Private Risk Management: How Much Risk is too Much Risk?Pay Attention or Pay Big
Understanding the Issue – Personal Property Rental – Reaping the Rewards or Regretting the Risks?
Considering renting out your backyard or watercraft to enhance cash flow? Today, inflation is trending down but prices for goods and services are expected to remain high for the next year. Personal property owners are getting creative with alternative income options during these unfavorable market conditions and rethinking how to extract more value from unused or underutilized assets.
From golf carts and boats to swimming pools and backyards, renting out personal property to supplement income has resurfaced as a popular trend known as the sharing economy. Born out of the Great Recession in the mid-2000s, the sharing economy offers a way to make money by matching peers who have unused assets with individuals seeking to utilize them. Less than a decade ago, the sharing economy was valued at $14 billion. By 2025, forecasts indicate a value of $335 billion.
While this may seem like a quick way to make extra cash, thanks to online platforms, like AirBNB, VRBO, Uber, Lyft, and Swimply, the risks can be greater than the reward.
Consider a family who rents out their vacation home and enforces rules to not use the jet ski, golf cart, or parked vehicle. Should the guests ignore the rules, and an accident occurs, the homeowner can be held liable and may not be financially protected for guest negligence.
Sharing your property can positively impact your wallet but also carries a downside due to increased liability that may not be covered under current homeowners or auto policies. One-third of individuals are seeking to participate in this sharing economyi, so meaningful collaboration among individuals, their insurance advisors, and insurers is critical to helping protect their assets.
Covering Your Assets
The sharing economy is built on trust and community, but those attributes do not offer protection against exposures as the protection that proper insurance coverage can provide. When renting out your personal property, the exposures to risk can be extremely broad and complex. In most homeowner’s insurance policies, limitations exist with commercial type of activities. Yet without defining the terms, conditions, and risk exposures ahead of time, a homeowner’s insurance policy could be nullified.
Most home or auto owners do not consider risk when they first join the sharing economy. And relying on the liability protection offered through online platforms can create gaps in coverage or contain exclusions they weren’t aware of – leaving them exposed to significant financial responsibility. Typically, up to $1 million of liability coverage is available at no cost through online platforms; however, this may be excluded or may not be enough in many cases.
Example: A pool owner uses an online platform to match their private pool with people looking for a place to swim. An individual rents the pool and is injured – consider these questions:
- Is the liability a commercial property issue because of a business transaction between two parties?
- Can coverage apply as an incidental event in a home-based business, noted on a homeowner’s insurance policy?
- What terms and conditions, like an occupancy endorsement, are included in a homeowner’s insurance policy—and will this provide short-term rental coverage?
Your Path to Profits
Work with your trusted insurance advisor to review your lifestyle, assets, and totality of risk exposures and help you determine the proper coverage needed.
- What are the sources of income outside of a day-to-day job?
- What are the intentions of renting personal property?
- What types of potential claims scenarios could occur?
- If renting a primary or vacation residence, what other potential liabilities exist—swimming pool, boat, or golf cart?
1 PRMA, Weather, Sharing Economy Pose Growing Risks for Homeowners, A.M Best TV, August 2, 2022.
Determining a Path Forward – Discovering Your Risk Tolerance
The Reality of Risk
Nobody can escape it. The larger your portfolio of assets, the larger your set of risks.
Many types of risk exist, and the most important discovery you will make to keep your assets intact is proper risk identification of your total assets and how they are used. When you have a thorough understanding of your exposure to liability, you can adjust your coverages to help protect your assets.
Discovering Your Personal Risk Tolerance
Risk tolerance simply means knowing how prepared you are to absorb the costs associated with an unexpected event or loss.
By participating in a Risk Tolerance Assessment, you will gain clarity from a trusted advisor about the type of personalized insurance program you need. Considerations in your discovery will include a review of your lifestyle, net worth, liquid assets, board participation, hobbies, children in the household of driving age, and more. Often, we find that insurance programs do not keep pace with life changes. The more an advisor understands and is updated about your lifestyle, the less cumbersome the discovery process will be to determine your risk comfort level or changes to it.
Uncovering Your Tolerance for Risk
As you take steps to identify your risk tolerance, your broker will want to identify areas of financial exposure and coverage gaps. This information includes but is not limited to:
- Is business conducted on premises?
- Do you employ domestic staff on a part-time or full-time basis?
- Do flooding, brush fires, landslides, or earthquakes affect your property?
- Is your property(s) located within two miles of tidal water?
- Does a swimming pool exist at any of your properties?
- How many properties are situated on more than five acres?
- What type of motorized recreational vehicles do you own for use on public or private roads?
- Do your dwellings meet current building codes?
- Is your residence or other property undergoing renovation or reconstruction?
- Is your property currently for sale?
- On which non-profit executive boards in the community do you serve?
- What is your disaster recovery plan?
An insurance risk tolerance assessment will help identify your willingness to incur risk and increase or lower deductibles accordingly—and everyone is different. However, everyone needs to consider the question, “What if?”
Oftentimes, the cost of remediating issues after a loss can end up being greater than what you might have expected. Going through a risk tolerance assessment helps you gauge your comfort level with covering the full scope of costs in the event of a loss.
Additionally, insurance is not something you can just set and forget. As you acquire and sell assets, your exposures will change and so might your appetite for risk. Regularly conducting a risk tolerance assessment helps ensure that your insurance is aligned with your risk appetite and evolving exposures.
Here are some common scenarios in which a risk tolerance assessment proves to be valuable:
- Accuracy of documentation – When assets, like a primary residence, are not titled properly and do not match the current insurance policies, this results in more exposure to risk, as this can be grounds to reject claims. Is this a scenario you would want to experience?
- Acquisition of valuables – When individuals inherit valuables, like art or collectibles, that grow in number and value over time, the risk of potential loss can be great unless you work with specialized advisor who understands the complexities involved in protecting them. If your valuables are compromised, how would you go about recouping, repairing, or replacing them without the right policy and limits in place?
- Aligning coverage with totality of assets – Tallying future income streams correctly ahead of a potential claim or lawsuit is important. Because claimants may pursue future earnings in addition to current assets and streams of income, it’s not enough to solely use a bottom-line number from a balance sheet to choose broader coverage and limits outside a homeowners or auto insurance policy. Would you want your future earnings to be at stake in a lawsuit, or would you want the financial protection insurance can offer?
Some people greatly value predictability, while others may be able to tolerate uncertainty better. Loss cannot be accurately predicted or always prevented, but for all, careful planning with knowledge of your risk tolerance will help preserve the assets you want to keep.
As you accumulate more assets over your lifetime, the need to work closely and align your risk management expert, your attorneys, and your financial advisor grows exponentially. They can help you see and protect all moving parts of your life.
If a diagnostic review of your current insurance program has not been held in the last eight to 12 months, this presents more risk. Ask yourself, how willing am I to forgo the knowledge of how current market conditions can affect me and my family?
Our team of private risk management advisors incorporates a diagnostic lifestyle review to determine if your risk tolerance and coverage needs have changed. Once we have a holistic illustration of your lifestyle and goals, we will create an insurance program that matches those needs and your current tolerance to risk.
Contact us to learn how we can work together to protect your now and your future.
This material has been prepared for informational purposes only. BRP Group, Inc. and its affiliates, do not provide tax, legal or accounting advice. Please consult with your own tax, legal or accounting professionals before engaging in any transaction.