The recent experiences of an Airbnb host have raised one of the risks of renting out your place on Airbnb. The woman, known as EJ, returned home to find that her home had been systematically ransacked by guests she found through Airbnb. Although we don’t have all of the details on what happened, most of the discussion has been about how Airbnb responded to this crisis. It’s blog post today and property damage guarantee is an important first step, but Airbnb seems to be taking a piecemeal approach.
I want to focus on the broader risks in the Airbnb model. I’ll preface this with the fact that I don’t believe Airbnb has a fundamentally broken business model. It has challenges, but many of them can be addressed. The marketplace that Airbnb has created is quite interesting and showcases some unique places around the world. Some are much more interesting than a cookie-cutter hotel room; I’d love to stay at this 727 treehouse.
Bad things happen. But they happen to companies new and old alike. While we’ve been busy talking about EJ and her Airbnb experience, Alex Trebek’s hotel room at the San Francisco Marriott Marquis was burgled.
Startups in general tend to underestimate risk. Big companies, consumers and media overestimate risk. While startups executives are rewarded for taking risks, most execs at big companies are rewarded for avoiding risk. It’s risk taking that allows for new businesses to emerge; it’s unlikely that YouTube would have come from a large company.
Fortunately, most people tend to be mostly good. Unfortunately, there are enough bad people out there that we have to worry about risk. In the aggregate, the risk of bad things happening in the Airbnb model is very small. But the aggregate doesn’t matter if you’re one of the unlucky ones; then the risk can be catastrophic.
Risk is interesting because the media like to dramatize risk and play to our fears. (It’s good for ratings and circulation.) The odds of dying in a terrorism-related plane crash are so incredibly tiny it’s not worth worrying about. Eating a Cinnabon at the airport food court is more likely to impact your well-being than a terrorist.
The Airbnb model presents risks to both the guest and the host.
There is a risk that you won’t get access to your room. This could be because the host flaked, overbooked or didn’t adequately coordinate plans to transfer the keys. A worst case scenario is that you’ve arrived in a foreign country where you don’t speak the language without a place to stay for the night. In the hotel world, there are established practices. If you have a confirmed reservation that the hotel can’t honor, the standard procedure (called “walking”) is to put you up in a room at a comparable hotel at their expense and provide you transportation to the alternate hotel.
There is also a risk that a place that was described as a gorgeous villa with ocean views turns out to be a shack where the only way to see the ocean is to stand on a chair and crane your neck at a specific angle. This risk exists with hotel as well; many pictures on hotel sites are of rooms and views that a normal person would never see. But there’s a lot information on third-party sites like TripAdvisor to help alleviate this risk.
And then there’s the risk that your host turns out to be Norman Bates. If I were a solo female traveler, I would be extremely reluctant to rent a room through a site like Airbnb. Again, while the aggregate risk is tiny, that’s small comfort if it affects you personally.
The bigger risks in the Airbnb model are on the host. The host has tens and potentially hundreds of thousands of dollars at risk.
A ransacking like that described by EJ can easily cost tens of thousands of dollars in damage to the home and personal property. (Not to mention the emotional toll it takes.)
Hosts may be unaware that they are taking on liability if the guest happens to get into an accident on their property. If someone slips and falls, that’s on the host. If someone drowns in the pool, that’s on the host. If someone gets drunk and jumps off the roof, they can sue you. In our litigious society, these lawsuits will happen. And it’s not just accidents that you have to worry about — there are people who will do this intentionally. Airbnb makes it easy to pick the lucrative marks. Rent a million-dollar estate and increase the odds for a jackpot. Investors in Airbnb should think twice before putting their vacation homes on the site.
You have homeowners insurance. You don’t have to worry, right?
Personal insurance is intended for personal use. By renting your house out for money, you’re giving the insurance company an easy opening to deny any claims for damage to your property or liability claims by your guests.
According to Loretta Worters of the Insurance Information Institute, an industry association, standard renters and homeowners insurance wouldn’t cover such cases. It doesn’t matter if you only rent out your home a few days a year. A landlord policy would cover such risks. Those policies typically cost 25% more than homeowners insurance.
Worters wasn’t aware of any claims that insurers have dealt with specific to Airbnb. See my detailed Q&A on insurance and Airbnb.
State Farm spokesman Dick Luedke said that the insurer deals with such claims on a case-by-case basis. When asked if State Farm had dealt with specific claims related to Airbnb, he said that he wasn’t able to speak to specific cases.
