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Deep Thoughts on Security Deposits and Insurance

We get a lot of questions about the best way to set up security deposits, when to use damage protection insurance, travel insurance, etc. I've seen a lot of different scenarios over the years, both with OwnerRez clients and my own properties, so here are my thoughts (I'm not a lawyer, standard disclaimers apply, bla bla bla)...

Security deposits are the first line of defense, whether you do a security hold on a card or a refundable deposit charge. I'd recommend taking a secdep even if you also have separate insurance. Not only do you have access to the funds immediately rather than having to file a claim, it also gives the guest some skin in the game so they tend to treat your property with more respect. You can also charge a deposit for other items covered in the renter agreement -- undisclosed extra guests, pets, etc. "covered in the renter agreement" is the key phrase there -- if the guest didn't agree to it prior to the charge, you'll loose a chargeback if they do one.

That said, there are issues that a secdep won't cover. Damage for an amount more than the secdep for one. There's also a risk of chargebacks unless you're taking the deposit by check. You can win chargebacks, but it's a capricious system. If the bank doesn't like you and the guest denies having done the damage, the bank sometimes just ignores the renter agreement and tells you to take the guest to court if you don't like it. I wouldn't recommend doing an additional charge for more than the security deposit for that exact reason -- if you don't have documentation that the guest specifically authorized an additional charge, you'll loose the chargeback. For secdeps, they specifically authorized the charge so that'll typically stand up, but language in a renter agreement about charging an undefined additional amount if necessary doesn't meet the banking requirements -- you'd have to take the guest to court.

The biggest thing to do is document, document, document. Pictures of damage, video of more cars than guests authorized on the booking, statements of neighbors or staff who witnessed, etc. If possible written admissions from the guest. Police report if relevant. Take pictures from time to time of everything so you'll have a recent "before" photo. Timeliness is key here -- the closer the documentation is to the time of the incident, the more weight it will carry. When I encounter damage, I'll get copious pictures and send the guest a professional email asking if they know what happened. A good deal of the time they'll admit it and we can work out a solution.

All of the above is basically to keep honest people honest. It sounds like I'm suspicious of guests, but I'm generally not -- 95% of people are good guests and everything will go smoothly. The point of the above is to establish a process beforehand and know what you'll do, know how to collect all the documentation you need, and be ready to work through it.

The second line of defense is accidental damage insurance. A couple of clarifying points here... First off, damage insurance doesn't cover intentional damage. Sometimes there's a fine line between negligence and intent, but no damage insurance will cover intentional damage or vandalism. That's why I recommend taking both the secdep and the insurance, so you're covered in both cases.

Secondly, the insurance offered through Airbnb, VRBO, CSA, etc. is insurance for the guest, not for you, the owner. That's why the guest has to admit fault with those insurances, and the insurance won't pay out if they don't admit to doing the damage.

We did a bunch of research on different companies when choosing the damage protection product to offer through OwnerRez, and that's why we went with TravelGuard/AIG's ARDI. That insurance is for you, the owner, not the guest. You submit a claim directly to TravelGuard, not a third party. The guest doesn't have to admit fault -- they don't even need to know about the insurance. Of course, if you want to surcharge it back to the guest, you can.

To find out more about how our damage protection works and costs, check out our article on ARDI & Damage Protection.

Another option is to self insure. Charge $50/booking for a damage waiver and put that into a separate account, which you tap into when damage occurs. Of course, in that case any issues or amounts over the balance are on you vs. the insurance company. If you've got a high volume so your risk pool is larger, and a high risk tolerance, that can be a more economical option than a damage insurance policy.

Finally, there's also the option of offering travel insurance for cancellations because of weather, sickness, accident, etc. This is insurance for the guest, but offering it can also help you out as the owner. If you don't at least offer travel insurance, enforcing a strict cancellation policy can be awkward. For my personal properties, I offer travel insurance during checkout, and then also have a triggered email go out through OwnerRez after booking reminding them of the option. If they're booking during higher risk times of the year (in my case, snow in the mountains during winter), the email template language changes to identify the risk and strongly suggest they purchase the travel insurance if they don't feel comfortable in snow etc. That way, I feel I've done my due diligence in offering coverage options, and in the event of a cancellation I can hold strong to my policy. For travel insurance, we also use TravelGuard -- their All Seasons Travel Plan. 

If the guest didn't buy travel insurance, suggest they check their credit card policy. Some cards include travel insurance/cancellation coverage for trips bought on the card.

Do you have anything else to add? I'd love to hear your thoughts and experiences in the comments.

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