Insuring your own home is fraught with traps. And it's doubly hard for landlords.
Although homeowners face risks such as under-insuring their homes or not being covered for gradual damage, landlords have a whole lot more to worry about.
What if a tenant maliciously damages the property, or the house can't be re-tenanted after an eviction or P-lab contamination? Most landlords have no idea if they're covered for these and other rental-specific risks. Many aren't.
Insurance companies such as Tower, AMI, State, Lantern, Vero, Lumley, Crombie Lockwood, Initio, AA Insurance and all of the high street banks sell insurance to landlords. But beware, the word "landlord" attached to an insurance policy, whether it's an extension or landlord-specific insurance, doesn't mean that it actually covers the risks faced by a landlord.
So what are those risks that aren't covered by standard homeowner policies? They include:
• Malicious damage or theft by tenant: Some tenants damage the properties they live in deliberately and steal the landlord's chattels. The TV programme Renters probably sensationalises the types of problems landlords face. But it does happen with regularity if landlord discussion forums are anything to go by. Sometimes that damage can be extensive and expensive. Without insurance cover there could be a very big bill when this breed of antisocial tenant moves out.
• Loss of rent for accidental damage: Most policies cover landlords for loss of rent following accidental damage such as fire or flood. Even so it's worth scratching beneath the surface because the dollar figure varies greatly and I don't think there is a single policy that offers sufficient cover. Just ask Christchurch landlords. Many of those who had loss of rent cover found it ran out long before their homes were tenantable again. Six months or $20,000 cover may not be enough, even if it sounds like a king's ransom now.
• Loss of rent for malicious damage, abandonment, or eviction: Sadly landlords often lose rent following malicious damage or if the property is abandoned, or tenants evicted. It's not always possible to re-tenant a property the day the old tenant leaves - especially if there is repair work to be done. As a result the landlord bleeds money for as long as it takes, unless they have insurance. Don't assume that just because one of these risks is covered, all of them are. For example, AMI's Premier Rental policy including optional extras covers loss of rent for abandonment, but not the other two.
• Gradual damage: This type of cover is usually limited (or excluded completely by State, Lantern and Westpac) on tenanted property, yet the risks are greater than for owner-occupied properties. Tenants don't always report water leaks to a landlord or they simply may not notice damage to the ceiling from a leaky roof. By the time the landlord spots the damage it's deemed "gradual" and the claim declined.
Damage to tenant's property: Landlords who damage tenants' property may be legally liable for the cost.
• Landlord's contents, fixtures and fittings: Landlords who let unfurnished properties often don't take out contents insurance. They do, however, often have "contents" in the house. That might be floor coverings, blinds, drapes, dishwashers and other items. As a result it's important to have some cover for landlord's contents on the standard home buildings policy.
• Other risks: The list of landlord risks goes on. It's possible to get cover for loss of rent through prevention of access due to failure of utilities or even murder or suicide. If, for example, the home becomes unsafe and is cordoned off or the utilities fail, a tenant may be able to exit a fixed-term tenancy early. Remaining tenants may not be able to return following a murder or suicide. That leaves the landlord with a property that can't be rented in the meantime until whatever is causing the problem is returned to normal.No single insurance policy in New Zealand covers all of these risks. There are those that get close but close may not be good enough if you need to claim.
Even adding the "landlord extension" doesn't always afford an acceptable level of cover. For example, even with all landlord extensions available added to basic homeowner insurance, AA Insurance, ASB, Kiwibank, and Lumley don't cover malicious or deliberate damage and loss of rent for abandonment or eviction.
But don't run out to change your cover if you're with one of those insurers mentioned above. Just to confuse matters there is another type of landlord insurance that is designed to be bolted onto these policies and boost the cover. This standalone insurance from third-party companies doesn't cover the house, but covers most of the risks mentioned above. It's sold by third-party companies such as Rentsure, REAL Landlord Insurance (both underwritten by NZI) and LandlordlordPlan (by Vero).
With one of these, which are priced between $270 and $360 a year, and the right standard policy with another insurer, landlords will be adequately covered. That is if they can afford it.
There are always "buts" when it comes to personal finance. The big "but" for landlords is that getting the right cover costs a small fortune. I looked at one example of a basic three-bedroom Mangere rental that won't be pulling in a huge rent. Getting the best cover, which involved a home policy, extension and standalone additional cover cost $1200 for a year. That's about three weeks' rent.
On the other hand, if your tenants cook one batch of P on the property, then the decontamination costs are likely to run into the tens of thousands of dollars.
The insurance industry will tell you price isn't the be-all and end-all with landlord insurance. They're correct. Cheap often means inadequate cover. Even worse, some landlords choose "budget" insurance hoping to save money. These budget or "market value" policies pay replacement less depreciation. If the house burns down the amount paid out will be significantly less than a sum insured replacement policy and is unlikely to be enough to rebuild.
Most homeowners, including landlords, are likely to be under-insured even if they've chosen "replacement" policies, which these days are limited to a sum insured. More about that can be found here: tinyurl.com/suminsuredinsurance
My recommendation to landlords is to use an insurance broker who specialises in rental insurance. I've spent hours reading every word of every policy mentioned here comparing the minutiae of cover on offer from each and I still worry about the loopholes.
What's more, a broker will look at more than just the big risks. There are many traps for anyone without an in-depth knowledge of the workings of insurance. For example, asks Cheryl Stuart, head of product and facilities at Crombie Lockwood Group, are your landlord's contents covered for replacement or indemnity (depreciated value)? Are your retaining walls covered adequately?
"Is there an inflationary provision to reflect the increased costs of materials and supplies in the event of wide area damage?" asks Stuart.
Using a broker costs the landlord nothing. Brokers get paid a commission by the insurance company and come claim time can go in to bat for you.
If you really don't want to use a broker then at least try to get your hands on a copy of August last year's back issue of the New Zealand Property Investor magazine, which has a handy table comparing policies.
A trick to be aware of is that the fine print in many of these policies requires that landlords carry out obligations such as doing regular property inspections and checking references. If they haven't done inspections and a P-lab is found on the property, or an explosion from said lab destroys it, the insurance company has grounds not to pay out. Ouch.