Canada: Your Reservation Has Changed... Airbnb Regulation in Toronto and Insurance Coverage Issues

Airbnb, the online marketplace for hospitality services, first began to operate in Toronto around 2010. It started with less than 100 listings over all, but has grown on an exponential scale - listings have roughly doubled each year, reaching over 12,000 in 2016.

Airbnb, and other similar businesses offering "Short Term Rentals", are not presently regulated in any significant way in the Toronto area, despite the fact that its main competitors - hotels, and bed and breakfasts ("B&Bs") - are regulated. However, the City of Toronto is moving towards creating regulations for Airbnb, with recommendations released in June 2017.

A less publicized grey area is the home insurance implications of a homeowner using their residence for Airbnb listings. Short Term Rentals of a residence are inconsistent with most standard home insurance policies.

Setting the Stage for Short Term Rental Municipal Regulation in Toronto

The growth of Airbnb has not occurred in a vacuum, and the impact has been pervasive. Vacationers have enjoyed more options, different types of accommodations, and lower costs. Homeowners were essentially given a new revenue source with the ability to rent out unused living space with minimal advertising and administration.

On the other side, traditional businesses, such as hotels and B&Bs, have struggled with a barrage of new competition and argued that it is unfair the Airbnb hosts they are competing with are not subject to the same variety of regulations and taxation. As Airbnb became particularly ubiquitous in tourist-friendly neighbourhoods, community members have complained about issues such as condo units operating constantly as "ghost hotels". While marketed primarily for vacation and leisure, Airbnb has also impacted the traditional rental industry. Similarly, Airbnb hosts operate outside of the reach of regulation and legislation applicable to traditional landlord-tenant relationships, with its protections for tenants. It has been cited as a contributor to the rental housing shortage in the Toronto area, as landlords have opted for the flexibility of Airbnb hosting instead of traditional rentals.

City of Toronto June 2017 Recommendations for Short Term Rentals and Impact

Other jurisdictions have implemented various regulations for Airbnb and similar businesses. In June 2017, the City of Toronto released a staff proposal to introduce regulation for the type of short term rentals synonymous with Airbnb.¹ Final recommendations are expected in late 2017.

The proposed regulations include:

• Hosts would only be allowed to rent out their principal residence.
• Hosts would be required to register with the city, with an associated fee and tax.
• Hosts must provide emergency and safety information to guests.
• The Short-Term Rental Company (i.e. Airbnb) would be licensed, and provide data.
• Short-term rentals are limited to a maximum of 28 consecutive days.
• Condo boards are to retain the power to ban short-term rentals.

The most prominent change is the restriction that homeowners can only be able to rent their principal residence as a Short Term Rental. The principal residence rule is clearly trying to curtail property owners from running a commercial enterprise, using multiple units only for Airbnb listings. A host can still list a non-principal residence, but this would be considered a commercial endeavor, and subject to a different regulatory scheme.

However, the recommended regulation would allow homeowners to rent out a "legal secondary unit" from their residence. Essentially this allows basement apartments (or similar spaces) to be used as Airbnb listings, so long as the homeowner is living in the same residence. This could take many basement apartments outside the realm of the traditional landlord-tenant relationship, and the applicable legal and regulatory framework. At least this would be the case for stays of up to 28 days consecutively. An obvious loophole is to rent a basement apartment essentially month-to-month, but with breaks of a few days strategically placed. The final recommendations may very well resolve this apparent loophole.

Intersection Between Short Term Rentals and Traditional Home Insurance

The use of a residence as Short Term Rental through Airbnb creates coverage issues for hosts relying on traditional homeowner policies. This is especially the case for properties used repeatedly or predominantly for Airbnb listings or as Short Term Rentals. Repeated or predominant use of a residence as a Short Term Rental obviously creates a different level of risk than a normal primary residence. Certainly an underwriter would consider consistent or exclusive use as a Short Term Rental to be a significantly increased risk if they were aware when issuing the policy.

