SDV Insights

Unshared Risk in the Sharing Economy: Insurance Coverage Pitfalls


Connecticut Lawyer  November/December  2017

While this may have been a freak accident, you are not alone in facing the possibility of these risks. If you’re using Airbnb, or a similar home-sharing service, yours is among the more than 1,800 active home rentals in Connecticut that were used by 54,000 visitors between June 1, 2015 and June 1, 2016.1 This begs the question, “With the rise of the sharing economy, are the associated risks being shared, or borne solely by the host or provider?”

Insurance is widely used as a risk transfer tool, but if the right coverages are not in place, it will not be effective. As the sharing economy continues to develop at a rapid pace with low barriers of entry, unless the industry keeps up, severe gaps in coverage could frustrate risk transfer, and leave the insured hung out to dry.

Will You Be Covered?

Your Homeowners Policy 
Your first inclination will likely be to submit a claim through your homeowners policy for the damages, and—had the fire not occurred in connection with the Airbnb booking—you would likely have coverage. Although the above scenario concerns a first-party claim for property damage, homeowners policies also provide liability coverage for third party claims. For instance, in 2015, an Airbnb guest died while sitting in a rope swing at the Airbnb property when the tree to which it was tied gave way.2 In that case, it was reported that the decedent’s family reached a settlement with the host’s insurance company, which provided coverage for commercial activity. However, most homeowners insurance does not cover commercial activity. In fact, there are a number of policy provisions that may restrict coverage for both bodily injury and property damage claims occasioned in connection with an Airbnb rental. 

The Business Pursuits Exclusion
Homeowners policies commonly contain a business pursuits exclusion, likely to be interpreted by Connecticut courts to exclude coverage for home-sharing losses. The business pursuits exclusion excludes personal liability coverage for matters “[a]rising out of or in connection with a business engaged in by an insured.”3 The Supreme Court of Connecticut, addressing the meaning of “business pursuits” in an exclusionary clause as a matter of first impression, found that it “contemplates a continuous or regular activity engaged in by the insured for the purpose of earning a profit or livelihood.”4 In other words, the applicability of the business pursuits exclusion involves a two-pronged test of continuity and profit motive. Continuity is found to be sufficient, “not as an isolated instance but as a regular or continuous practice.”5 Under that language, so long as the property is being rented through Airbnb regularly throughout the course of the year, it will likely be found to be continuous. Turning to the second prong, whether an actual profit is earned or whether it is the insured’s sole occupation or business is immaterial.6 For example, in its analysis of whether a homeowner’s horse boarding constituted an activity for profit, the Connecticut Supreme Court looked to whether the homeowners were reporting their income under the Internal Revenue Service’s “hobby rules” which include activities not engaged in for profit.7

A similar analysis would likely apply to the determination of whether home-sharing services constitute a business pursuit. The trend across the United States, as well as Connecticut, is to treat home-sharing services as a business for profit, which under Connecticut case law would likely be found to be excluded as a business pursuit. In fact, on July 1, 2016, Connecticut began collecting the 15 percent hotel tax on Airbnb rental activities, evidencing that Connecticut views home sharing as a for-profit activity.8 Although Connecticut has not yet enacted legislation mandating minimum insurance requirements for home-sharing services, recent legislation suggests such a requirement is likely to be passed in the future. Public Act 17-140, as amended by 17-203, creates a regulatory structure for ride-sharing services (also known as transportation network companies). This new law requires that drivers be covered by a primary automobile insurance policy that recognizes their ride-sharing business and mandates minimum limits depending on the driving activity.9 Other states and cities, including San Francisco,10 have enacted similar laws for home-sharing services. Given its recent enactment of ride-sharing legislation, Connecticut may not be far behind.

Other standard form homeowners policies contain language defining business broadly as “[a] trade, profession or occupation engaged in on a full-time, part-time or occasional basis; or...[a]ny other activity engaged in for money or other compensation, except...[one] for which no ‘insured’ receives more than $2,000 in total compensation for the 12 months before the beginning of the policy period.”11 This language would similarly treat home sharing as a business if it grosses more than $2,000 annually.

Other Restrictive Policy Language In addition to coverage restrictions based on business operation, the standard form limits the definition of insureds to “[y]ou and residents of your household who are... your relatives,” other persons under 21 and in the care of anyone named above, and a fulltime student previously a resident of the household under the age of 24.12 Pursuant to the clear policy language, Airbnb guests do not qualify as insureds. This means that if a guest causes harm to a third party while renting from you, the guest will not be covered.

