The right amount of cover

It is vital that landlords understand the level of cover offered to them by insurances such as landlord and strata as well as standard building and contents policies.

When it comes to building, strata and landlord insurance, how do you find your way through the maze?

Standard Building & Contents Insurance

Standard building and contents insurance is primarily designed for owner occupiers and is the type of policy that most people have to cover their free-standing home and personal possessions.

A standard home and contents policy might offer insurance cover for the building when occupied by a tenant, but is unlikely to provide cover for many actions by the tenant that can result in financial loss for the landlord. As a result, it won’t often cover landlords for the specific risks associated with owning rental property. These risks can include malicious damage to the property by a tenant, various forms of accidental damage, loss of rental income as a result of property damage or a tenant absconding and legal liability for occurrences on the rented property that cause death or bodily injury.

Landlords will need specialised landlord insurance if they want to be covered for these types of risk.

Strata Insurance

In a strata-titled apartment situation, strata insurance is held by the body corporate and paid for by owners’ levies. Under a strata title, the body corporate is legally responsible for insuring the buildings at the strata-title site, as well as the owners’ legal liability for common property areas. This includes insuring the roofing, walls and the owners’ legal liability for shared walkways and common garden areas.

However, strata insurance usually doesn’t extend to cover the interior of individual units including internal wall coverings, curtains or removable flooring such as carpet or floating floors. This means that if a tenant damages the property or simply stops paying their rent, the landlord is very likely to be left out of pocket if they don’t have landlord insurance in place.

Confusion about the level of cover provided by strata insurance can leave landlords at risk of legal liability claims. If a tenant or visitor injures themselves in a common area of the strata title development such as a shared walkway, any subsequent legal liability claim should be handled by the strata insurer. But if a tenant or visitor were to injure themselves while they are inside a rented apartment, it is the landlord who can be found liable. In order to be covered for legal liability inside the rented apartment, the landlord will ordinarily need a separate landlord insurance policy.

Landlord Insurance

Landlord insurance is specifically designed to cover landlords against actions by tenants. In the case of a stand-alone building, it can also cover the building itself.

Some of the specific risks that landlords face are malicious damage by a tenant, theft, accidental damage, legal liability (as landlords) and loss of rental income. These risks are specific to landlords and unlikely to be covered by a standard building and contents insurance or strata insurance policies. Because of this, landlords should be aware of the availability of insurance policies that are specifically designed to address these needs.

It’s important to remember that even the best tenant can accidentally damage a property or suffer financial hardship that leaves them unable to pay the rent.

Key clauses in an insurance policy for landlords should cover the following:

  • Malicious damage by a tenant: Malicious damage covers everything from holes punched in walls and doors that have been kicked in, through to intentional damage to carpets and floors.
  • Accidental damage: This covers unintentional damage to a property. It might include the accidental breakage of a window or the spilling of red wine on a white carpet. Accidental damage may also cover damage caused by small children, but excludes gradual “wear and tear” or simply poor housekeeping.
  • Legal liability: This covers the expenses incurred if a law suit arises as a result of a tenant suffering bodily injury or property damage where the landlord is found responsible. A good landlord insurance policy should provide legal liability cover of up to $20 million.
  • Loss of rental income: In instances where malicious damage has been caused to a property, a loss of rental income may result during the time required for the property to be repaired or cleaned. Loss of rental income can also result from absconding tenants, defaulting payments, death of a sole tenant, failure to give vacant possession or a court awarding a tenant a release from lease obligations due to hardship. Choosing a policy that covers these incidents will ensure the landlord continues to receive a steady flow of rental income.
  • Tax audits: Some landlord insurance policies cover landlords for up to a certain level of professional fees relating to an investment property audit undertaken by the Australian Tax Office.

Landlords who don’t have landlord insurance really should think about how they would manage if they were faced with these types of financial losses.

If you are looking for a new landlord insurance policy we would recommend you read over the policy wording of the policy you are interested in before purchasing the policy. Some policies may appear to be good value for money, but after factoring in excesses and other expenses it might cost you more than you think in the long run if you have to make a claim. Differing insurers will also have varying conditions and definitions for loss of rent cover. Not all policies include cover for loss of rent if the tenant absconds or dies, if they leave the property unable to be tenanted while repairs to damage are made, or if access to the rented property is prevented due to an insured event occurring. Likewise a policy might cover ‘damage’, but it is prudent to check whether this includes both accidental and malicious damage and whether the policy covers damage caused by the tenant. It is also important to read the product disclosure statement of the policy.

Source: Majda, C. (2011) Sold Magazine, ‘The right amount of cover’.

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