From the June 2013 issue of Investment Advisor • Subscribe!

May 28, 2013

High-Risk Trading—Not of Derivatives but of Homes

Whole businesses have sprung up around the concept of home-swapping for vacations, but one thing often lacking is insurance against the risk

While not new by any means, a trend that’s grown substantially is home-swapping for vacations. Some people trade places to feel as if they’re members of the community they visit instead of feeling like tourists. Others trade because hotel costs in a pricey place might be beyond their budget.

Whole businesses have sprung up around the concept, with listings everywhere from Craigslist to numerous professional sites. One thing often lacking, though, is insurance against the additional risk a vacationer takes when allowing a perfect stranger into his home.

While home-swapping traveler blogs extol the low number of serious problems—the person you swap with is as anxious that you treat his home well as you are that he treats yours well—there are also horror stories, such as a British family who swapped their home for a place on the beach in Australia, only to come home and find that their “guests” had sold their house, belongings and car during their absence.

Then there’s the story told by Jim Fiske, vice president and U.S. marketing manager for Chubb Personal Insurance. “We actually had a situation a couple of years ago,” he related, “when one of our clients lent their home in a ski resort area to some friends.” The friends “lit a glorious fire,” basking in the après ski scene, and went to town for ice cream. By the time they returned, the house had burned down.

Theft and loss are not the only hazards to an exchange. Fiske cautioned, “When you introduce third parties to a house, you not only introduce property risk, but also liability exposure and identity theft.” After all, ­whoever lives in your home while you’re living in theirs will have ample unsupervised opportunities to take your car for a spin, authorized or not, and rifle through your private papers, as well as track down any valuables. Said Fiske, “It’s a limited upside and potentially unlimited downside.”

Even if you’ve allowed the exchanger to drive your car, what if he has an accident? Fiske told of an arrangement in which someone had an accident driving someone else’s car. The driver was seriously injured, said Fiske, and sued the owner, who was ordered to pay the difference between what his insurance company covered and the amount of the claim, because the swap company had a limit of liability.

Home exchangers generally rely on the fact that the people with whom they exchange are “guests” in that no money changes hands, so that any ­damages would be covered by their homeowner’s or renter’s policies. However, even if that’s the case, Fiske said, if you swap homes you’re receiving a consideration—the use of their home—that could be argued by your insurer to constitute using your home for commercial purposes and invalidate your coverage.

While Fiske added that Chubb doesn’t “have any exclusion in our ­policy that would prevent us from paying for a loss of this type,” he “can’t speak for our competitors.” And some companies will not cover such losses. This is not something you want to discover after the fact if you return home and find your house trashed, burned or otherwise violated.

Keghan Hurst, PR director for HomeExchange.com, said that while people should check with their own insurance companies, “we understand that most insurance covers exchange partners as invited guests in your home or ‘permitted’ drivers and offers coverage as such,” and that “most insurance companies prefer your home isn’t left empty while you are traveling.”

Fiske responded, “While there is some logic to the thinking, we’d ­certainly rather have a comprehensive monitored alarm system and the water turned off than a stranger in the home. An alarm system is a constant, while people can be variable.”

Ed Kushins, founder and president of HomeExchange.com, said his own insurance provider, USAA, and “a number of other insurance companies” told him “home exchange is specifically not a commercial use (as opposed to renting). It is not a financial transaction; it is a hospitality, and exchange partners are treated as any other invited guest.” [Emphasis his.]

Still, Fiske pointed out that it’s “important to manage risk in order to maximize life. [Home swappers without insurance] are trying to maximize life without acknowledging that there’s any risk associated with it.”

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