From the February 2017 issue of Investment Advisor • Subscribe!

Protecting Clients From the Financial Dangers of the Sharing Economy

Home sharing in particular comes with risks; how to ensure clients don't unknowingly put their finances at risk

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How to help HNW clients protect their homes, stuff and identities How to help HNW clients protect their homes, stuff and identities

According to a 2016 report by Pew, 72% of Americans have used some type of shared or on-demand online service. As a result, you have probably heard your clients talk about such on-demand services, including short-term vacation rentals like AirBnB and Home Away, ride-hailing apps like Uber or Lyft, shared office spaces like WeWork, short-term clothing rentals and more.

According to the same Pew report, 11% of adults have used a home-sharing platform. If your clients decide to share their secondary homes, unused apartments or vacation condos with the public, it will be increasingly important to ensure they have sufficient insurance protection in place. Why? Because many may overlook significant liability and property exposures and therefore unknowingly put their personal finances at risk. Fortunately, there are a number of strategies and risk mitigation best practices to help protect your clients.

Home Sharing 101

While there are pluses to sharing one's home, it does come with risk. Take the situation where your clients decide to rent out their mountain home in Aspen. During the stay, guests adjust the home's temperature, causing a water pipe to rupture and flood the home. Is your client covered? The answer could depend.

(Related: Prepping the Winter Home)

The first step to answering that question is whether the home-sharing platform offers insurance to help protect the host. For example, some platform providers offer coverages — even up to $1 million — for damages to covered property. However, the insurance may still leave hosts with gaps in coverage. Most notably, many losses will be settled at “actual cash value” instead of “replacement cost,” meaning that the amount your client receives from the claim payout may be considerably less than the amount it will cost to repair, restore or replace the item. Also, there are usually other exclusions in host protection insurance, including losses or damages to cash, securities, common areas and fine artwork, to name just a few.

Home-sharing platforms may offer hosts primary liability coverage of up to $1 million per occurrence in the event of third-party claims of bodily injury or property damage, but what happens if a guest causes a water damage loss in a multi-million dollar condominium high-rise? Your client could be exposed to costs in excess of the $1 million of coverage.

While the insurance industry is moving toward offering sharing economy coverages, today's standard homeowners policies from many insurers generally exclude coverage for business-related risks or if a location is rented out regularly, including losses from theft of contents, accidental fire, an injury to a guest, or water damage, as in the above examples. Your clients may incur significant out-of-pocket expenses and may not realize that they have this exposure.

If your clients are considering sharing their properties, you should recommend that they consult with their insurance agents or brokers.

For high-net-worth clients with multi-million dollar properties, the coverage provided by the home-sharing platform might not be sufficient. If their agents or brokers deem that additional coverage is required, they can help work with their existing insurance carriers to determine whether their personal homeowners insurance policy covers losses caused by renters, or whether they would need to purchase a commercial business owners policy similar to those for hotels or bed and breakfasts. This type of policy may be necessary to fully protect a client.

Building a Home-Sharing Risk Mitigation Plan

Having proper insurance protection is important, but helping your clients think through a holistic risk mitigation plan before they enter the sharing economy is the best way to protect against accidents, injuries or property damage.

Start by encouraging your clients to think like a hotel owner. For instance, most hotels are required to have fire evacuation information clearly posted in a hotel room, most often on the back of the door. While your clients are not bound to the same standard, you should advise them to consider similar processes before sharing their homes. How can people get out safely in the event of an emergency? Are exits clearly marked? Do their apartments have easily accessible fire escapes?

Clearly mark locations of fire extinguishers and first aid kits. Ensure that they have a list of emergency contact information easily available to guests, including the local police and fire department and neighborhood watch patrol.

Additionally, before any guests arrive, advise your clients to think about what in their homes could result in a guest slipping, tripping or falling. For instance, your clients may want to consider removing any planters or yard items from the properties that might be hard to see at night. Stress the importance of working with their contractors or handymen to fix any loose steps or handrails on the interior and exterior of their homes. Installing additional lighting around walkways and driveways can also go a long way in helping to prevent a guest accident or injury.

Also, your clients should provide renters with instructions for their homes’ heating, plumbing, security and other systems. Otherwise, guests may not know how to turn off such systems in an emergency. Additionally, your clients should consider posting caution signs where appropriate. This might include reminders to open the fireplace flue and warnings to prevent being injured by scalding hot water.

Your clients who have valuable collections and fine art also need to think about how best to protect those items. Host protection insurance offered through the sharing platforms typically excludes losses to those items if they cannot be replaced with ones of like kind and quality, or if there are any losses as a result of damages from the repairing, restoring or retouching process. Consequently, before sharing their homes, your clients may want to remove breakable and expensive items, and make sure paintings are properly secured wherever they’re displayed.

Again, consider advising high-net-worth clients with valuable collections to discuss their coverage with their agent or broker professional. For instance, if they have valuable articles policies or endorsements in place, with itemized pieces insured at up-to-date values, they may have adequate coverage for losses to these pieces incurred during rental periods.

Last, there is the potential of identity theft when participating in a home-sharing relationship. Your clients can help protect themselves by removing or locking up personal documents and getting rid of laptops and other electronic devices that could be tapped for confidential information and passwords. Discuss with your clients identity theft protection strategies and insurance that can help monitor suspicious activities and provide credit alerts, as well as cover expenses associated with restoring and repairing one's identity.

Know the Risks to Enjoy the Rewards

There are clearly many benefits associated with sharing one's home. However, it's important your clients take the time to carefully assess the risks and consider risk mitigation best practices.

Resources, like Chubb.com, can help provide specific information about related insurance protections. Having these types of conversations with your clients will ensure they enjoy a safe and secure home-sharing experience.

--- Read 3 Emerging Risks Your Clients Aren’t Prepared for in 2017 on ThinkAdvisor. 

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