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Landlord insurance is optional, but well worth having

Landlord insurance is designed specifically to cover losses involving rental properties. A recent MoneyHub survey report shows a widespread view that landlord insurance is simply an optional addition to a rental property's existing house and contents insurance, rather than essential cover. That is not the case. Ordinary house and contents insurance covers only losses to the property and its contents caused by events such as fire or earthquakes. When a property is rented out, landlords often face additional, unexpected risks, such as damage to the property or its contents, rent arrears, or contamination caused by the manufacture of methamphetamine. These are not covered by the standard policies described above.

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Although landlord insurance is not compulsory, it can therefore relieve landlords of many worries.

What landlord insurance covers

Landlord insurance typically covers potential losses in the following areas:

• Rent.
• Loss of rent resulting from malicious damage by tenants, sudden accidents, natural disasters, or a government or local authority declaring the property uninhabitable.
• Loss of rent when tenants leave without notifying the landlord, or when the Tenancy Tribunal orders tenants to leave and terminates the tenancy.
• Furniture and appliances.

Damage to or theft of furniture and appliances supplied for tenants' use.

• Unexpected events.

The cost of repairing or replacing the house and its contents following events such as theft, fire, earthquakes, explosions, storms or floods.

• Malicious or intentional damage by tenants.

This is particularly likely when tenants need to be evicted or during the eviction process.

• Intentional damage by third parties.

Some insurers' policies cover damage to the property caused by people other than tenants.

• Legal liability and compensation.

Compensation for any harm caused to third parties by the rental property or the landlord's belongings inside it. For example, a fire in the property may spread to a neighbour's home.

• Emergency repairs.

The cost of emergency repairs to the house, including replacing locks and keys.

• Methamphetamine contamination.

Testing for and removing methamphetamine contamination inside the house.

Some matters may fall outside the policy's cover, including:

• Some insurers cover tenants' rent arrears, while others regard this as a “payment risk” that landlords should bear themselves.
• Some insurers may exclude “gradual damage” and what is considered “normal wear and tear”. For example, if wooden window frames rot over time, the insurer will not pay to replace the windows.

As with other insurance, landlord insurance varies in cover and cost between insurers. Landlords should shop around, seek advice and compare policies before buying. Generally, however, broader cover means higher premiums.

 

To get insurance, first show that you fulfil your duties as a landlord

Owners taking out landlord insurance must demonstrate to the insurer that they have fulfilled their obligations as landlords. Otherwise, their ability to claim may be affected if a problem arises. These obligations include:

Before the tenancy:

• Selecting suitable tenants.
• Carrying out comprehensive credit checks on tenants.
• Lodging the tenants' bond.

During the tenancy:

• Inspecting the rental property regularly every three or six months, as required by the policy.
• Managing rent effectively.

Informing tenants about insurance is both an obligation and a safeguard

Crockers property manager Franklyn Young reminds landlords that current tenancy law requires the following:

• Landlords must provide insurance information in any new tenancy agreement.
• Landlords must also provide a statement informing tenants that a copy of the insurance policy is available on request.
• Landlords must also keep tenants informed of any changes to this information within a reasonable time.

Franklyn says this helps tenants understand which actions or omissions could invalidate the insurance policy. It also helps them understand what the insurance covers and the excess they would need to pay if they were liable for damage. In addition, landlords who fail to provide this information, or fail to notify tenants of changes in writing within a reasonable time, may face a fine of up to NZ$500.

 

Landlord insurance benefits tenants too

As a tenant, do not assume landlord insurance has nothing to do with you. Most tenants undoubtedly have no intention of deliberately damaging the home they rent, but some accidents are unavoidable.

Taking effect on 27 August 2019, the Residential Tenancies Amendment Act provides that if tenants or their guests carelessly damage the rental home or its contents, the tenants will be liable for the resulting costs. Compensation is capped at four weeks' rent or the insurance excess, if the landlord has landlord insurance, whichever is lower. For tenants paying income-related rent, liability is capped at four weeks' market rent or the insurance excess, if landlord insurance is in place, whichever is lower. After settling the claim less the excess, the insurer cannot seek to recover the damage costs from the tenant.

Whether your rental home has landlord insurance therefore directly affects how much compensation you may have to pay if the landlord's property is damaged.

Franklyn also recommends that tenants take out contents insurance, because landlord insurance does not cover tenants' belongings. For example, if a leak in the rental home damages a tenant's furniture, landlord insurance pays only for repairs to the house and the landlord's belongings. The tenant's possessions are not covered because they are not part of the property.

As the saying goes, setbacks teach us wisdom. After the shock of this pandemic, owners may wish to consider insurance for their rental properties. Such a policy might also make your property more attractive in a highly competitive rental market.

About the interviewee:

 

Franklyn Young

A graduate of the University of Auckland with a bachelor's degree in property, Franklyn has worked for several major property companies managing residential properties, commercial properties and bodies corporate. He is currently a business development and project manager at Crockers Property Group.