A Liability Risk for Airbnb Hosts

Over the last few years, Uber and Airbnb have come to be known as leaders of something called the sharing economy.

Give their founders credit for this feat of mostly misplaced nomenclature. The companies help people sell rides in cars and rent stays in homes; they deserve no more credit for promoting a skill learned in preschool than Marriott or taxi companies.

But here’s one thing they do love to share: risk. Uber grew by heaping it on many drivers, asking them to push damage claims through their personal insurance companies while knowing that those companies did not cover commercial activity.

And now comes Airbnb with its free $1 million liability coverage that will cover the hosts for its tens of thousands of United States listings. How can it afford to provide this for nothing, to everybody? Well, it is “secondary” coverage, which means that it, too, wants hosts to push any claims for guests’ injuries and deaths through hosts’ own insurance companies first.

So how might that work in practice, or would it at all? This week, I sent 17 questions about Airbnb’s move and short-term rentals in general to the biggest home insurance companies in the United States as ranked by SNL Financial. One thing came through loud and clear from the handful of companies that did not dodge my inquiries entirely: Most homeowner’s and renter’s insurance policies do not cover regular commercial activity in the home.

“If you’re conducting a business, on a full- or part-time basis, by renting out your home or apartment (or a room in your home or apartment) as a way to earn money, your homeowner’s or renter’s insurance policy probably would not provide liability coverage,” said Rebecca Hirsch, a USAA spokeswoman, in an email.

Here’s what Oregon’s insurance commissioner had to say to Airbnb hosts in a September consumer advisory statement: “Homeowner policies generally do not provide coverage for business use.”

Insurance companies are not fond of liars either, nor of people who conveniently neglect to tell them that they are running a small-scale hotel. “An insured has the obligation to be forthcoming about all facts relating to his/her insured property. Not doing so could impact coverage and jeopardize the continuation of insurance,” said Laura Strykowski, an Allstate spokeswoman.

So why would Airbnb offer secondary liability coverage at all if it knows that most hosts’ primary insurers frown on their getting into the hosteling business? Three reasons. First, it had to do something, and fast; there’s a new ordinance in San Francisco requiring hosts to have at least $500,000 in liability coverage. Hosts probably would not have gotten their acts together without the company’s help.

Second, it knows that some insurance companies have exceptions of various sorts. Allstate allows people to rent out their home for a week or two while still maintaining liability coverage for people who stay there. Ms. Hirsch of USAA said that for people who “very occasionally rent a room out (as opposed to doing this as a business), liability coverage may be available.” Chubb offers coverage as long as you’re not taking in more than $15,000 a year in rental income, which it believes is more generous than most other insurance companies.

Insurers handle claims on a case-by-case basis. Facts matter. Lawyers get involved and exploit loopholes. Hey, it could all work out well for Airbnb, at least some of the time, right? Clearly, the company thinks it’s worth trying.

The third reason is more basic: It would cost Airbnb enormous amounts of money to offer primary coverage to every host. How much? Well, consider the efforts of its competitor, HomeAway. That company encourages its own hosts to purchase primary coverage for their rental properties, an offering that it refers to as HomeAway Assure.

Scott Wolf, president of the program division for CBIZ Insurance Services, which provides the Assure policy, broke the host’s cost down: For a $1 million, four-bedroom home with contents worth $100,000, the annual cost of coverage would be about $3,000, which includes any damage, liability coverage and replacement of rental income in case the home is temporarily uninhabitable. Most Airbnb properties are worth less than this, its hosts may rent only part of their homes and do so less often, and the company would get a bulk discount if it were to buy coverage for all of them. Still, multiply that times 800,000 listings and it’s easy to see why it’s out of the question for Airbnb to hand out primary coverage to everyone.

So why doesn’t the company do what HomeAway does and offer hosts the option to buy a ready-made primary insurance solution for their renting activities? “We wanted the experience for our hosts to be automatic and easy and offer real peace of mind,” said Jonathan Golden, the Airbnb product leader who has been working on insurance issues for over three years, “versus going to another site and potentially having to purchase another policy.”

Free is indeed appealing to hosts who feel the pain every time Airbnb takes 6 to 12 percent of their revenue as a fee. “I’m pretty happy they’re offering something, given the percentage they’re taking,” said Crystal Bradshaw, who has two listings in Paso Robles, Calif., on the site that she manages with her husband, Justin. (They once hosted me at a different listing in Burbank, Calif.) “At least as a host, I’m getting something back.”

“This makes it more attractive to host from Airbnb,” Mr. Bradshaw added.

So what are the odds that they or anyone else will ever need to use the insurance? One reason it has taken so long for Airbnb to offer liability coverage is that insurance company actuaries aren’t fond of underwriting anything until they have years of data on death, dismemberment, drownings, compound fractures, crushings and the like.

Airbnb shared that data with its underwriters (who are making the company pay an unspecified deductible before any coverage kicks in), but the company would not share it with me. “Over 26 million guests have had a safe and positive experience on Airbnb, including over 16 million in 2014 alone,” Jakob Kerr, an Airbnb spokesman, said in an emailed statement. “We respect our hosts’ and guests’ privacy and do not comment on questions like these.” When I responded that disclosing the raw number of accidental deaths and injuries violates no one’s privacy, he said he did not have anything to add.

Mr. Wolf, the insurance executive, said that he budgeted for $2 million in liability claims each year on the 7,000 rentals he insured through the Assure product. If each of those is occupied 180 nights each year, that means $1 million in claims for every 630,000 nights of occupancy each year. Guests can feel good about those odds. Busy hosts might be less comfortable. Airbnb, with its 800,000 listings at any given time, has more to worry about.

Everyday consumers who neither host nor stay at Airbnb units may think this has nothing to do with them. Chubb, however, sees it differently. If Airbnb succeeds in sharing risk with personal insurance companies, then everyone’s premiums have to rise to cover it. “If you don’t underwrite appropriately, it drives up prices for the average homeowner,” said Christie Alderman, a vice president for Chubb Personal Insurance.

Insurance companies could solve this by asking all policyholders about their hosting habits, but none of the 10 I contacted said that they had made any changes to their policies as home-renting has grown. They should ask.

As for Airbnb’s hosts, they have a few choices. They can simply tell their insurance companies exactly what they’re doing, which is what the insurance companies and Airbnb ask them to do. Mr. Golden of Airbnb said the company did not know what percentage of its hosts were doing so; my educated guess is that it’s a tiny fraction. Or they can buy a vacation home-rental/landlord policy from a company like CBIZ, which offers it on its website.

Option 3 is to cross their fingers and hope that Airbnb’s liability backstop will work as advertised. Those who are tempted by this should keep something in mind: The company that now wants hosts to trust it is also the one that built its business by providing a platform for those same hosts to violate all sorts of local ordinances on short-term lodging all over the world. Some of them got into trouble by doing so.

When a serious injury or death occurs at a host’s home and the host’s homeowner’s policy denies the claim because of the commercial activity the host was engaged in, will Airbnb be there when the lawsuits start flying? We’re about to find out. And it will be a telling test of just how much the company has truly grown up.