Some buyers fib to their mortgage lenders, saying that they are purchasing a property as a primary residence when it will actually be a second home or a rental. That’s loan fraud. In a similar way, some buyers fib to their insurance company. That’s insurance fraud, and it can lead to non-payment of a claim.
If you are not familiar with the different coverages offered by insurance companies, it is quite possible that you have the wrong coverage on your mountain cabin, and might be denied payment through no conscious fault of your own.
It is important to understand that there are different insurance coverages, based on different uses of the property. The homeowners insurance we are all familiar with is the “Primary Dwelling Policy.” This is for an owner occupied dwelling that will be occupied 365 days of the year.
There is also a “Secondary Dwelling Policy,” which is for properties that are occupied for more than 180 days, not for rental purposes.
Most of our buyers would fall under the “Seasonal Dwelling Policy,” which is for occupancy of less than 180 days, not for rental purposes.
Weekend and weekly rental properties fall under a “Commercial Rental Dwelling Policy,” which typically has higher available liability limits and may include coverage for loss of business income. Typically, a number of rental units can be placed under the same policy.
Obviously, premiums increase as we move up this ladder. The point is that if you are not insured with the correct policy and you have a claim, you are at risk for having that claim denied. I would be willing to wager that this is the case about 60% of the time for rental properties in our area. In that case, you might as well just not have insurance and save yourself the expense in the first place. You might think something like this never would be discovered, but I’ve recently heard from a former claims adjuster that it is not at all uncommon for claims to be denied for this reason.
(The same person told me that carriers are becoming increasingly nervous about rental hot tubs, due to some large claims that have recently been filed for infection and disease.)
There are not many insurance companies who will insure rental dwellings, so it is quite possible in some cases that insurance agents who do not have carriers who will issue the proper coverage will try to slip the coverage through under the wrong category in order to write the policy and earn a commission. This would not be the cabin owner’s fault, although it would probably still lead to denial of the claim. One knowledgeable person told me that in this situation, it would be “your word against theirs.”
Finally, there is coverage on vacant land for liability that might accrue from an accident or incident on the property. I’m told that this coverage is very reasonable (about $137 annually for 25 acres).
One thing to consider for properties with additional acreage is that the additional acreage may not be covered under the existing homeowner’s policy – some policies only insure within a stated distance of the cabin.