Insurers and property bosses are alarmed about a Court of Appeal ruling out last month, which cleared tenants of an Auckland rental property burnt when a pot of hot oil was left on the stove.

The upshot is that more than 1.3 million tenants in at least 500,000 rental properties could be off the hook if they accidentally damage the house they rent beyond repair and it has to be rebuilt.

Concern was expressed by Seamus Donegan, IAG's enterprise deputy general counsel, who worked with Bruce Grey QC, acting for AMI against the Auckland tenants Kenji and Tieko Osaki to recover $216,413.28 when Mrs Osaki left a pot of oil on high heat and unattended for five minutes. Fire broke out, causing substantial damage to the house.

But AMI lost because the tenants were found to be immune from any liability for the damage to the property, which their landlord had insured.


"We're surprised and disappointed by the outcome," Donegan said. "If damage to the landlord's property was unintentional, we can't take any action to recover money."

IAG, New Zealand's biggest insurer and AMI's owner, takes many claims against tenants, he revealed.

"In light of the Court of Appeal decision, tenants are still liable for unintentional damage to other property such as neighbouring properties and tenants still need liability cover in their contents policies for that risk," Donegan said.

The AMI case cannot now be appealed to the Supreme Court because it was an appeal of a Tenancy Tribunal decision, sought to be overturned first in the District Court and then in the High Court, Donegan said.

Property investor and former lawyer David Whitburn said the decision was worrying because it confirmed landlords were liable for accidental damage to their properties.

"This case is bound to have a ripple effect on both liability insurers and also landlords," Whitburn said.

Building and Housing Minister Nick Smith praised the decision, saying it was common sense, although he indicated discomfort with insurers.

"The insurance industry is being a bit cheeky. When someone pays their fire insurance and then there's a genuine accident, they should pay out."

Insurance Council chief executive Tim Grafton expressed disappointment with both the decision and Smith's views, saying the Osakis did not have contents insurance. That meant the landlord's insurer, AMI, had to pay for the damage caused to the house, which he said was unfair.

Adam Heath, Vero's portfolio and products executive general manager, was surprised by the ruling.

" ... we are currently working through the implications of this decision from an insurance perspective," said Heath.