I've always had a contract for all the VRBO rental that i've done. It just gives me a little bit of comfort and if the owners aren't out there trying to scam you they shouldn't have an issue with creating a contract for you.

Basically you just want the agreement to state what you are renting, how much, what the security deposit is, when, # of people, cancellation policy, any rental rules (i.e. you are/are not allowed to do something, ala smoking or using a hot tub, etc.).

I did a quick search and found the following link that seems to cover the important bits: http://community.homeaway.com/docs/DOC-1573

It also looks like VRBO itself has some sample ones but that was behind an owner's login that I didn't try and go past. http://vacationrentals.vrbo.com/sample-forms (although it maybe the same as above as it also says homeaway).

As far as liability insurance, the home owners really should have it on their policy. Its more to protect them than to protect you, personally, I wouldn't worry about it too much.

As far as payment, I have always used some kind of well documented form of payment, i.e. credit card or check and definitely not cash. Keep in mind if you do end up using paypal, I believe the owner will end up having to take a 2.5% (or something like that) penalty for transaction fees and they may or may not be ok with that.

Drek