The Landlord's Guide To Renting

Part 7 – Landlord's Insurance

Summer is the season for bushfires, floods and cyclones. All year round, house fires, storms and tempests, broken pipes and bad tenants cause damage to rental properties.

Visitors twist their ankles when they trip on stairs and slip on a path, fracture limbs when decks collapse and receive lacerations when glass doors break.

Landlord Insurance covers: Building Insurance for damage to rental properties; Public Liability Insurance for personal injury to visitors; Malicious Damage by bad tenants and Loss of Rent.

This article looks at Landlord Insurance for property investors.

Landlord Building Insurance – the risks

What physical items does landlord building insurance cover?

Landlord Building insurance covers the building structure – walls, roofs, ceilings, floors, windows, doors, decks, sheds, pools, gates, fences, dividing walls, landscaped and paved areas. For houses, the landlord takes out the insurance. For strata property, the Owners Corporation / Body Corporate takes out Building Insurance because it owns the building structure (the common property).

Landlord’s Contents Insurance is taken out by landlords to cover the fittings and fixtures inside the building for both houses and strata units/townhouses – kitchen cupboards, bathroom fittings, light fittings, blinds and curtains, floor coverings. The tenant’s goods are not covered.

Is insuring the building for less than it is worth a smart way to save money?

Insuring the building for less than building value will save money on insurance premiums. But how smart is underinsuring the building?

Illustration: assume the building value is $300,000 and it is insured for $200,000. If it is a total loss the insurance company will pay $200,000 and the building owner will need to fund $100,000 out of their own pocket to replace the building.

It would be smarter for the owner to pay an extra $300 in insurance premium and receive the full $300,000 building value.

What is the building value for insurance purposes?

Property valuations will often state a building value for insurance purposes. By law, strata schemes must update building valuations regularly (at least every 5 years) for insurance purposes. But homeowners and investors are not required to do so.

A simple method landlords use to estimate the building value is to follow the insurer’s guidelines on the cost to rebuild the home with comparable features and materials. Insurers might have a home building value calculator on their website or a cost per square metre of building area guide for manual calculation. Many insurers include a consumer price index increase in their renewal notices.

Most Building Insurance policies provide new for old - replacement cost cover. Some provide indemnity cover, which is less than new because depreciation and condition are taken into account. It pays to check! Strata Insurance policies always cover replacement cost.

What events will landlord insurance cover?

The Insurance Contracts Act, 1984, sets out the events covered by standard home insurance policies. The events covered and exclusions in a Standard Landlord Insurance Policies are:

Events covered: fire or explosion; lightning; earthquake; theft, burglary or housebreaking (by outsiders); deliberate or malicious damage (by outsiders); bursting pipes or water overflowing (but not pipe repair); riot or civil commotion; impact damage by vehicles, aircraft, boats, rockets or satellites (by outsiders); falling trees or television aerials; storm, tempest, flood.

Exclusions: depreciation; wear and tear; rust or corrosion; the action of insects or vermin; war or weaponry; business use; tree lopping; if the home is unoccupied for 60 days; damage to retaining walls, gates and fences (if by storm and tempest); accidental damage to glass or porcelain fittings.

Landlord Insurance - Common areas of dispute

The Financial Ombudsman Service (FOS) is funded by the Insurance Industry in Australia to help resolve disputes between insurer and insured. If the insurer denies liability or the insured person rejects the insurer’s offer as insufficient to cover the damage, then the insured person may request FOS to determine the dispute. Both the insurer and the insured are entitled to make written submissions to FOS. The determination is made on the papers, without a hearing.

FOS publishes its determinations on its website. These are useful guides to common disputes in Landlord Insurance. These areas of dispute recur in those determinations.

What reasons do insurers use to deny claims for fire damage?

House fires result in potentially large claims for building repairs or rebuilding.

Even smoke and fire damage to the inside of a home unit can be expensive to repair – in one case, the insurer paid $31,900 for cleaning and repairs to the unit, and $3,045 for 10 weeks loss of rent, until the unit was ready for the tenant to move back in, for a fire which originated from a faulty light in the fish tank.

Because of the high cost, insurers will try to deny claims for fire damage more forcefully than other, smaller claims. Insurance companies use these reasons to deny claims for fire damage:

• Reason 1 – The fire was caused by vandalism and arson by an occupant or owner – the insurer must establish this was the likely cause by expert reports – speculation about the cause or suggesting dishonest acts or a fraudulent motive by the owner is not enough.
• Reason 2 – The status of the property had changed from residential to commercial – the threshold is where more than 20% of the floor area is used for business purposes.
  Illustration: if business stock and equipment is stored in less than 20% of the building, the insurer may either accept a claim for the whole building destroyed by the fire, or for that part which is not used for business purposes. Business stock and equipment stored are not covered.
• Reason 3 – The building has been unoccupied for more than 60 days – unless the insurer has agreed, the coverage is invalidated. Occasional residency can be sufficient, but a property in the course of renovation, stripped of a bathroom and kitchen, is treated as unoccupied.
  
  Reason 4 – The building was not structurally sound – a building in barely habitable condition might be structurally unsound.
  Illustration: A Council Emergency Order issued because the property was unhealthy to live in: there were broken sewer pipes, the smell of raw sewage and rotten floorboards; the house was not secure against wind and rain. The tenants vacated. This would amount to a structurally unsound building and be sufficient reason for the insurer to deny a claim.

If a property is damaged by fire, the insurer is entitled to engage a builder to repair or rebuild the home. Or, if the insurer chooses, it will make a cash settlement.

Was it storm damage or was the roof already in poor condition?

