Landlord insurance 101

07/12/2011

The chances are that if you own a rental property then you’ll have bought a landlord insurance policy to give you the peace of mind that you’re covered against the catalogue of problems that can put you in financial strife.

But the insurance companies wouldn’t be profitable enterprises if they offered blanket policies that paid out at the drop of a hat. And landlords can be caught out by those tricky clauses that they failed to spot when purchasing their policy.

 Be careful

Did you know, for example, that NRMA’s Landlord Insurance Product disclosure statement and policy booklet state’s that, if your tenant defaults on their rent payments during the term of the rental agreement, the insurer won’t pay out:

“if we previously paid a claim under the same rental agreement for:

- rent default

- theft or attempted theft by a tenant or their guest, or

- vandalism or a malicious or intentional act by a tenant or their guest

if your tenant is behind in rent payments before your policy starts.”

So, if your tenant’s friend comes over and clears out the TV, dishwasher and washing machine that you’ve provided for them, for example, and you make a claim for them on your landlord insurance policy, then you won’t be able to make another claim if – under the same rental agreement – your tenant defaults on their rent payments.  

Moreover, under those circumstances that you are covered for rent default, you’ll receive the amount of rent in default minus certain deductions:

“- 4 times the weekly rent amount that is shown in your written rental agreement, and

- the rent default excess”

In this case the default excess is $300. So, if your weekly rent comes to $200, for example, then $1,100 will be deducted from the amount that NRMA will pay out – which is capped at $5,000.

And when it comes to water damage, for example, Terri Scheer’s Landlord Preferred Policy, Product Disclosure Statement and Policy Wording states that it will not cover “loss or damage caused by the gradual escape of liquid over a period of time”.

So, for example, if the washing machine in your rental property had an unseen leak that slowly eroded the floorboards underneath it, then you might have to pay for the repairs out of your own pocket.

And be careful if your property’s within striking distance of the ocean. The general exclusions on AAMI’s Landlord Insurance Policy include damage caused by: “Tidal wave, tsunami, high tide or other actions of the sea”.

 A question of risk

So why do insurance policies list all of these uninsurable events? And how do they decide what they will and won’t cover?

Terri Scheer manager Carolyn Majda explains that it’s a case of trying to strike a balance between providing cover for the most common eventualities, while keeping the insurer’s level of risk manageable.

“No insurance policy will cover every type of loss that can be experienced. Insurance is a risk management tool that reduces the risk to landlords, and which provides cover for many of the most common types of risk,” she says

“Part of the principle too is to keep insurance affordable for as many people as possible. You could have an insurance policy that could cover all of these things, but the premium would put it out of most people’s reach.”

She adds that an insured event as defined in your policy will need to have occurred in order to make a claim, and that the details of this event must meet the policy’s terms and conditions. She uses the example of taking out a landlord insurance policy while your tenant is in arrears to further illustrate her point. 

“If a tenant is in arrears to the point where notices could be served to remedy the arrears at the time the policy is taken out, and doesn’t get up to date for a period of at least two calendar months, then we would not accept liability for a loss of rent or damage claim.”   

“It is very important therefore that landlords are honest when answering the disclosure questions at the time of taking out the policy as it can result in a claim not being paid if the policy terms and conditions are not met.”

Disclosure

Majda points out that a surprising amount of landlords are only spurred on to take out insurance once the arrears problem rears its ugly head. But most insurers won’t be willing to take on the risk of insuring a property whose tenant is already behind in their payments.

“It’s like having a car accident and then insuring your car,” she says.

The other main sticking point when it comes to disclosure, says Majda, is pre-existing damage to the property. If you fail to accurately disclose such damage then, should you put in a claim for future damage, the insurer’s assessor may deem that the pre-existing damage was the cause and deny your claim.

But working out exactly what you need to disclose to your insurer can be confusing. After all, it would be an exhausting task to try to get hold of the property’s maintenance history and disclose every instance of a damaged and repaired skirting board, floorboard or bathroom tile for example.

“There’s a duty of disclosure on anyone when they’re taking out an insurance policy to disclose any information that a ‘reasonable person’ – and that’s how they describe it – what a reasonable person would think was relevant for the insurer to know,” explains Majda.

“But where the insurer doesn’t ask the right questions they can’t then go back and say ‘we didn’t know this so now we’re going to deny your claim’. They have to be very specific about the information they want.”

