Insurance: Are You Covered?
Neil Bayley explains the six critical pillars of insuring your rental, so that you don’t get a nasty surprise come claim time.
1 January 2021
“Expectation versus delivery” it’s a common problem with insurance cover. You expect you are covered for something, but when you find out you’re not, disappointment and frustration set in. Worse still, you could suffer a serious financial loss.
It’s best to take a bit of time initially to understand exactly what you are covered for, and ask plenty of questions. If there’s a gap there that concerns you, find out if it can be filled with an extension to your policy. Or is it a risk you need to bear yourself? At least you will know, so if/when a claim arises, you won’t be disappointed by the result.
In this article we are going to share with you six critical keys to landlord’s insurance on residential property.
1 Disclose all information up front. A tenanted property is a totally different proposition for an insurer to an owner-occupied home. When applying for house insurance cover, be sure to give a clear picture of what the house is used for. Is it rented to a permanent tenant, is it a casual tenancy, Airbnb, or perhaps unoccupied for part of the year? Your insurer needs to know exactly what the risk is, and what they are covering, so be as open as possible.
Not disclosing certain information may invalidate your policy later, or could limit the amount of a claim payment.
2 Ensure you have “replacement cover” (new for old) as opposed to “indemnity” cover where depreciation is deducted. Once you’re sure you do have replacement cover, check if there is a limit on the sum insured payable? Some insurers have a set sum insured and that’s it, so if it costs more to rebuild the home following a fire for example, then you’re out of pocket.
Others will pay replacement “regardless of cost” for damage other than that caused by a natural disaster. For natural disaster claims they have a 10% buffer on the nominated sum insured. Some insurers may even go a step further and cover “total replacement” on all perils. Be clear on what sum insured you have, as it could mean a difference of tens, if not hundreds of thousands of dollars.
If you are limited to a nominated sum insured, it is strongly recommended that you obtain a proper insurance replacement valuation, and have this updated regularly. This is often a requirement set by insurers to obtain the “total replacement” option. Also double check whether your sum insured is GST inclusive or exclusive – this can make a huge difference!
3 Be clear on what is covered if your tenant intentionally damages your home. “Accidental” damage by a tenant will normally be covered under a standard policy, as it is with any owner-occupied property. But again, check this out as not all policies are the same.
But what if your tenant runs amuck and intentionally trashes the place? Malicious damage by persons lawfully living at the property is usually an exclusion under an insurance policy, so this is where specific extensions are brought in to cover these eventualities for tenanted properties. Ensure you have this extension if this concerns you. It will normally be labelled a “landlord’s extension” or similar. Limits will apply, in the region of $30,000-$50,000.
4 Check what protection you have for loss of rent. Rent is your cashflow and part of the return on your investment, so this area needs close attention. Loss of rent can occur either through:
1. The property being uninhabitable as a result of an insured peril – for example, fire or flood, and the need for your tenants to vacate the property while repairs are completed.
2. Non-payment of rent by the tenant as a result of:
• Prevention of access: where the tenant is lawfully entitled to vacate the home due to prevention of access to the home or failure of public utilities.
• Vacating without notice: where the tenant vacates the home without giving the required notice.
• Eviction of tenant: where your tenant is lawfully evicted from the home as a result of non-payment of rent.
• Tenancy Tribunal order: where the Tenancy Tribunal makes an order for the tenant to leave the home and for the tenancy to end.
Under 1. Where insured property damage has occurred, you will normally be covered up to a maximum of 12 months and a maximum dollar figure – for example, $40,000.
Under 2. Where non-payment of rent is from these other causes, time limits will often apply – for example, eight or 12 weeks. Loss of rent sums insured, and indeed other set limits will apply “per residential unit”. So, take a block of flats as an example. If there are eight units within the complex, then the sum insured limit will apply for each unit – not over the whole complex.
5 Be crystal clear on what cover is provided for meth contamination and any limits that may apply. Again, this is often a policy exclusion, but an extension is available for tenanted properties. The cover provided is generally for the testing, decontamination and repair of your home if it suffers loss as a result of use, consumption, storage or manufacture of methamphetamine or its precursor chemicals by your tenants or persons at the home with your tenants’ permission.
This benefit includes the costs reasonably incurred in searching for and identifying contamination, if testing confirms that the home is contaminated. For most insurers, the level of chemical contamination would need to exceed 15μg/100cm2 based on government guidelines.
If a damaged portion of the home needs to be repaired or rebuilt in order to achieve a post-remediation contamination level of less than 1.5μg/100cm2, insurers may also pay the reasonable cost incurred in repairing or rebuilding the damaged portion.
Limits apply - $30,000 to $50,000 for any one event is common, but insurers do vary, so clarify what limit you have, and whether this is GST inclusive or exclusive it could mean an additional $7,500 on a $50,000 limit.
6 Check what cover you have for landlord’s furnishings. Not only what sum insured limit applies, but also what the definition of a furnishing actually is? Does this include furniture that you supply, in addition to the usual drapes, blinds, rugs, etcetera?
Carpet used to be considered “contents”, however this changed a few years ago and most insurers now classify carpet to be part of the house policy – and rightly so. Again, double check this as some insurers have a different approach.
If you have a lot of furniture and appliances that don’t fall within the definition of a “furnishing” and/or it is above the limit allowed in the house policy, you may need a separate contents policy to cover these items.
NOTE: For any of the special extensions applying to an insurance policy for a tenanted property, you will often need to comply with “best practice” guidelines in managing your property. The main areas are:
• tenant selection
• rent in advance
• payment of bond
• property inspections
A professional property manager can take care of these obligations for you, to ensure you comply. Your insurer should also supply you with written guidelines for you to follow, to ensure you are not likely to jeopardise any potential claim.
Disclaimer: Please note that the content of this article is general in nature. It is not intended as a substitute for specific professional advice on insurance and should not be relied upon for that purpose.