Airbnb : What are Insurers Thinking?

Why do people join networks such as Airbnb, well, as per their own website the main reason is income, therefore letting is a commercial activity. Obviously if you are a freeholder unencumbered by any conditions of your mortgagee or your current insurer regarding sub-letting then you can use your property as you see fit. Using your property to generate additional income is your decision: As long as it does not prejudice any contract with a party whom have a financial interest or provide indemnity for your property.

In fact, the levels of income generated mean that this type of “let” is more lucrative and far less onerous than a normal assured shorthold tenancy.

  • Question: Following some well published cases of letting nightmares including drug taking, substantial property damage, malicious damage etc. (see airbnbhell.com) Parties who are responsible for, such as Landlords, Right to Manage Companies, managing agents etc. Or neighbours of Airbnb lets, especially in block of flats, have been asking their brokers “does the presence of short term un-vetted occupancies prejudice any of their insurance covers?”
  • Non-Reply: A simple straightforward question, which the broking fraternity has been unable to answer.

But a leading insurer has given us some insight into their thinking by providing us with some guidance notes which illustrates their thinking in relation to the activity of letting or sub-letting your property on a non-lease basis. Of course, we are aware these notes relate mainly to flats.

Lease Considerations
Before stating the insurers position, it is worth considering then implications of breaching your lease. There is a Lands Tribunal Case of Nemcova v Fairfield Rents Ltd (2016 UKUT 303) which means short term lets breach the terms of most leases which states it should be occupied as a “private residence” and people renting short term usually have a “private residence” elsewhere so this is a temporary location more akin to a hotel room. This case is an actionable lease breach on its own however the exclusion of cover for short-term lets by insurers also triggers a lease breach as most leases say the lessee isn’t allowed to undertake activities which adversely affect the insurance terms offered. In the light of these 2 lease breaches the lessee should stop the short term letting and let your Broker know when it’s ended to maintain full cover.

But surely sub-letting is the norm? CHECK YOUR LEASE!
The lease may have a provision to say that subletting is only allowed with permission. The freeholder cannot unreasonably refuse but, in such cases, they would need to see references. Experience suggests that problems are usually caused by unsatisfactory tenants rather than owner-occupiers and for that reason you can expect the freeholder to take up the references and consider them carefully before granting consent.

It is also not unreasonable for the freeholder to ask the subtenant to enter into a direct agreement with them to obey the conditions of the lease (except for paying ground rent and service charge). Indeed, if you are the freeholder and a license is required, you would be sensible to include a condition making it clear that any breach of the terms of the lease by the subtenant will be treated as a breach by the flat-owner himself. Otherwise it can be difficult to hold the latter responsible for nuisances caused by their tenant.

There may also be finance conditions of a loan secured against your property, but in this piece, I cannot comment on this variable and it is down to individuals to check their own contract conditions before letting.

Insurers Thoughts
Insurers have commented upon policy considerations:

Rent / Alternative Accommodation. Is a policy benefit providing by a standard property owners policy should your premises become uninhabitable as a result of the occurrence of an insured peril?

However, if the property, at the time of the loss was occupied on, or about to be occupied on a short-term agreement, then loss of income/alternative accommodation would it constitute an insured loss? The answer is no, insures have commented they would neither recompense the landlord for their financial loss, nor would they rehouse the temporary tenants.

However, if the property, at the time of the loss was occupied on, or about to be occupied on a short-term agreement, then loss of income/alternative accommodation would it constitute an insured loss? The answer is no, insures have commented they would neither recompense the landlord for their financial loss, nor would they rehouse the temporary tenants.

Rights of Recovery: this is a thorny area: Most property owner’s insurance policies contain an agreement that insurer agrees to waive their rights of subrogation against a tenant. In other words, following a loss they do not pursue a tenant (even if they were the authors of the loss) to recompense them for their costs as long as the tenant are occupying the property within the terms of the lease. A lease on a flat in a block as a rule does not allow the demised premises to be used for commercial purposes i.e. the generating of income.

So would insurers pursue a tenant for their loss, it is doubtful as insurers would have to establish negligence which would require the reasonable foreseeability as well as a failure of duty. But what if the Airbnb sourced occupant could be held to be negligent i.e. disarming fire and theft detection systems, the answer is yes, the insurance company would have to claim against the public liability cover provided by Airbnb.

Are insurers considering tightening up their underwriting?
Insurers are suggesting applying the following risk conditions to short term occupancy:

The lessee must provide short term occupant with:

  1. instructions on how to use all cooking equipment, including extraction equipment
  2. emergency contact telephone numbers including emergency services for overseas guests
  3. the location of the mains water stopcock and instructions to turn this off in the event of escape of water
  4. how to set Security Alarms at the Residential Unit
  5. guidelines on how to avoid any known hazards at the property and details of emergency evacuation routes and procedures
  6. Giving access numbers of fob re electronic controlled entry, does this prejudice fellow tenants
    insurance conditions.

The following conditions may also apply:

  1. during periods of un-occupancy between lettings the Unoccupied Conditions shall be operative
  2. smoke alarms shall remain operational and shall be tested in accordance with manufacturer’s instructions
  3. where the contents of the Residential Unit are covered by this Policy, and Loss or Damage by Malicious Damage or Theft shall be excluded during the period of the short-term letting
  4. the lessee or their representatives shall carry out an inspection of the Residential Unit after Short Term Letting
  5. smoking shall be prohibited anywhere in the Residential Unit
  6. the excess stated in the Schedule

This is the internal reflection of a leading insurer but it does highlight that the questions raised by Airbnb lettings is a current topic for the insurance market to resolve. But do not expect a uniform or speedy market resolution. Answers to the questions posed by this letting phenomena will evolve to suit all parties whilst trying to avoid putting additional responsibilities on the professionals caught in the middle of the uncertainty: managing agents, directors of RMC’s etc.

LOOK TO YOUR BROKER FOR MORE HELP
At Clear Insurance Management Ltd we are specialists in the property market. If you’d like further information contact us today or visit www.thecleargroup.com/for-your-business/property-and-construction/residential-property

For further property insurance advice and guidance please contact: Kevin Donegan  |  020 7280 3494

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