Luedke says that it is an “emerging exposure that the industry is trying to get its arms around.” He offered two competing points of guidance: its policies cover temporary rentals for citywide events such as the Indianapolis 500. A homeowner could leave town for up to 30 days and still be covered. At the same time, Luedke said, State Farm policies exclude claims related to businesses and renting out your home through Airbnb could be considered a business. “We haven’t made this determination yet.”
Today, Airbnb announced that it will provide $50,000 worth of coverage for “loss or damage due to vandalism or theft caused by an Airbnb guest.”
According to Airbnb CEO Brian Chesky, this coverage is being provided directly through Airbnb, not a third-party insurer. Until the restrictions on that coverage are known, it’s hard to say how significant that protection is. Too many restrictions and it is worthless; too few and it invites fraud that could be very costly. (Not to mention likelihood of running afoul of insurance regulations.) In any case, that coverage wouldn’t affect liability claims, which are the bigger potential monetary risk.
A less catastrophic but still notable risk is chargeback risk. If someone is dissatisifed with their stay, they can request a chargeback from their credit card company. It is difficult to win a chargeback dispute for card-not-present transactions. From its terms and conditions, it’s unclear whether Airbnb covers this risk. (It seems like Airbnb eats these losses.)
Dealing with risk
Startups dealing with risks in new models is nothing new. But few focus on it until they have to. And Airbnb now has to. In order for the company and its marketplace to thrive, it must address these risks and make sure that people are comfortable transacting in its marketplace.
Some of the guidance that Airbnb provides on its site is laughable. It suggests that hosts look for pictures of prospective guests and ask for them if they’re not already provided in the profile. Anyone who has spent time on the Internet knows that what you see online isn’t necessarily what you see offline. Emphasizing pictures also makes it easier for hosts to discriminate based on things like race and gender.
Some suggestions to reduce perceived risk:
- For renters, guarantee that they will have a room for the night. If the host flakes, Airbnb will buy them a comparable room somewhere else. StubHub does something similar with its FanProtect guarantee.
- For renters, offer a verified host program that includes confirmation of the quality of the lodgings as well as a background check on the host.
- For hosts, include liability insurance in the service fees. Because it’s a new model it’s important that the insurance cover these types of arrangements. Although it may be tempting to sell this as a value-added service, it is better for the marketplace if it’s a standard part of the transaction. The costs of such insurance should be low because the risk is small.
One of the hidden benefits of insurance, beyond covering risk, is that insurers help you figure out how to minimize losses. It makes sense — it’s their money on the line. Two examples illustrate this:
- One of my favorite museum tours is the architectural tour of Richard Meier’s beautiful Getty Museum in Los Angeles. The guide pointed out many of the changes to the original plan that were required by the Getty’s insurers. A water feature on the main plaza had to have benches placed around its edges to keep people from walking into it. A ramp had to have metal barriers added to keep people from sliding down.
- I once noticed in a hotel room that the fire sprinkler had a sign next to it that indicated not to hang clothes from it. That had me puzzled. It turns out that if you hang clothes from it, the sprinkler head can break off and flood the room. As a result, insurers advised hotels to put up signs to minimize such losses.
In the Airbnb case, two obvious risk mitigation strategies come to mind: require that frequent hosts install combination door locks, with the combination being changed between guests. (This protects both the host and future guests.) Another would be to require guests to swipe a credit card on arrival, turning card-not-present transactions into card present transactions. That would significantly reduce chargeback risk.
I’ve looked at risks to hosts and guests in this post, but there are a lot of other issues Airbnb will have to deal with as it grows. Lodging is a heavily regulated industry and there are many powerful interests at play. There are issues related to taxation of temporary lodging, zoning, rent control, fire safety inspections and more.
For hosts that are renting out accommodations that they themselves rent, there are issues related to subletting. Many leases prohibit subletting without written permission. Even if you own the place and are living in a condo, townhome or planned community there’s a good chance that renting out your place will violate your homeowner associations CC&Rs. It’s common to require that any rentals be for at least 6 months or a year.
Some of these challenges are easily solvable; others will be harder. Airbnb needs to not only fix its PR problems, it needs to fix the problems in its model. Today’s changes address one of the issues above — property damage — but others remain. Not dealing with all of the risks is a risk Airbnb can’t afford to take.