To be confident the big rubber ‘denied’ stamp won’t land on your insurance claim, discover the top eight conditions insurance companies use to reject landlords’ claims. Nicole Navarro
Just because your policy is entitled ‘landlord insurance’ or ‘tenant protection’, don’t be fooled into thinking that every almighty act or damage a tenant commits in your investment property is covered.
The key to improving your chances of a successful claim, according to Argonaut Legal solicitor Tim O’Dwyer, is to disclose everything.
“It’s a contract of utmost good faith, so you have a legal duty to disclose anything regarding the risk they’re taking on your behalf,” he explains of the chosen insurer.
“If there was a fire in the past, if you’re aware of any illegal structures, or if you’ve done any special deals with tenants operating businesses onsite, these are risks the insurance company needs to know about,” he says.
O’Dwyer adds, “Then there’s the situation with a whole lot of tall trees on the property, none of us would think of telling an insurer about that, or if there was past flooding on the property, or a whole lot of burglaries… what they don’t know won’t hurt them… until you make a claim.”
What are the top eight exclusions in a standard landlord insurance policy?
Terri Scheer Insurance general manager Carolyn Majda reveals the insurance exclusions to be wary of when renting out a property and offers advice on how to minimise risks as a landlord.
1. Property vacant for extended periods. Check your policy wording to see if you have cover when your property is vacant for extended periods. Some policies can provide cover for up to 90 days if your property is vacant, however it’s important to notify your insurer if the property is going to be vacant for a longer period as there may be special conditions applied. Failure to notify could reduce your ability to claim against the policy.
2. Apply for cover from the start. The best time to apply for cover is at the time of signing your managing agency agreement. Even if the property isn’t tenanted, you’re exposed to a liability risk as soon as the property manager advertises and opens your property for inspection.
Placing cover at this time also means you don’t run the risk of a loss of rent claim being reduced or declined because the tenant’s rent will be up to date from day one of the policy. Too often landlords wait until the tenant gets behind before applying for insurance. Insurance is about protecting against something that might happen, not something that already has or is in the process of happening.
3. Running a business from home. Some tenants like to set up a family day care or run a small business in their shed or spare room, however having people constantly entering the premises opens the landlord’s exposure to loss or damage, and even liability claims. It’s for this reason that many insurance policies will exclude cover for properties that have a business being run from them. A home office is generally fine, however family day care, beauticians, accountants etc. shouldn’t be allowed to trade from a rental property to ensure the landlord has full cover on their insurance policy.
“You can be covered for almost any risk if you’re prepared to pay a premium,” says O’Dwyer. “If you’re going to agree to your tenants running a business from home you need to first check with your insurance company that it isn’t going to invalidate the policy.”
He explains, “The insurer will then require your tenants to show the risks accompanying the business in your name and their (the tenant’s) name. For example, if it’s a day care and someone gets hurt – they could sue the tenant but the landlord would also be liable and there would be a question asked why the place wasn’t safe – you would need to make sure your tenant also takes out insurance.
“If your tenant is a painter and storing flammable cans, that’s a risk the insurance company needs to know about,” he notes. “Woodworking, joinery that’s also a concern because machines can catch fire. If an insurance company knows about it they can determine whether to give you the policy or increase the premium.”
4. Sub-letting. Share house living is popular in Australia as it makes renting a more affordable and fun option for many people. Where a tenant sub-lets (where they have made an agreement with other people who aren’t named on the lease to occupy part or all of the home), the tenant listed on the lease is actually the one who is totally responsible for any loss or damage to the home, or for rental arrears. This isn’t something that’s recommended and landlords should insist that all occupants of the home are named on the lease (with the usual exception being a family situation).
5. Pets. Pet damage in a rental property can range from urine stains on carpet to scratched doors and doorframes to shredded curtains. This can be avoided. Adopting a ‘no pet’ policy for your property can help reduce the chance of this damage happening. Pet damage is often excluded from insurance policies simply because of the large risk of it occurring where animals are left unattended for long periods of time or who are bored.
6. Maintenance requests. Landlords can be found legally liable for loss or damage occurring to a tenant, their belongings or their visitors, which is why landlords should always act promptly on maintenance requests. Things such as tiles lifting, loose floorboards, uneven carpet as minor as they may sound can have big implications should someone trip over and become injured. If landlords are lax in attending to maintenance, despite regular follow up from their property manager, their insurance policy may not provide cover. Again, insurance is only for the unexpected events, neither for carelessness nor negligence of the landlord.
If you’re uninsured and have not acted, you could be faced with a lawsuit amounting to hundreds of thousands of dollars. Either way, as a landlord you have a duty of care to provide a safe environment for your tenant. Responding promptly to any request for maintenance, particularly if it poses a safety risk is the best way to protect you from legal action.
7. Agreeing to a payment plan. The Residential Tenancies Act (RTA) in each state allows for the issue of breach notices should a tenant fall behind in their rent. If the tenant still fails to pay rent, you can generally apply to the court to have them evicted from the property, thus enabling you to make an insurance claim for the lost rent. Where this procedure isn’t followed and the agent agrees to a payment plan on behalf of the landlord with the tenant and the tenant then fails to pay, you’ll have a situation where arrears have built up. This means you’ll need to follow the RTA guidelines to have any action occur, but have now exposed the insurer to an even greater loss. In many cases, it will refuse or reduce your loss of rent claim if you’ve not followed the RTA allowances in the first instance, causing you to be out of pocket.
8. Telling the insurance company you have a monitored alarm system (to get a cheaper premium), but not using it. Any insured person has a duty to disclose information relevant to the insurer’s decision to accept a risk and under what conditions. The customer must always answer questions relating to the risk honestly and failing to do so may render the insurance void or at the very least mean a claim may be denied.
What can you do to ensure the tenant discloses all information to avoid jeopardising your insurance policy?
“Make sure you use a reputable agent,” suggests O’Dwyer. “One thing you can’t insure against is an incompetent, negligent managing agent. You can sue the agent for negligence or breach of contract, but make sure you’ve asked for references on that agent and don’t sign any engagement without a lawyer first looking at their (the agent’s) exclusions of liability contract.”
O’Dwyer also suggests you encourage your tenants to disclose information and discourage them from certain practices that could jeopardise your policy by adding some additional clauses into your rental agreement that stipulate what a tenant can or can’t do. These are the clauses a property manager generally must clarify with a new tenant.
Majda says in most tenancy agreements the terms and agreements stipulate that you don’t run a business from home. But if they don’t stipulate this, she agrees with O’Dwyer that perhaps it’s something that could be added as an additional clause to the agreement.
But Majda also agrees that you need to be confident in your agent’s ability to observe any problems that might jeopardise an insurance claim, and report these to the landlord.
Another idea is to create your own property manual for prospective tenants to read in addition to the tenancy agreement, highlighting the areas of particular concern. This is a particularly good idea if your property lends itself to a business set-up, for example, if it includes a separate granny flat or workshop. Perhaps instead of stating the tenant can’t run a business, suggest that if they plan on starting a business to notify you so your premium can be increased. Be upfront and honest about the consequences, perhaps then your tenant will do the same.