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Deep Thoughts on Security Deposits and Insurance

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Deep Thoughts on Security Deposits and Insurance

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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 -- the guest doesn't even know about the insurance as you are carrying it.

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.

20 Comments (add yours)

Nov 3, 2018 9:57 PM
Beach House Galv says:

Can you owners upcharge the accidental damage insurance price that is billed to the guest?

Nov 5, 2018 8:54 AM
Chris Hynes says:

For the accidental damage insurance, that's billed to you, not the guest.

You can add a surcharge to your bookings (or not -- some folks like to keep that coverage on the down low as they feel that people will respect the place more, not knowing they have insurance).

Nov 7, 2018 6:53 PM
BlueMtnCabins says:

Secdep vs actual damage deposit (i.e just auth held against card, vs money actually charged and put in bank). I use the latter as non-taxable surcharge. Pro: money in bank; con: if guests want to buy trip insurance, the damage deposit amount gets included into the amount against which trip insurance is calculated so it is overstated; also refunds take 30 cents out of your money ; remembering to refund it :)

Mar 8, 2019 3:04 PM
BlueMtnCabins says:

Any update on showing actual damage deposit differently (i.e maybe after the total). I am having cold feet going with cc hold secdep or the ARDI insurance in lieu of actual deposit changed to renter. bUt I think that total looks overstated as many ppl do not take time to actually look at line items...

Mar 9, 2019 12:06 PM
Stacy S says:

I am with Chris on this... I charge a security deposit AND have the ARDI damage insurance for every booking at $20 for $1500. I increased my cleaning fee by $20 to cover that cost. I agree that renters need some skin in the game but you want to also be covered for anything that exceeds the deposit. (I learned this the hard way with my very first guest in my 2 month old house!) For guests that are returning and took good care of my home on the prior stay, I only charge them $100 security deposit since I know the likelihood is low that they'll need it and I have the $1500 just in case. This also allows me to keep my deposit lower than it used to be on the listing sites which helps with the total that they see. -Esp when the sites fees are steadily increasing.

Mar 10, 2019 7:47 AM
Chris Hynes says:

@BlueMtn - We're on the home stretch with our channel integrations now, which have been taking up most of the time. Once that's done we'll get into some much needed overhauls in other areas like secdeps.

What are your worries with holds? Like @Stacy said, going with ARDI doesn't mean you have to drop the secdep -- on my properties I do both ARDI and a hold.

Mar 10, 2019 9:27 AM
BlueMtnCabins says:

Chris Hynes said:

@BlueMtn - We're on the home stretch with our channel integrations now, which have been taking up most of the time. Once that's done we'll get into some much needed overhauls in other areas like secdeps.

What are your worries with holds? Like @Stacy said, going with ARDI doesn't mean you have to drop the secdep -- on my properties I do both ARDI and a hold.

I guess i did not make it clear. I do not do secdep "hold", I actually charge secdep and then refund it. So it is not so much secdep vs ARDI or secdep with ARDI, but rather "what kind" of secdep". I do not do credit card holds, money is actually charged to the renter. How would you hold anything anyway if they paid by check or venmo, for example?

here is what my quotes look like

Item Description Rate Amount
Rent 3 nights (4/26 - 4/28, departing 4/29) during Standard at Weekend Night rate at $189.00 per Weekend Night $567.00 $567.00
Surcharge Cleaning Fee based on $130.00 per stay $130.00 $130.00
Tax TN Sales + County Lodging Tax 12.75% $88.87
Surcharge REFUNDABLE DAMAGE DEPOSIT based on $300.00 per stay $300.00 $300.00
Total: $1,085.87

So as you can see "refundable damage deposit" shown before total, and it makes quote looks larger than it is. So if there was a way to show it after total or something like that. That way the Travel insurance would also not include the deposit amount ( as that does not need to be insurable anyhow).

Every time I am on the verge to go to CC hold (vs actual money charge), I get some new example why I should not. Like in our Smokies group, just happened. A lady has a PM. PM rented her cabin to a group. There was no actual money charged as secdep but was a CC hold. The group had a drunken fight and bashed out a window and window frame. $1400 in damage. But here is the kicker. One person who signed the rental agreement and gave their CC is now refusing to pay and disputing secdep because it was the OTHER person in their group who was brawling and broke the window. That is what I do not like about CC holds. This may be not likely if you have small 1 bd properties not conducive to groups. Mine accommodate 10-12-16 people so groups are common. I do not want "he did - she did" in a group should something happen. I want actual $$$ in my account :-)

Mar 10, 2019 10:25 AM
Chris Hynes says:

Right, yes, I get the part about the difference in types and how the charges show. We're working on it (and we have updated TI to let the guest specify the amount so they can remove the secdep or add air travel costs etc).