Insurance Claims Services managing director, and all-round thorn in the side of the insurance industry, Michael Arnold, points out that all insurers are regulated by the Insurance Contracts Act 1984, which offers some consumer protection.

“Hardly anyone outside the industry itself is aware of the protection it provides,” he says. “For instance, it lays down – Section 46 – that an insurer cannot deny liability because of a pre-existing defect if the insured didn’t know about it.”

He adds that you should always put your application in writing to make sure that you understand what it is you’re expected to disclose.

“Always complete a proposal form. That way you can consider the questions being asked and if they are answered honestly there should be nothing to fear,” he says. 

“Do not take out insurance over the phone. I have several cases where insurance has been sold over the phone and when a claim occurs later a cute little clause is discovered that excludes what has happened. Selling insurance by phone is a slick way of marketing for insurers but it is fraught with dangers as far as the consumer is concerned.”

Read the fine print

Sadly, landlord insurance is all too often a purchase that investors fail to investigate adequately, especially when you’re faced with a product disclosure statement (PDS) the length of a short book that’s full of technical terms and a seemingly endless list of scenarios for which you will and won’t be covered.

“In some cases the PDS may involve up to 85 or 90 pages, so expecting an insurance ignorant consumer to wade their way through it with a magnifying glass is quite unreasonable,” says Arnold.

But, unreasonable or not, you’ll be doing yourself a massive favour by playing the insurance game and reading through each page thoroughly so that you know where you stand.

These days most PDS documents can be viewed online, allowing you to take a good look at an insurer’s policy, and quiz the one of their representatives on any ambiguities, before signing on the dotted line.

“Where a landlord is unsure of any aspect of the cover they are considering, they should ask as many questions as possible to ensure they are getting the policy that suits their needs,” says Majda. 

“It is a legislative requirement that customers be provided with a copy of the PDS (Product Disclosure Statement) and Policy Wording, and they really do have a responsibility to themselves to read and understand their policy.”

When asked if it’s standard practice to talk through the policy with landlords to make sure they understand what they’re covered for when they sign up, Majda explains that “it is certainly our standard practice to go through the policy coverage with customers when we are asked, and any caller who has purchased a policy is always asked if they have any other questions before the call is ended.”

Tony Jackson from St. George Underwriting Agency however warns that, while his company’s representatives are always happy to discuss the cover and how it works with a prospective policyholder, it isn't safe to rely on verbal discussions as the basis for the contract. So be sure to refer back to the PDS and policy wording.

“While we will advise on the operation of our policy, we do not give personal advice on their insurance requirements. If a person wants personal advice on their needs, they should consult an insurance broker,” he adds.

If you do decide to sing up to a policy, but subsequently notice a clause that you’re not happy with, there’ll be a cooling off period that allows you to cancel and receive a full refund if you haven’t already made a claim within that timeframe.

NRMA gives its policy holders 21 days to change their minds, for example, while Terri Scheer offers a 30-day cooling off period.

What to cover?

In terms of the minimum level of cover that you should expect, Majda suggests that your policy should include loss of rent, malicious or accidental damage caused by tenants, and legal liability.

General exclusions, however, will include wear and tear and poor or untidy living habits.

“As with an owner-occupied house, over time there will be signs of wear and tear in the house and this is the same in rental properties. This is maintenance and upkeep as opposed to an insurable event,” she says. 

“In terms of poor or untidy living habits, some people, whether they are renting or owner occupiers are generally untidy. Again, this is not an insurable event but with regular inspections, can be readily identified and action taken to remedy and therefore prevent any loss to the landlord.”

She adds that as a general rule you won’t be able to add these two exclusions to your policy, but extra levels of cover are available for certain scenarios.

“For example the Terri Scheer Landlord Preferred Policy also provides cover for deliberate damage and tax audit, which will help in the event of the ATO auditing your tax affairs in regards to your rental property,” she explains.

A question of definitions

Where many landlords come unstuck is when it comes to defining the type of event that’s put them at a financial disadvantage.

A classic case is damage caused by the tenant. You might think that any serious damage caused by the tenant should classify as an insurable event. But your insurer will make a call on whether this event counts as ‘wear and tear’, ‘negligence’, ‘malicious damage’, ‘accidental damage’ or ‘deliberate damage’ for example.

As explained, wear and tear and poor and untidy living habits are unlikely to be covered. So cigarette burns in the carpet, for example, may count as untidiness rather than malicious damage. If this is the case, you’ll need to get your tenants to pay for repairs out of their rental bond as it’s it will be classified as an uninsurable event.