Although serious claims are not necessarily commonplace, it is easy to envision different risks associated with using a residence as a Short Term Rental. Short Term Rentals are often geared to leisurely users with the potential for hosting small or large parties. The use of alcohol and recreational drugs is foreseeable with associated personal injury and property damage risks. Social host liability, or even commercial host liability, is a risk. Unlike traditional accommodations like hotels, Short Term Rentals have more variability, and physical hazards may present a far greater risk to an unsupervised and unfamiliar guest compared with a homeowner accustomed to the property. With hotels or B&Bs, usually someone is present on the property in case of emergency (if not actual security services), which would be rare for Short Term Rentals. Guests are naturally not as familiar as homeowners about how utilities and chattels within the residence work, creating more risk of misuse and damage. The increased risk is apparent both with respect to property damage and personal injury.

Relevant Exclusions and Gaps in Home Insurance Policies for Residences used as Short Term Rentals

There are a variety of common exclusions in home or rental insurance policies that could be applicable to homeowners using their residence as a Short Term Rental with Airbnb.

• Using a residence as a Short Term Rental could engage exclusions eliminating coverage when the home is used as part of a commercial enterprise.
• Using a residence as a Short Term Rental could be considered a material change of risk outside the scope of the agreement giving rise to the policy.
• Exclusions requiring a homeowner to reasonably protect the property may be engaged. This could include the use as a Short Term Rental in itself, poor host oversight or physical hazards particularly dangerous to guests unfamiliar with the property.
• Home policies or leasing agreements may contain an alienation covenant limiting abilities to rent or lease, which could be breached by use as a Short Term Rental.
• Permitted use provisions could dictate that a property can only be used as a private residence, which could be interpreted to preclude use as a Short Term Rental.
• Some policies may require that the insurer is notified of any rentals.
• More generally, home insurance coverage is generally limited to ordinary liability exposures, especially for personal injury claims. The use of a home as a Short Term Rental may not be considered an ordinary liability exposure.

Airbnb Coverage

Airbnb, as an example, has attempted to address these gaps and risks with its Host Guarantee, which is admittedly not "insurance". There are some key limitations and uncertainties. It only covers the subject property, and not damage to neighbouring properties, or condo common elements. The claim must arise during the accommodation, with uncertainty respecting problems with a delayed onset or discovery. Payouts may be based on the cash value, as opposed to replacement costs, which is often a significant distinction in residential property claims. Hosts remain obligated to first try and resolve the issue with the guest.

Airbnb also offers a Host Protection Insurance for third party liability claims. It covers some claims to damage to the actual building, but only if presented as a third party liability claim against the host, for instance, a tenant host sued by their landlord. It does not cover personal property. There is no consensus on what exactly is covered and how claims are handled.

There are a variety of insurance products available designed to specifically fill the coverage gaps between traditional home insurance and the Airbnb products. It is unknown how many hosts are aware of the coverage gaps, let alone incur the expense of additional insurance to address them.

Insurance for "Legal Secondary Units" used as Short Term Rentals

The City of Toronto June 2017 recommendations specified that a "legal secondary unit" could be a Short Term Rental listed with Airbnb. The most common example of a legal secondary unit is a basement apartment. The requirement is that the host must also live at the property. This type of rental makes up a large part of the overall rental market, and previously would have been governed by landlord-tenant law and regulation, and subject to rental insurance. Now, a homeowner using a basement apartment as a Short Term Rental no longer necessarily requires rental insurance. They would still be subject to the uncertain coverage situation discussed above.

Conclusion

Airbnb and other similar businesses have revolutionized the hospitality industry, and Short Term Rentals have emerged as a significant market force. In doing so, it created large grey areas in municipal regulation and insurance coverage. The City of Toronto has provided an outline of how it intends to regulate Short Term Rentals, including Airbnb, which raises many interesting issues. The insurance situation remains unsettled with home insurance, Airbnb insurance products, and other insurance creating an uncertain hodgepodge of coverage options to hosts.

^{1 Proposed Regulations for Short-term Rentals for Consultation, June 7, 2017, City of Toronto Report for Action Ex26.3,}

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