However, my point is that the hold vs charge doesn't really matter if it's on a credit card. If a security deposit charge is disputed, the bank will remove the funds just the same as they would for a security deposit hold. In your example, it wouldn'tve mattered if the PM had done a full charged secdep instead of a hold -- when the dispute was made the money would have been removed even if it was a charge. When a dispute comes down, regardless of whether it's a charge or a hold, the bank will yank the money until the dispute is resolved. If they don't settle in your favor then your only recourse is a lawsuit.

The only way around that is to take the deposit via some non credit card means like check/cash/venmo -- something that doesn't have a dispute process.

Mar 10, 2019 12:07 PM
BlueMtnCabins says:

But in any case, if I go with hod secdep , how do you do hold on those who pay by check/venmo? They have to send additional check or payment?

Mar 10, 2019 3:13 PM
BlueMtnCabins says:

here's example:

$219 x 3 Nights $657
Cleaning fee $130
Taxes (12.75%) $100.34
Total $887
Security Deposit $300
Total + Deposit $1,187

"total" being bold face

Mar 16, 2019 1:26 PM
BlueMtnCabins says:

Is it possible to turn insurance on but define different coverage for different properties? I.e smaller property - smaller coverage? Thanks

Mar 18, 2019 8:36 PM
Paul W says:

Yes. You can define $10, 20 or $35 per booking which is equal to $500, 1500 or 3500 of coverage per booking.

Mar 19, 2019 11:43 AM
JTVRs says:

For $29 (3 day booking) , the safelystay I mentioned in other post gives you $10,000 in contents coverage with $100 deductible, $100,000 of liability and building damage coverage, and does a background check on responsible party! Through their API. They also maintain a database a problem guests from over a million booked nights.There are other costs for longer stays or more liability/building coverage.

Mar 22, 2019 1:26 PM
BlueMtnCabins says:

JTVRs said:

For $29 (3 day booking) , the safelystay I mentioned in other post gives you $10,000 in contents coverage with $100 deductible, $100,000 of liability and building damage coverage, and does a background check on responsible party! Through their API. They also maintain a database a problem guests from over a million booked nights.There are other costs for longer stays or more liability/building coverage.

Do they integrate with OR? and are there lower coverage amounts?

Mar 22, 2019 9:44 PM
JTVRs says:

$29 is the lowest. That is for a 3-day booking. But again, it includes 10,000 property damage with only $100 deductible. And it provides $100,000 liability and building coverage. And it does a background check on the booking party. And checks their own million night database of problem renters

Seems a bargain. They are a significant company and have been around for a while. If API used, I think it can auto background check the booker.

They offer an API that is supposed to work easily with others. .. https://www.safelystay.com/technologyplatform

Mar 25, 2019 11:17 AM
BlueMtnCabins says:

Thank you, $29 being cheap is relative. My lowest rates start from $139 per night, and our market is very stingy. we are competing against 10K of other properties. People literally bargain over $5 per night.. this would add $10 per night. So that;s why I asked if there is lower amount.

Mar 25, 2019 12:27 PM
JTVRs says:

True. But the ARDI coverage here is $20 for $1000. This is $29 for $10,000 plus a lot of other stuff.

HomeAway is trying to get people to elect $49 pdp. This is much better compared to that.

Mar 25, 2019 8:00 PM
Paul W says:

It is extremely rare (if ever) when you need to make a claim beyond a few hundred dollars.

Chris and my rentals have been running for 12+ years and we've had over 6,000 bookings. In that time the most expensive damage claims we've made is a $800 fridge screen (one of those stupid touch-screens on the front of fancy fridges that are more trouble than they're worth) and a $700 love seat. Cracked windows, broken doors, damage to lawns, deck boards, floor scratches, stained sheets, etc - all are never more than a few hundred bucks at most. Having 10 grand of coverage is pointless if you never use all that.

PS. Our regular HOI insurance on the houses covers really big stuff with a 500/1000 deductible (and short term renter/liability is specifically mentioned as a named coverage) so anything that would be 10 grand we can cover with that.

Mar 25, 2019 8:06 PM
Paul W says:

....but that's not to say that it isn't a good deal. I should add that that price ($29 for 10k coverage and other background checks) is quite good. I wonder if that's a spread risk model where they require that it be paid for on all bookings. I would think it would have to be.

Mar 25, 2019 8:48 PM
BlueMtnCabins says:

It is a great deal. I dont know about your area. But I have posted before - in our Smoky mountains group a lady just had her window bashed out to a tune of $1400 . Most of our insurance policies have typical $2500 deductible so that is not high enough to claim form insurance, but not a small peanuts either. I guess it depends. If you have small 1bd cottages, it is less likely. With group cabins you are bound to have rowdy people and damage no matter how much you try to screen. So while this particular option may be an overkill, I am starting to think about the ARDI option.

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