Renting out a room: what your homeowners policy covers

If you live in the house and rent a room to a roommate, a lodger or a boarder on a long-term basis, the standard ISO HO-3 can still apply, and its liability section was written to allow it for up to two roomers. The catch is that the policy does not protect your tenant's belongings, may treat the rent as business income, and can be voided or refused if you rented a room and never mentioned it. Tell your insurer before the first rent check, and get the answer in writing.

This guide covers one room, or a few, in the home where you also live. A guest room booked by the night is a different product (see Insuring an Airbnb or other short-term rental and home-sharing endorsements for occasional hosts), and a whole unit rented to a tenant belongs on a landlord form (see landlord insurance: what a rental property policy covers).

What the HO-3 says about rooms for rent

The wording below is from ISO HO 00 03 05 11, the 2011 edition hosted by the Maine Bureau of Insurance. Later editions and your insurer's own form may differ, so treat this as the pattern to look for in your policy.

Liability for renting part of your home. The HO-3 excludes liability arising out of a "business," and defines business to include any activity engaged in for money or compensation, apart from small activities where no insured receives more than $2,000 in the 12 months before the policy period. Rent from a roomer can pass that figure in a few months. But the business exclusion carries an exception: it does not apply to the rental of an "insured location" in part for use only as a residence, "unless a single-family unit is intended for use by the occupying family to lodge more than two roomers or boarders." Read plainly, renting to one or two roomers keeps your personal liability coverage intact. Three or more roomers, or a house run as a rooming house, takes you out of that exception. See business pursuits exclusion.

Your own property and the building. Renting a room does not change the dwelling coverage on the structure. Coverage D can also pay fair rental value if a covered loss, such as a fire, makes the rented part of the home unfit to live in, less any expenses that stop while it is empty. That is lost rent, and it is built into the form.

The tenant's property is not covered. Under Coverage C, the HO-3 does not cover "property of roomers, boarders and other tenants, except property of roomers and boarders related to an insured." A roommate who is not your relative, and whose laptop is stolen or whose bed burns, has no claim on your policy. They need their own renters policy, and you should ask for one as a condition of the room.

Theft by or from the tenant. The theft peril does not include theft "from that part of a residence premises rented by an insured to someone other than another insured." If your roommate takes items from the room they rent, or someone steals from that room, your policy may not respond. Items in the rest of the house are treated differently, but a tenant with a key is a claim your insurer will look at closely.

The questions a claims department asks

A rented room rarely causes a denial by itself. Misstatements do. Here are the facts that tend to decide a claim.

• How many people rent from you. One or two is the case the form anticipates. Three or four is a different risk and may call for a landlord or commercial policy.
• Whether you live there. The HO-3 covers a "residence premises" where you reside. If you move out and rent the whole house, the homeowners form no longer fits, and the roomers' arrangement turns into a tenancy. That is a landlord policy situation.
• Whether the room is a separate unit. A basement with its own entrance and kitchen can be an apartment under some policies. An HO-3 pays $2,500 toward appliances, carpeting and furnishings in each apartment on the residence premises that you regularly rent, but that is a limited payment and it excludes theft. If the space is self-contained, check how your policy treats it. A detached unit may be an "other structure" excluded when rented to a non-tenant of the dwelling. See Insuring an ADU or backyard cottage.
• Whether you serve guests short term. A room offered nightly raises the business and liability questions covered in the short-term rental guides.
• What you disclosed on the application. Applications often ask whether any part of the home is rented. A rented room you did not report can lead to a claim dispute or a nonrenewal. See nonrenewal vs cancellation of homeowners insurance: your rights.

What to ask your agent

1. Do you allow roomers or boarders in an owner-occupied home, and is there a limit on the number?
2. Does the liability coverage apply to injuries to a roomer, who is not an insured?
3. Does the policy treat the rent as business income, and does any business exclusion apply?
4. Is there an endorsement that adds coverage or limits it? A home-sharing endorsement is for short stays, but some insurers sell a roomer or "incidental rental" option.
5. Will the premium or eligibility change, and does the answer change if the tenant is a relative?

Ask the agent to note the answer in the file, and ask for the endorsement form number if there is one. A conversation you cannot prove does not help in a claim dispute.

Hypothetical example

Say you own a three-bedroom house and rent one bedroom to a friend of a friend for $800 a month, for a lease of nine months. Over those months you collect $7,200. A tenant's guest slips on an icy front step and sues you. The $2,000 compensation threshold in the "business" definition is behind you by month three, so the policy treats the rent as business activity. Whether your liability coverage responds depends on the exception for rental of part of an insured location for residence use only, and a single roomer meets it under the 2011 ISO wording. Your insurer's form may differ, which is exactly why the written confirmation matters. The same winter, a burst pipe ruins the tenant's laptop and clothing; none of that is paid by your policy, because the tenant's property is excluded. If the tenant carried renters insurance, that policy pays.

Beyond insurance

A few non-insurance issues interact with coverage.

• Mortgage and HOA terms. Some mortgages and many associations restrict renting. A rental that breaks those terms can complicate a claim and may carry fines.
• Local rules. Zoning, occupancy limits and registration requirements for rooms and rooming houses vary by city and county.
• Tenant protections. Even informal roomers may have rights under state law, including notice requirements before you can remove them.
• Liability limits. More people in the house means more chances of injury. An umbrella policy can sit above your liability limit, but ask whether it excludes business use or rental activity.
• Taxes. Rental income has tax consequences. A tax professional, not an insurance agent, is the one to ask.

If you run a business such as a day care or a home office out of the same house, that is a separate gap; see running a business from home: the insurance gaps. The homeowners coverage gap checker and which homeowners policy form fits your home? can help you spot what your setup leaves out.

When to change policies

Stay on the homeowners policy when you live in the house, rent to no more than two roomers on a stable basis, and your insurer has confirmed. Consider a different form when any of these is true: you plan to rent to three or more people, the room is rented nightly, you are moving out, or the unit is a separate apartment or detached structure. Insurers that write dwelling fire policies may offer rental coverage, but a DP form lacks the broader personal liability of a homeowners policy unless it is added, so compare the whole package.

Key takeaways

• A long-term roomer or two in the home where you live generally fits the ISO HO-3, which keeps liability coverage for rental to no more than two roomers or boarders.
• The HO-3 excludes the property of roomers who are not your relatives, so your tenant needs renters insurance.
• Rent from a roomer can count as business income past $2,000 a year, and theft from the rented room is excluded; read both provisions in your own form.
• Disclose the arrangement to your insurer and get the answer in writing; an undisclosed rental can create a claim dispute or a nonrenewal.
• Switch to a landlord or short-term rental policy if you move out, rent to three or more people, or rent nightly.