According to a 2017 report by the Insurance Council of Australia, eight in 10 home owners, landlords and renters were underinsured.
Although it’s not compulsory, landlord’s insurance is a relatively inexpensive way to protect yourself against a variety of problems that may arise, giving you security and peace of mind.
What is landlord’s insurance?
Landlord’s insurance, as the name suggests, is an insurance policy that is specifically tailored to the needs of real estate investors. It’s designed to protect you against common risks that you may encounter when renting out an investment property. These include:
- Accidental loss or damage to the property
- Deliberate damage by a tenant
- Damage caused by floods, storms or fire
- Damage from pets
- Loss of rental income from a defaulting tenant
The cost of a landlord insurance policy is a business expense incurred in the running of the investment property. As such, any policy premiums you pay are tax deductible.
Your investment property is one of your most valuable assets. It might represent a nest egg for your future, or a vital source of income for right now. You protect your other valuable assets, from your car to your family home, and your rental property should be no exception.
It’s important to understand the difference between landlord’s insurance and other types of property insurance.
Often, owners of investment properties believe that a standard home and contents insurance policy will suffice. However, these policies don’t take into account the peculiar risks of a landlord, such as intentional damage or loss of rental income.
Around half of all claims made under landlord insurance policies are for loss of rental income, which isn’t covered under a home and contents policy. This occurs despite the careful checks that your property manager undertakes. Circumstances change, and there may be a number of reasons why your tenant cannot, or will not, pay rent.
Some may be out of their control. A weather event can damage the property so badly that your tenant can’t live there until the repairs are done. In extreme circumstances, a burglar may break into a rental property and trash it badly enough to be unlivable until it is repaired. In both cases, you’re looking at a significant repair bill and loss of rent, and while a home and contents policy may cover the damage, it won’t cover the rental income.
In other circumstances, the tenant themselves may refuse, or be unable, to pay rent. There are mechanisms for addressing the breach and getting your money, but they can take time. Sometimes, your only remedy is to evict the tenant and find someone who can pay, which represents an extra cost to you. In the meantime, a landlord’s insurance policy will step into the breach and ensure that your cash flow isn’t badly affected.
If your property is in a strata complex, your fees generally include an amount for building insurance. Many strata owners, therefore, assume that they don’t need an additional insurance policy.
Building insurance, however, focuses on cover for common property and for the external structure of the building such as roofing and external walls. Carpets, floorboards, curtains, screens and other fittings fall outside the building policy and need to be insured separately. If your tenant, or their pet, causes damage to the interior either intentionally or accidentally, you want that to be covered.
Choosing a policy
When you’re weighing up landlord insurance policies, look carefully at what they cover, and how much they cover you for, and when cover kicks in.
All good policies should cover the following:
Loss of rental income
It is vital that your landlord’s insurance policy covers loss of rental income. It’s the most common reason for policy holders to make a claim. If your tenant fails to pay rent for any reason, or defaults on their lease, you can be reimbursed for the lost income. In addition, if the property suffers damage that means you can’t rent it out, your policy should cover the lost rental income during the repair period.
Your policy should cover you against any damage caused by your tenants or their guests or pets. This may include accidental, negligent and intentional damage.
As well as damage to your property, your policy should cover you for any theft of items that belong to you. Check that it includes theft by both burglars as well as tenants and visitors, and includes any damage caused in the commission of the burglary.
Acts of nature
Sometimes it isn’t a person who causes the damage to your property, but a natural event. Check that your policy covers you for any acts of nature that are likely in your area, including storms, floods, fire, lightning strikes and earthquakes.
As the property owner, you may be liable if your tenant or a visitor to the house injures themselves and seeks compensation. Your landlord’s insurance policy should protect you against that liability.
Periodic Lease Insurance
Tenancy law holds that if a fixed term tenancy expires, the lease remains in place on a periodic basis for as long as the tenant continues to pay rent. A periodic tenancy is usually on a 21-day cycle but may vary depending on the rental period. All the terms and conditions from the original tenancy continue to apply to both parties unless explicitly changed.
Some policies only cover you while a signed fixed term tenancy is in effect. If you and your tenant continue on a periodic basis and something goes wrong, you may find that you aren’t covered. For this reason, it’s prudent to take out cover that will remain in effect during a periodic tenancy.
It’s important to make sure that your policy covers you for enough money to really compensate you for potential losses.
When you’re researching insurance providers, ask:
- What is the excess on the policy? This is the amount that you have to pay out of pocket before the insurance policy ‘kicks in’. It might be the first $500 or $1000, for example, and if your loss exceeds that amount the policy pays the remainder.
- How much does the policy cover under loss of rental income? Generally, your policy will have a cap on the amount and/or the time for which you can claim.
- What is the process of making a claim? Some providers make it easier than others, which can help if you’re already dealing with a complicated set of repairs or contentious break in.
In most cases, you will never need to claim against your landlord’s insurance policy. A good tenant screening process will reduce the risk of you having a bad experience with a tenant, and most tenants are responsible people who take good care of their home and pay their rent on time. Unforeseen circumstances do arise though, and landlord’s insurance can give you much needed peace of mind.
This article contains general advice only. Investors should research multiple policies, focusing on those providers who cater specifically for landlords. If you need help comparing the features and benefits of each, don’t hesitate to consult a professional insurance broker for advice.
To learn more about why landlord’s insurance is a must-have, talk to the team at Peter Blackshaw Real Estate today.