The definition of “insured location” in standard form policies could also eliminate or restrict coverage for Airbnb related losses. “Insured location” means the “residence premises;” “residence premises” is defined as “[t]he one family dwelling where you reside; [t]he two, three or four family dwelling where you reside in at least one of the family units; or [t]hat part of any other building or structure where you reside.”13 Therefore, if you are renting your one family home, be prepared that your carrier may deny coverage for any event that occurs while you are not residing in the home. However, as a policyholder, you should look for facts to combat any denials based on this definition or others.

While standard policies include coverage for theft, loss caused by theft from that part of the premises rented out by the insured to someone who is not an insured is excluded.14 Thus, you will not be covered for theft by a guest. Furthermore, property of a guest is only covered while the property is in a residence occupied by an insured.15 If you are Airbnb-ing your property, it is likely that you are no longer in the premises being rented, and therefore, the guest’s property would not be covered. Coverage is likewise broadly excluded for property of roomers, boarders, or other tenants, as well as property in an apartment regularly rented or held for rental to others by an insured.16

Emerging Litigation
While case law remains undeveloped with regard to coverage issues for home-sharing properties, a suit recently filed in California claims that Travelers wrongfully denied coverage to its insured under a homeowners policy simply because the homeowner had listed the property on Airbnb.17 The homeowner-plaintiff owns a two-building home in California. On no more than a few occasions, beginning with a charity fundraiser, she hosted several Airbnb guests on the top floor of one of the buildings. She uses the bottom floor of that building as a wine cellar. The complaint alleges that a severe storm caused a tree to fall on the bottom level of the building, resulting in $80,000-$120,000 in damages. It is further alleged that Travelers denied coverage for the claim based on an undefined exclusion in the policy for “structures rented or held for rental.” Even though the bottom floor is not connected to the top level, and the loss to the bottom floor had nothing to do with the few Airbnb listings, Travelers denied coverage citing to the exclusion because the plaintiff had listed the top floor on Airbnb during the policy period. Counsel for the plaintiff, Cooper Johnson of Shernoff Bidart Echeverria LLP, stated that it is highly likely that other policyholders have been affected by what is believed and alleged in the complaint to be a “company-wide practice at Travelers, which systemically denies claims when any part of a damaged structure has been listed on Airbnb, regardless of the nexus between the loss and an occupancy by an Airbnb guest.” 

The case demonstrates that insurers may be using broad, undefined rental exclusions contained in their policies to deny coverage for otherwise covered claims wholly unrelated to the supposed “rental,” simply because the property at one time during the policy period was listed on Airbnb. This must be a cause of concern for insureds. The litigation may also prove to be the impetus for other policyholders to come forward to report instances of similar, wrongful denials.

Coverage Available through Airbnb: Host Protection Insurance
A second avenue to pursue coverage may be Airbnb’s Host Protection Insurance (HPI), which provides coverage through a policy issued by a Lloyd’s of London participating insurer. Airbnb’s HPI policy was offered in response to enactment of local ordinances requiring minimum insurance coverage for home-sharing activities.18 After reaching out to Airbnb several times, they declined to provide a copy of their policy (which is advertised as available upon request), and instead, directed us back to the summary coverage page on their website.19 The summary document states that HPI is offered at no additional costs to hosts, providing “primary” coverage20 for liability for either bodily injury or property damage, and has limits of $1 million per occurrence and location, and a $10 million aggregate limit.21 This means that not only does each host have a limit of $1 million per location during the policy term, but that you also may not have coverage depending on the number and amount of claims filed by other hosts across the United States. There are upwards of 500,000 Airbnb listings in the United States, meaning that if only 100 of those listings have claims of $100,000 each within the policy term, the $10 million aggregate limit will be exhausted. If you are the next claim to come in, you will not have coverage.

The summary document also lists “key” exclusions, including: aircraft, auto and mobile equipment, assault and battery, Chinese drywall, communicable disease, contractual liability, cross suits (i.e., insured v. insured),22 distribution of material in violation of statutes, electronic data, employment related practices, expected or intended injury, exterior finish or insulation systems, fungi or bacteria, liquor liability, loss or damage to certain property, nuclear risks, personal and advertising injury, pollution, products and completed operations, products recall, punitive or exemplary damages, sexual assault, silica, silica dust, lead and asbestos, watercraft, war, and workers compensation and employers liability.23

For a location to be covered, it must be (1) owned or controlled by the host; (2) listed on the Airbnb website; and (3) booked and occupied by a third party using the Airbnb website who has consented to the Airbnb terms of service.24 The HPI coverage is further limited to an actual stay (which begins on the check-in date and ends on the check-out date), not a booking, meaning that there is no coverage for a no-show, an early arrival, or late departure.25 The summary document states that the host may have the right to refer complaints to an external resolution service, indicative that the HPI policy may have an alternative dispute resolution clause, which—if enforceable— would prevent insureds from bringing suit under the policy.26

The response to the coverage offering is mixed: forums on Airbnb’s website include dissatisfied hosts who have had their claims denied, declaring the insurance payout to be a “myth” and reporting that Airbnb requires insurmountable evidence such as police reports of non-criminal acts and receipts of damaged items in order to provide reimbursement for damages, while others reported positive experiences with the service. The takeaway message is that hosts should not rely on HPI coverage as a potential source of recovery, especially given that the policy is not available for review. 

