There's various options when it comes to damage insurance payment. HomeAway work with CSA to offer a Personal Damage Protection program which starts at $39. The owner collects this payment and pays for the insurance. Security deposits vary widely, but typical amounts are $250-$350. Some owners charge a lot more (HomeAway report the average is $500), and some don't charge one, but instead keep credit card information and charge damages to this.
A key reason that a lot of owners say they charge a security deposit is to make sure that the guests have some stake in treating the property well. There is an argument that if the guest has paid for damage insurance, they may feel it isn't as important to be as careful in your property. They may rationalize that if something is damaged no-one is harmed except some big insurance company.
This is the main reason that we charge a $250 security deposit. We want the guest to have some skin in the game. Of course, $250 isn't going to cover a lot of the damage that guests could potentially do to your home. But like many owners we've been fortunate to have only minor damage. Of course, we are also very careful to screen out guests that might be likely to cause more damage, like vacationing students under the age of 25.
Some guests are hesitant to pay a security deposit. HomeAway claim that 75% of renters prefer a small, non-refundable fee over a larger refundable damage deposit. Although we will sometimes discount, we will never waive or reduce the security deposit. On the rare occasions that we rent to guests with pets we will charge a higher security deposit.
If you decide to go the damage insurance route, make sure to check the fine print about what is covered and what isn't. Some plans cover replacement costs, but not the labor to have repairs made. Also if you need to pay more to clean your property after a guest, you may have trouble claiming this. For this reason, some owners that use insurance, also charge a security deposit for those things not covered by the plan. You also have to factor in the time and effort to file an insurance claim, and the risk that the plan will not pay out. What will happen if the guest denies the damage?
For all these reasons we're choosing to stick with a damage deposit and thorough screening of guests. If the industry shifts heavily to insurance instead of security deposits, we'll need to reevaluate to stay competitive. But so far that doesn't seem to have happened.
[Also see Dealing with Vacation Rental Damage]