Whether someone trips and breaks a dish over dinner or one of your guests throws a wild party, it’s almost inevitable that at some point, your vacation rental will suffer some damage.

Because of the near-inevitability of this, security deposits are a routine part of rental transactions.

Typically half the rental fee, a security deposit — also called a damage deposit — is typically collected by check or credit card and held until after the guest leaves and you or your housekeeper has had a chance to do a final inspection. Any damage or extra fees (e.g. additional cleaning) can then be deducted against the amount; any remainder is then refunded.

It’s a pretty straightforward process. However, deposits and deductions can also be a source of contention for two reasons:

  • Often around $500, it’s a significant amount of money that’s paid upfront and held for a long period of time with no benefit to your guest, and
  • Owners and guests sometimes disagree about whether a deduction is justified, leading to disputes, bad feelings, and even cancelled transactions.

Security deposits can also create a fair amount of work for owners between collecting, deducting and refunding various amounts. Beyond that, some jurisdictions have requirements or timelines that need to be followed; for example, vacation rental owners in Hawaii have 14 days to make a claim against a damage deposit.

Is there an easier way? Some vacation owners think so.

Vacation Rental Property Damage Protection

Introduced several years ago, property damage protection insurance offers an alternative to security deposits; instead of a deposit, owners can offer renters the option of purchasing an insurance policy that costs significantly less — under $100 for the policies offered through HomeAway.

Less hassle for greater coverage is an option that appeals to many owners. In an interview with Bloomberg, Flipkey founder T.J. Mahony said half of owners using the FlipKey listings site offer the non-refundable insurance instead of deposits.

However, one owner on HomeAway noted the importance of understanding what the tradeoff is: “Some things that are NOT COVERED: Extra guest fees; Smoking or Pet Fees; Excessive Cleaning Fees; Violation of the Rental Agreement; Loss of Rental while repairs are taking place. So DO GET a Security Deposit or Credit Card for these risks.”

On another HomeAway thread, several owners explained that replacing the security deposit had changed guest behavior. “I think having the security deposit really motivates renters to leave your home in the best condition possible because they want to be sure they get all of their money back,” noted one person. “Aside from filing a claim for some real damage, the insurance doesn’t do that.”

Another said they’d had a very negative experience with switching. “Our damages from guests have gone up considerably since we started this program.  I will be going back to collecting Security Deposits after this last group with insurance has finished their stays.”

That said, HomeAway did a survey that found “75% of renters prefer a small, non-refundable cost over a larger refundable damage deposit.” Giving renters the option to purchase insurance could help distinguish you from the competition as long as you’re comfortable that the coverage won’t leave you feeling exposed.

If you’ve replaced your security deposit with an insurance package, did you have a positive or negative experience?