Takeaways for the Host Coverage is not a guarantee under either your own homeowners insurance or that offered through Airbnb, which could leave you bearing the brunt of the risk associated with home-sharing activities. In order to protect yourself in the event of a loss:
1. A good broker is an important part of the process. Talk to your broker, ask them to compare your own coverage against any coverages offered by the home-sharing company, and seek to cover any gaps that may exist.
2. Contact your existing homeowners insurer to notify them of your activities and inquire into whether you will be covered for short-term rentals, or if they offer an endorsement to cover these services.
3. Consider purchase of a separate standalone policy designed for short-term rentals.
4. Check local ordinances and laws to ensure you are complying with any minimum insurance requirements. CL 

Notes
1. Altimari, Daniela. “Airbnb Agrees To Have Hosts Collect State Taxes.” Hartford Courant June 09, 2016. Accessed August 01, 2017. http://www. courant.com/politics/hc-airbnb-taxes-0609- 20160608-story.html.
2. Lieber, Ron. “Death in Airbnb Rental Raises Liability Questions.” The New York Times, November 13, 2015. Accessed August 1, 2017. https:// www.nytimes.com/2015/11/14/your-money/ death-in-airbnb-rental-raises-liability-questions. html?_r=0 .
3. Cambridge Mut. Fire Ins. Co. v. Sakon, 132 Conn. App. 370, 376, 380 (2011) (internal quotation marks omitted), copy available at http://connecticut.lexroll.com/cambridge-mutual-fire-insco-v-sakon-132-conn-app-370-2011/.
4. Pac. Indem. Ins. Co. v. Aetna Cas. & Sur. Co., 240 Conn. 26, 33 (1997).
5. Id. at 33.
6. Id. at 34.
7. Id. at 28.
8. Lieber, “Death in Airbnb Rental Raises Liability Questions.”
9. Public Act No. 17-140, as amended by Public Act No. 17-203.
10. See S.F. Admin. Code 41A.5. (g)(D).
11. See HO-3 Form, Definitions, B. 3, copy available at http://www.iii.org/sites/default/files/docs/ pdf/HO3_sample.pdf.
12. See HO-3 Form, Definitions, B. 5, copy available at http://www.iii.org/sites/default/files/docs/ pdf/HO3_sample.pdf
13. See HO-3 Form, Definitions, B. 6., B. 11, copy available at http://www.iii.org/sites/default/ files/docs/pdf/HO3_sample.pdf.
14. See HO-3 Form, Section I – Perils Insured Against, B. Coverage C – Personal Property, 1. Covered Property, copy available at http://www. iii.org/sites/default/files/docs/pdf/HO3_sample.pdf.
15. See HO-3 Form, Section I – Perils Insured Against, B. Coverage C – Personal Property, 9. Theft
16. See HO-3 Form, Section I – Property Coverages, B. Coverage C – Personal Property, 4. Property Not Covered, Sec. f and g, copy available at http://www.iii.org/sites/default/files/docs/ pdf/HO3_sample.pdf.
17. See Richers v. Travelers Insurance Co., No. 17CV000777, (Cal. Super. Ct. filed July 7, 2017).
18. San Francisco was one of the first to enact an ordinance governing short terms rentals
19. “How can we help?” What is Host Protection Insurance? | Airbnb Help Centre. Accessed August 01, 2017. https://www.airbnb.ca/help/ article/937/what-is-host-protection-insurance.
20. Previously, HPI was offered only as secondary insurance, requiring a denial from your homeowner’s policy before it could be triggered.
21. See Host Protection Insurance Summary, available at https://ww.airbnb.com/user/hpi_program_summary_pdf, 4.
22. Although we could not obtain a copy of the policy from Airbnb to determine exactly who qualifies as an “insured”, assuming the host and guest both qualify as insureds under the terms of the policy, the effect of the insured v. insured exclusion could mean that there would be no coverage for you in the event your guest sues you – one of the most likely claims to arise. Likewise, this exclusion bars coverage for you against any suits brought against you by your landlord or homeowners association according to the Host Protection Insurance Summary.
23. See Host Protection Insurance Summary, 5-9.
24. See Host Protection Summary, 4.
25. See Host Protection Insurance Summary, 3.
26. See Host Protection Insurance Summary, 10.






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