The problem, of course, is that these uninsurable events can stack up – leaving you out of pocket even after spending the rental bond on repairs.

Jackson explains that, in his experience, most claims are for tenant defaults “followed by deliberate damage by tenants and damage by water from a storm or leaking pipes and the like”.

And in terms of their dollar value, claims for fire damage come first, followed by tenant default.

“Loss of rent is the most common type of claim we experience, with around 60% of our claims being for loss of rent,” adds Majda. “Malicious and accidental damage follow; with water damage also being very common.”

But, as discussed, defining ‘malicious’, ‘accidental’ and ‘deliberate’ damage can be a real sticking point when it comes to making a claim – with different rules being applied to each of the three categories.

Those of you that read property investor Kathie Comb’s tenant from hell story in our November issue will have seen how – of the myriad offences caused by her tenants – the only damage that was deemed malicious by her insurer NRMA, and therefore insurable, was a burn hole in the bathtub. 

Damage that wasn’t covered included a burn hole in the cooktop bench; vinyl on kitchen floor that was warped with a piece deliberately cut out; flyscreens that had been cut to pieces; carpets that were burnt and missing pieces; and holes drilled in all window frames.

It’s vital, therefore to know what you’re covered for and how it’s defined.

Malicious, accidental or deliberate?

Malicious damage

Majda explains that the Terri Scheer definition of malicious damage is: “Damage committed on the property which is motivated by spite, malice or vindictiveness with the intention of damaging the property.” This does not include:

• Damage caused by the landlord or someone acting under the express consent of the landlord or the landlord’s family
• Tenant carelessness, neglect, unhygienic living habits or poor housekeeping
• Deliberate damage
• Damage caused by children
• Damage caused by domestic pets
• Scratching, denting or chipping, or
• Damage as a result of repairs or attempted repairs carried out by the tenant

“A common example of malicious damage is holes being punched or kicked into walls or doors,” she explains.

Accidental damage

Accidental damage, on the other hand, is defined by Terri Scheer as, “a sudden or unexpected loss which is caused by persons including your tenant, their family or their guests.” A common example of accidental damage is spillage on carpets, for example.

The exclusions here are:

• Damage caused over a period of time
• Malicious damage
• Deliberate damage
• Damages otherwise excluded by the policy
• Neglect, wear and tear

Deliberate damage

Confused yet? There’s still deliberate damage to be explained.

“We added this as a cover in our policy as we found many landlords claiming for changes made to their property which weren’t accidental, nor were they committed with spite or vindictiveness,” says Majda of the deliberate damage definition.

“A good example is hanging pictures without the landlord’s consent. The intent is generally to make the property more homely, however it does change the property from the original state it was rented to the tenant in.”

 Watch the excesses

Depending on your insurer, you may also find that each instance of damage has an excess applied to it, meaning that you might not be receiving the level of cover that you thought you were.

“When the value of a claim has been calculated, the value of the excess is deducted from that amount. An excess generally applies to each event. Therefore difficulties can arise at the end of a tenancy where accumulated damage may be perceived as a series of events, which opens the door to multiple excesses being applied,” says Jackson.

“I am aware of a case where another insurer received claim for damage caused to a kitchen bench from the tenant cutting food without using a cutting board. The insurer deemed each cut to be a separate event, and applied an excess to each one.”

So in this instance, for example, the combined excess amounts for each cut could end up outweighing the amount that the insurer would have paid out for repairing or replacing the kitchen bench.

“Act prudently as if you were uninsured,” Jackson suggests. “But advise your insurer as soon as possible to give them the opportunity to look at damage before it's repaired or to take over the conduct of the repair. If you can, take lots of photos.”

Building, contents and liability

There are three main elements that can be included in a landlord insurance policy; namely building contents and legal liability.

Building

The building element covers damage to the structure of the property. This will normally encompass the building itself as well as outdoor structures such as garages, gates and fences. It may also cover certain fixtures and fittings, such as air conditioning.

Majda warns that a standard home and contents policy normally won’t provide cover if you then go on to rent your home out.

She gives the example of a client who only had his building insured up to a value of $60,000 on his landlord insurance policy, because he thought that his existing house and contents policy would be adequate.

“The tenant set the couch on fire and burnt the house down. So their building insurer didn’t have to pay that claim because it was caused by a tenant – that was an exclusion in their policy,” she says.”

