Standard home insurance will not cover the extras landlords need.

Owning a rental property can be an excellent investment, but it inevitably comes with risks when renting to people a landlord doesn’t know.

Landlords will be footing the bill if things go wrong with tenants or property.

Mitigating potential losses, and understanding these risks, is essential to success as a landlord if there is an accident. Standard home insurance will not be enough.

A house insurance policy may offer some cover for a rental, with a standard house policy covering the property’s structure, says Richard Godman, Vero Insurance manager technical underwriting, consumer insurance.

“Typically, though, it won’t cover any furniture provided for tenants’ belongings – as a rule of thumb, it will only cover anything that is permanently affixed to the house such as a fitted kitchen, a bathtub or the carpet.”

As high interest rates and rising council and insurance costs bite into landlords’ incomes, one of the most asked questions by property investors is do they need specific landlord insurance for rentals.

Flooding is likely to become a more regular issue and insurance policies are likely to change as the climate crisis worsens.

Depending on who the landlord is speaking to, the answer is usually a resounding “yes”.

While most landlords charge tenants the maximum four-week bond to cover intentional damage, rent arrears, meth contamination and loss of rent, it doesn’t usually cover the loss.

Landlord insurance, on the other hand, covers other risks that can be associated with renting out a property that don’t fall under a normal home and contents or strata title policy.

For many investors taking out landlord insurance gives them peace of mind as it covers much more: loss of rent if a tenant leaves unexpectedly, theft and meth contamination.

However, not all landlord policies are the same. For instance, some offer cover for rent arrears and others don’t. Part of what makes it difficult to choose which policy suits a landlord’s specific needs is that each policy varies from insurer to insurer, so it’s essential for rental property owners to carefully read and understand the fine print before choosing.

When dealing with natural disasters, loss of rent can be crippling. Landlord insurance can cover this.

Talk to a Broker

Opes Insurance says it’s best for landlords to work through an insurance broker to get a policy tailored to their needs, but there are basics.

Godman says it’s important to understand how landlord insurance cover works and what the options are, so landlords can make decisions on how to protect their investment in a way that will suit them.

“If a property investor wants to, they can buy specific landlord cover, which might be add-ons to a standard home insurance policy, or a separate landlord insurance policy. For example, Vero’s house insurance policy has an optional landlord extension, which gives cover for things like loss of rent.”

However, before landlords can make any sort of claim there are a few things they are required to do, such as selecting tenants carefully, actively monitoring rent payments and making property inspections every three months, even if they know and trust the tenant.

If they don’t comply with that, their insurance may be considered void and the insurance company will not make a payment in the event of a claim.

Keeping records of the condition of the property from the start of a tenancy – taking photos and logging any damage – makes claims easier to settle. This is important for identifying issues as soon as possible.

Keeping on top of repairs to prevent gradual damage is also important. If blocked guttering overflows and leads to an internal leak, for example, deficient maintenance could be determined as the cause of the loss and may not be fully covered by insurance.

Also important is security, by making sure door and window locks and other security features are in good working order. And always let the insurer know if there are changes to the rental, such as adding extra rooms or building a self-contained unit, so the policy can be updated.

Maintenance of a property is important as insurance may not cover a home if it has not been done correctly.

Loss of Rent

The first major benefit of landlord insurance is loss of rent.

Most insurance companies will cover landlords if their house is damaged in an earthquake, flood, volcanic activity, tornadoes or something similar.

The cover usually ranges from six weeks to 12 months. In terms of the maximum cover, it’s typically up to $20,000 (about $400 a week).

Similar levels of cover are offered by insurance companies if tenants can’t live in the rental.

“That probably works out to be okay in most types of policies, as landlords will not be paying a property manager or having to account for vacancy as the property will be uninhabitable,” says Opes managing partner Andrew Nicol.

“They will still be able to pay their mortgage, which for most investors is the important part. However, if a tenant falls into arrears, not all policies will cover this. If a landlord arranges a policy to cover arrears they will be paid out if a 14-day notice is issued before a claim is filed at the Tenancy Tribunal and the tribunal awards in their favour.

