enough. By the same token, a jazzed-up commercial general liability policy likely falls short of what this market really needs.
The recipe for success lies in developing custom tailored definitions, sub-limits, exclusions and conditions that have been tested against viable scenarios and in the context of the various business models.
Anything less is just well… mumbo gumbo.
But it's not just the carriers who seem to be getting it wrong.
The clever tag line for one seminar on insurance (although Séance d'Assurance seems more apropos this week dans le vieux carré français) posed the provocative question: "Do you use protection?".
Unquestionably spicy marketing sauce in a place already famous for heavy seasoning, but property managers would be wise to think in these terms about the homeowners with whom they choose to partner; and to practice safe business.
The homeowner unwilling to spend a few dollars extra for appropriate and responsive coverage may well be equally shortsighted and derelict when it comes to addressing slip and fall hazards or proactively managing other risk. With judges and juries allocating liability equally among homeowners and property managers in landmark cases, for the furnished accommodation sector the carefree days of the Age of Aquarius are over before they started.
That full moon overhead may in fact have been in the seventh house, but was only renting short term.
Moreover, bearing in mind the courts allocation of liability, the comforts that Property Managers derive from being added as additional insureds on the property owners insurance policy, are well, unsettling.
Under the best-case scenario, where a homeowner managed to procure coverage with no prohibition for commercial rental activity, doubling the number of insureds effectively halves the limits available to each. If two legal defense teams come into play, defense expenses will soar, potentially exhausting coverage limits and/or the insurers financial inclination to continue to contest a case if all that remains at stake is a moral victory.
Meanwhile, where the policy won't respond at all to claims arising out of rental activities, then the named insured safety blanket is tantamount to a drawing a cheque on an empty bank account.
Now social media networking is increasingly becoming a part of the loss adjudication process. Just as disability benefits insurers are thinking twice before indemnifying ostensibly convalescing employees who post their white water rafting exploits on Facebook, a quick Google search on the part of insurers will expose properties listed for continuous commercial rental and impact amounts payable. Unscrupulous investment homeowners seeking to misrepresent the nature of a property to save premium run a very real risk of being uninsured.
If everyone works together to understand it and get it right, the vacation rental industry can effectively manage risk as easy as sweet potato pie.
Get it wrong and it'll be sounding sour notes all night long.
Laissez les bon temps roulé.