WHAT IS LANDLORD INSURANCE AND WHY DO YOU NEED IT FOR YOUR INVESTMENT PROPERTY?
Choosing landlord insurance is no simple task. There are at least ten major insurance providers that offer policies aimed at the property investor, as well as countless other financial institutions that offer insurance as a side product. Choosing the company with the best reputation, the most competitive price or the most irritatingly catchy jingle is not a guarantee for adequate coverage.
When choosing an insurance provider, it is important to exercise due diligence. Just as you need to research the market before buying a property, so you need to research the insurance market before signing up for a policy. But don’t just rely on comparative websites to do the research for you. It is important to look beyond outward price and find out what you are actually covered for before making your choice. After all, each piece of real estate you invest in is precious. You take a risk by borrowing money and putting yourself in debt to purchase it. You work hard to maintain it and optimise it so it will work hard for you. Would you compromise this by choosing the wrong insurance cover?
The following is a guide on what to look for, how to decide which policy is best, as well as a brief comparison of three well-known insurers.
WHAT TYPE OF INSURANCE DO YOU NEED?
As a landlord, your insurance needs will depend on the type of property you have purchased as well as the type of risks most relevant to its location. If you have purchased a dwelling that is managed by a body corporate, such as an apartment or villa in a complex, the fabric of your building should be insured by your strata management. But, this is not enough to mitigate any of the risks associated with tenants, such as rent default. Your strata scheme also won’t cover any contents that you provide for your tenant’s use. Even if you rent out an unfurnished apartment, items that are not considered permanent fixtures, such as carpets and internal blinds, will not be covered by strata. Depending on whether you have invested in a detached property, such as a house, or a property that is part of a complex, such as a unit, there are different types of landlord insurance to cover your needs.
Essential for any property that is not managed or insured by a strata scheme, building insurance covers the fabric of a building, and should cover its: plumbing and gas systems, pipes, cables, fixed appliances, exterior blinds and awnings, certain external structures and fixtures and fittings (excluding carpets, curtains and internal blinds). Building insurance should cover you for complete or partial destruction of your property and loss of rent due to its being uninhabitable. Some building insurance will cover damage caused by a tenant and/or their guests at a premium, whereas others will include as part of their standard policy.
This covers any contents that are owned by the landlord and are provided for the tenants’ use. Contents are considered to be not a part of the structure of the building, and can include: carpets and loose floor coverings, curtains, internal blinds, furnishings and furniture, non-fixed light fittings, household goods and domestic appliances. Contents insurance should cover you against damage caused by tenants and/or their guests but you may have to pay a premium for this. There are often limits to the amount you can claim for appliances such as white goods and televisions, as well as conditions that apply to items kept outside.
LOSS OF RENT:
Landlord insurance, whether or not it is building and contents, or just contents, should protect you against loss of rent. Different brands offer different limits on the amount of rent they will cover. These amounts can also vary significantly depending on the circumstances that led to the rental loss occurring. For example, some may offer up to six weeks of rent if your tenant leaves without notice, and 15 weeks of rent if your tenant dies.
Most insurers offer coverage that will protect you against the injury or death of a tenant occurring at the property that you may be legally accountable for, as well as legal costs should you wind up in court over rental disputes, etc. The amount of coverage offered varies across providers and will be subject to certain conditions as set out in the PDS.
WHAT ARE YOU COVERED AGAINST?
It is wise to carefully read the PDS of every insurer you consider in order to determine what events they will cover you for, as well as any claim limits or special conditions that come into play.
LOSS OF RENT:
• Most insurers only offer coverage against loss of rent (due to tenant hardship, absconding tenant, etc.) if the property is under a current residential tenancy agreement.
• Insurers vary depending on whether they charge an excess for claims. Some insurers will deduct an equivalent of four weeks rent (the typical bond amount) before paying a loss of rent claim, whereas others won’t charge an excess at all.
• While some insurers will pay out a certain number of weeks rent, others will pay up to a fixed monetary amount.
ACTS OF NATURE:
• Many insurers will not cover you for “actions of the sea”, such as king tides or tsunamis. Others will only cover you for landslides or tsunamis if they occur within a certain timeframe of an earthquake.
• Insurers vary according to what constitutes a “flood” and whether or not you will be covered.
• Insurers generally won’t cover you for storm damage that occurs when your property’s roof is not water tight and in excellent repair. This includes water damage in the event of a storm when you are in the process of renovating (and have an untiled or partially tiled roof).
• Insurers also don’t usually cover you for damage caused by rising damp or pollution.
• Many insurers will cover against civil unrest, such as rioting. Most insurers, however, will not cover you against acts of terrorism or war (whether defined or undefined).
• Landlord insurance should cover you for theft or malicious damage, whether caused by a tenant and their guests or not, however, most insurers will not cover you if you or your tenant invited the person responsible into the premises. This sounds like an obvious thing, however, it is not uncommon for an unwitting person to invite a stranger inside, only to be robbed by them.
STEPS FOR CHOOSING LANDLORD INSURANCE
It can be just a tad overwhelming to weigh up all of the different options, prices and conditions out there, so here is a step by step guide to help bring some structure to your search.
1) Decide exactly what you need coverage for – do you need insurance that covers building and contents or just contents? What about loss of rent and indemnity/court costs? What risks are involved? Did you invest in an area that is susceptible to flooding, bushfires or cyclones? It is essential to know the likelihood of such acts of nature occurring and purchase adequate insurance in order to mitigate this risk. It is also important to be aware that high-risk areas may be subject to higher premiums.
2) Figure out how much coverage you need – how much will it cost to replace/repair any contents that are stolen/damaged? What would it cost to repair structural damage? How many weeks rent could you live comfortably without? It is important to ensure the coverage you purchase will cover the full extent of your expenses.
3) Get quotes from a few different providers based on what and how much you need.
4) Read the PDS and PEDs of the providers you are considering in order to uncover any hidden conditions that may affect whether or not you can claim. Take note of the different claim limits, excesses and conditions specific to each insurance policy on offer, and compare them to each other. Which one offers the most value and the best coverage for you? How does any excess charged affect their overall value?
5) Find out how to make a claim and what documentation you will need to provide. Assess how worst case scenarios will affect this. For example, what if your documentation was lost or destroyed by fire?
6) Try to negotiate better conditions or a lower price (it doesn’t hurt to try).
Have you had any situations were your insurance didn’t quite cover what you thought it would? Or have you run into unexpected complications with your property or tenant where your insurance saved you? Tell us in the comments section below.