“So they got their loss of rent cover and the $60,000 cover from us, but that wasn’t anywhere near the full replacement cost of the property.”

Contents

The contents element will cover items such as carpets, curtains, blinds and light fittings. It’s important to check your individual policy but, as a general rule, Majda explains that “anything that’s left behind for the tenant to be able use is generally covered against malicious or accidental damage that the tenants cause – or theft.”

Legal liability

This element should cover you in case you’re found to be legally liable for injury to a tenant, or damage to their property, while they’re in your property.

To explain this point, Majda uses the example of a Terri Scheer client who had failed to adequately maintain a tear in the carpet of his property.

“It had been reported and I think the landlord might have put a mat over it or something like that. But it moved and there was a day where the tenant tripped over, fell into the bathroom and was injured.”

The landlord was found to be legally liable, and therefore his insurer paid out for the tenant’s costs in this instance.

Making a claim

Your insurer will provide you with details on how to make a claim, and Majda points out that it’s important that you take immediate action to reduce any further loss.

“For example, in a loss of rent situation, landlords or their property manager should be acting promptly to serve notices when tenants fall into arrears,” she says.

“Or, in the event of a water damage claim, that repairs to the cause of the leak are undertaken as soon as they’ve been advised of the problem.  In terms of malicious damage, most insurers will want the issue reported to the local police station.”

You’ll need to notify your insurer as soon as possible of the situation so that they can get the claims process going.

“Where it’s likely the damage costs are going to be significant, it’s likely an assessor will need to be appointed and the sooner this can occur, the more likelihood of your claim progressing without any delays,” says Majda.

She adds that it’s difficult for an insurer to properly assess a claim if the repairs are undertaken before advising the insurer of the damage – as they won’t have had the opportunity to view the damage itself.

“Having photos of any damage will assist the claims process, as will having copies of the ingoing property inspection report (and outgoing if the claim is lodged at the end of a tenancy). Those documents will help identify any damage which may have occurred during the tenancy period,” she adds.

“Where a property manager has been appointed to manage the property, it can be simpler for them to lodge the claim on behalf of the landlord as they will have the rental ledger, inspection reports etc. close at hand.”

Disputes

If you’ve gone through the motions but your claim is denied, then all is not lost. All insurers will have their own dispute resolution process and you’ll want to present your case for a rethink to them in the first instance. 

“Documenting your complaint in writing, providing as much supporting evidence or documentation is very helpful both to the insured and the insurer as it will help the insured person articulate exactly what their issue is and why, and it will give the insurer an opportunity to have all of the facts in front of them as they consider the complaint,” says Majda.

Arnold believes that too many consumers give up too easily when their claim has been denied because they feel they are up against “city hall”, and adds that in many cases the insured party may well be misled by a technicality that they didn’t understand.

“Insurance companies are primarily concerned with profit and their share price; they will claim otherwise but that is the reality and so they will seize on any pretext to avoid liability. This may involve disputing cause of loss, date of loss, allegation of pre-existing damage or failure to comply with policy conditions or failure to notify the insurer of changes,” he says. 

“Right now I have a claim where an insurer mailed a renewal notice to an insured but he didn’t receive it and the mail in his locality was well known for unreliable mail delivery. However the law says you must prove that you haven’t received anything, which of course is an impossibility because you can only prove a positive and not a negative. It is a ludicrous situation.”

If you go through your insurer’s internal dispute resolution process, but they still won’t budge, then you can take your case to the Financial Ombudsman Service (FOS). This process won’t cost you a cent, and the insurer has to abide by any decision made by the FOS.

Arnold, however, has his reservations about the FOS.

“You have to be careful here because that service – FOS – was established only for the benefit of the finance industry. In fact, if you check their Constitution you’ll find there is no mention anywhere of the consumer,” he says. “So many of their determinations are biased, and they refuse to reconsider anything.”

If you’re not happy with the FOS decision then in most states another option, he says, may be to take your case to the state’s Department of Fair Trading.

“In most states you can go to their Departments of Fair Trading like the one we have here in NSW – the Consumer, Tenancy and Trader Tribunal – which here has authority up to $30,000,” says Arnold.

If all else fails, and you still think that your insurance company has a case to answer, then you can go down the legal avenue. At this stage, however, it’s important to take legal advice on what the chances of a victory are. It will then be up to you to weigh up the legal costs against the chance of a win.