“Any arrears awarded by the tribunal will usually be paid by the insurance company within five days.”

If a tenant does “a runner” or a landlord has to terminate the tenancy for arrears or unlawful behaviour, insurance companies will, in most cases, cover this.

“For example, if a tenant signed a 12-month tenancy agreement and left after six months or they weren’t paying the rent and the landlord pursued them through the Tenancy Tribunal and they agree to pay the arrears at $10 a week, the relevant section of the policy can be initiated and the landlord can make a claim.

“We’re talking about making sure a landlord’s cashflow is secure and they can hold on to the property,” Nicol says.

Non-accidental damage can be covered by some insurance.

Damage Claims

Landlord insurance provides cover for incidents such as red wine stains on the carpet or a ball through a window.

Over time, tenants might cause minor accidental damage – like multiple stains on the floor – that add up to the landlord wanting to replace the carpet. But the way a Vero policy and others work is that each “event” of damage incurs its own excess, so several individual stains over many months will probably incur a higher total excess than the claim is worth (unless it can be proved the stains were the result of a single incident).

Where it gets complicated for landlords is that they may not see the damage accumulating over time if they’re only inspecting a property infrequently, so it feels like one event, Godman says.

“It’s important to keep in mind what kind of damage is just wear and tear requiring routine maintenance, and what kind of damage should be an insurance claim.”

For damage that isn’t accidental (some call it malicious) there can be protection for loss caused by an intentional act of vandalism or theft of chattels by a tenant or one of their guests.

For example, Vero offers an optional landlord extension which covers malicious damage caused by tenants, up to $30,000.

While landlords can go after the tenant through the tribunal, it’s unlikely they will be awarded the amount claimed or get it in a lump sum.

They may, however, be able to recover the insurance excess from the tenant/s, but the landlord will need to let them know what the excess is and provide them with a copy of the insurance policy. Godman says claiming back any excesses needs to be handled between the landlord and tenant – an insurer won’t be able to get involved.

Meth contamination is a regular claim brought before the tribunal. It’s essential to have insurance for any clean-up as it is a significant cost. But as with all policies it pays to shop around. Some include smoking meth as an optional extra in their cover, while manufacturing meth is already included.

Nicol says landlords have a duty to make sure new tenants are in a safe environment.

“There have been cases where tenants have been refunded their entire rent and damages by the tribunal because they were living in a meth contaminated house.”

In one case, a meth test had not been done at the start of the tenancy. A test was done later, and the property was found to be contaminated. Nicol says it could well have been the tenants were smoking meth, but they lodged the claim, were successful, and there was no way of knowing.

“All of a sudden it was the landlord’s problem and not the tenant’s.”

Airbnb and short-term rentals are covered by commercial insurance.

The Airbnb Scene

Insurance for Airbnb properties is another story. It’s under commercial insurance.

If a landlord is renting a property on Airbnb, not only do they have to pay higher council rates in many areas, but they also have to pay commercial insurance, which is more expensive. It’s a lot of extra cost that people don’t think about.

Body corporates also need to know for insurance purposes who is using their apartment/property as an Airbnb because it will come under a different policy. If a body corporate is insuring an entire apartment building, for example, the Airbnb landlord might have to go to another insurer for the extra landlord’s cover.

The Cost

Costs for residential landlord insurance, which is an add-on to regular house insurance, is a ballpark figure of $2,000 a year plus, depending on the quality of the policy.

Factors like the size, value and location of the rental also have an influence on the premium.

Insurance costs can be kept down by pragmatic and proactive management by landlords. A landlord who focuses on tenant selection, vetting, regular property inspections and maintenance, including plumbing and electrical checks, will outperform their peers.

The Essentials

These seven instances of what an ideal landlord insurance policy should contain aren’t available through all policies, but many are common between them. Check your policy for these:

• hidden gradual damage
• loss of rent from uninhabitable due to earthquake or act of god
• unpaid rent arrears from tenants
• loss of rent if you have had to evict your tenants or if they have left without notice
• malicious damage caused by tenants
• theft of chattels
• meth contamination.