When it rains or hails, insurance claims are made for water damage. The water must enter the roof of the building through a roof opening for a storm and tempest claim. Insurance companies must be given access to inspect and to conduct ‘make safe’ repairs as soon as the damage occurs.

Insurance companies will pay claims for water entry where strong winds (above 40 on the Beaufort scale) cause the roof opening for instance by lifting or tearing an iron roof, dislodging roof tiles or a tree branch falling causing damage the roof. The claims will cover roof and ceiling repairs, painting, drying or replacing damaged floor coverings. Pre-existing water damage is not covered.

Insurance companies will not pay claims if the roof was in poor condition. Illustrations: no flashing between the main roof and the rear patio roof; loose and rusted roofing sheets; deteriorated roofing timbers, support walls; gutter blockage and general wear and tear. Claims will also be denied if the water entry was as a result of defective workmanship or design in the construction of the roof.

Trees near property boundaries can damage buildings in two ways: (1) Tree limbs can fall on buildings and fences. If so, building insurance will cover the damage. (2) Tree roots can damage foundations and fences. If so, building insurance will not cover the damage. In this picture, the tree roots from a neighbour’s jacaranda tree have been cut at the boundary and a barrier is to be installed to prevent damage caused by the tree roots.

Did soil conditions cause building subsidence or was it leakage from underground pipes?

Cornices detach and cracks mysteriously appear in walls when buildings subside. Building Insurance will cover the damage if it is caused by water leakage from broken sewer or burst underground water pipes, or from an earthquake or tsunami, but not otherwise, such as water escaping from storm water pipes or drains. The cost of repair or replacement of the pipes is not covered.

The claim will be reduced or denied if the damage was due to changed soil conditions – such as moisture content which causes differential settlement, foundation instability, and cracks in buildings.

Illustrations where cover is excluded: leaking stormwater pipes which increase soil moisture content; tree roots which move walls and affect soil moisture content by drying the ground; reactive clay soils which expand when it rains and shrink when it is dry, or change seasonally.

For earthquake damage, insurers will contribute towards the repair of the new cracks, and the owner will be responsible for repairs to pre-existing cracks. The damage must have occurred within 72 hours of the earthquake.

Was it flood water or surface run-off rainwater that inundated the house?

When buildings are inundated by water, insurers will not cover flood water damage to properties in flood prone areas unless flood cover has been taken out (at a higher premium). Non-flood prone areas are automatically covered – the line is drawn at a 1 in 100 flood.

What is flood water? It is water that breaks the banks of a river, or the normal confines of any watercourse, lake, reservoir, canal or dam.

Insurers will cover inundation by surface run-off rainwater. A common test is: surface run-off water usually follows heavy rainfall quickly, while flood water rises over time.

Was it malicious damage or simply unhygienic living habits?

Malicious damage caused by tenants is an optional cover in Landlord Insurance.

The malicious damage must be deliberate or intentional. It includes vandalism. Some policies require it to be reported to the police. The FOS determinations give examples: holes in walls, cupboards and doors, removal of kitchen cupboard doors, cracked windows, broken tiles, ripped carpets, spray paint on walls, damaged fly screens, broken locks, missing dials on stoves. Many policies cap the amount payable.

Malicious damage cover excludes tenant neglect in all its forms: untidiness, unclean and unhygienic living habits, poor housekeeping, wear and tear, rust deterioration or corrosion, mould, wet or dry rot, dampness, carelessness. The FOS determinations give examples of tenant neglect as: missing or damaged light fittings, half-painted walls, broken tiles, dirty carpets.

Some policies exclude specific damage from malicious damage cover: rubbish and abandoned goods; scratches, chips and scuff marks caused by children or pets; stains and water damaged floor coverings from over-watered pot plants or splashing from showers, sinks or baths; faulty materials and workmanship.

If malicious damage not covered by insurance, the landlord’s recourse is to claim against the rental bond and to obtain a Tenancy Tribunal order for compensation.

What does rent default cover that loss of rent does not?

Rent default is an optional cover in Landlord Insurance. It covers tenants who stop paying, are evicted or leave before the end of a tenancy agreement. Often a threshold of four weeks applies (or the rental bond is deducted), there is a maximum cover of 10, 13 or 16 weeks rent or a dollar amount, and the excess is deducted.

Loss of rent is part of the standard cover in Landlord Insurance where a tenant must move out temporarily while fire or storm and tempest damage is being repaired. Most policies apply a cap of one year and a total of $52,000.

What are the top Natural Disasters in Australia since 1945?

Natural disasters result in a deluge of claims for insurers. This is a list of the most expensive natural disasters in Australia since 1945:

Tropical Cyclones – Darwin 1974 (Tracy), Northern Australian 1973 (Madge), Far North Queensland 2005 (Larry) & Far North Queensland 2011 (Yasi)
Severe storm – Central Coast NSW 2007
Floods – Hunter Valley 1955, Brisbane 1974, South East Queensland 2010 & 2011
Hailstorms – Brisbane 1985, Sydney 1999
Earthquakes – Meckering WA 1967, Newcastle NSW 1989
Bushfires – Tasmania 1967 (Black Tuesday) Victoria 1983 (Ash Wednesday) & 2009 (Black Sunday), Canberra 2003

The Investor’s Guide to Property Ventures has been produced by Cordato Partners Lawyers, as part of its Property Law practice. We can meet all your conveyancing needs.

To join the free mailing list for the Guide (mail or email), Contact us by email – info@propertyinvestmentlawyer.com.au or by phone (02) 8297 5600 (speak to Sally Wade). Our office is located at Level 5, 49 York Street, Sydney NSW 2000 (near Wynyard Station).

© Copyright 2019 Cordato Partners