Understanding Policy Limits in Insurance: Definitions and More

Owning and operating a short-term or vacation rental property is an excellent way to boost your income. However, short-term property managers might encounter damage to their units, whether from a natural event, guests causing the damage, guests getting injured by the damage, or negligence.

When that happens, short-term property managers should have a liability policy. These differ slightly from regular homeowners insurance, especially regarding policy limits. In this article, we’ll define policy limits in short-term rental insurance and some specific types that may pertain to your property.

What Are Policy Limits?

The policy limit definition is easy to grasp conceptually. It’s the maximum amount your insurance company will pay to cover losses, damages, guest injuries, and personal liability related to your property. 

These limits act as a financial safety net, covering structure damage, lost income, item damages, and guest injuries. When deciding what limits are appropriate for your unique property, insurers take a few considerations:

Property Value

When you have a more expensive rental property, you risk paying more in damages. However, that also means the potential payout on insurance claims may have higher overall limits.

Guest Turnover

Short-term rental properties with a higher rate of tenant turnover face a bigger exposure to damages and injuries than slower ones. An insurer may respond by imposing lower policy limits on properties with higher guest churn and resident rotation.

Location

Short-term rentals in places known to experience flooding, earthquakes, natural disasters, or high crime rates are exposed to elevated risks of damage and injury. Insurers will take those factors into account and likely lower your policy limits.

Claims History

Property managers with a record of making multiple claims could face stricter policy limits based on their histories. They could even be deemed ineligible for property insurance if they make frequent claims.

Specific Policy Limits: A Glossary

Have you found yourself asking, “What is my policy limit?” If so, the first thing to know is that many concepts and types of policy limits pertain to short-term rentals. Here are some of the more common definitions of policy limits.

Per-Occurrence Basis

A policy taken out on a per-occurrence basis imposes a maximum payout for a single damage incident. For example, suppose that your per-occurrence basis limit is $15,000, and a tenant breaks a window or causes structural damage. 

In that case, the insurer will only pay up to $15,000 as compensation. If the repair or replacement cost exceeds $15,000, the property manager or owner must pay out of pocket for the overage.

Aggregate Limits

An aggregate limit is the maximum they’ll pay out throughout the policy’s life. Let’s say your policy covers one full year of damage with an aggregate limit of $75,000. That figure covers all damages from incidents that happen on your property. 

If multiple incidents occur over that year, you’re in the clear as long as the total cost stays under $75,000. But if they exceed $75,000, you’ll have to pay the cost overrun yourself.

Per-Person and Combined Limits

These concepts are similar to per-occurrence bases and aggregate limits but are most frequently deployed when a guest suffers an injury. On per-person coverage, insurers set a maximum dollar amount for a single guest’s injury. 

For example, if you have a per-person limit of $25,000 and the guest’s medical expenses remain lower than that, you’re good. If they exceed that amount, you’re on the hook for it.

Combined limits are similar to aggregate limits. However, the difference is that coverage is based on multiple claimants that arise from a single incident rather than the policy lifespan. 

For example, let’s say you have a combined limit of $150,000. If a tree falls on multiple units and causes injury to five of your guests, as long as their total damages remain under $150,000, you’re covered. If they go over $150,000, the payments become your responsibility.

Split Limits

Split limits come into play if you take out multiple policies on different coverages. You may have separate policies for property damages, guest injuries, legal coverage, and loss of income. 

Each component may have other limits — maybe $25,000 for damage and $50,000 for guest injuries. With split limits, rental managers can customize their coverage according to the levels of risk. On the insurer’s side, split limits make risk management more efficient.

Other Types of Coverage

In addition to knowing different policy limits, some coverage varieties are especially pertinent to short-term property managers. A few of them include:

Dwelling Coverage

This coverage pertains to damage to the structure of your rental unit and property itself. For example, if lightning strikes the dwelling and causes damage to your roof, windows, crossbeams, electrical wiring, and other structural components of the property, dwelling coverage comes into play.

Contents Coverage

This coverage pertains to objects inside the rental unit, such as: 

• Furniture
• Appliances
• Dining room tables
• Electronics, decorations
• Other features. 

For example, suppose that there’s a leak in a unit’s dishwasher that goes unnoticed. The seepage spreads to the adjacent cabinet and causes damage to pots and pans, along with the floorboard. This is what contents coverage addresses.

It’s important to know what a contents policy likely won’t cover: 

• Cars
• Valuables
• Cash
• Items belonging to the guests
• Pets
• Perishables 

Some insurers may offer add-on insurance to cover these items, though.

Loss of Use Coverage

This kind of coverage reimburses you for lost rental income if a covered event causes your property to be uninhabitable. For instance, suppose that a pipe was to burst, flooding your unit and significantly damaging your kitchen and living room. 

In this case, a subcontractor tells you repairs will take at least a month before the property can be rented out again. Loss of use coverage might cover the income you lose from not being able to rent out the property.

Safely: Offering a Wide Range of Short-Term Rental Coverage

Hopefully, Safely has answered the question, “What are policy limits?” Many other concepts fall under that category as well. If you’re a short-term rental property manager needing insurance or clarity on coverage limits, contact us online to schedule a meeting.