When it comes to insuring your property, not all policies are equal.
Standard home and contents insurance will not protect against many of the risks that landlord’s face. Whether it is loss of rent due to an absconding tenant, malicious or accidental damage, or a range of other circumstances including tenant hardship, risk comes in many shapes and sizes.
Insurance you need to consider:
- Building insurance: This insurance must be in place before the settlement on any property. As well as fire and storm damage, you can add damage caused by tenants when a property is for investment purposes.
- Public liability insurance: This is designed to protect the owner against a damages payout if anyone is injured on the premises as a result of negligence.
- Landlord’s insurance: Landlord’s insurance is one of the most important purchases a property investor can make. For an outlay of a few hundred dollars a year, you can be covered for not only damage to buildings and contents, but also for rental default and damage by tenants. However, as some investors have found out during the Queensland floods, it pays to make sure you get the right coverage for your property – otherwise you could be left with an expensive repair bill.
- Income protection: While not compulsory, it is important to consider income protection insurance as a landlord. Could you maintain any out of pocket expenses on your property should you be unable to work?
There is no legal requirement from a rental/management perspective to having insurance, but take it from me, the risk is real and insurance is imperative.
For your reference, here is a quick summary of the different types of insurances relevant to investment property owners:
House and contents insurance
House insurance typically covers your home, garage (and any other buildings), walls, gates, fences, and driveways. Experts recommend you have replacement cover for all included items and provision for the full cost of rebuilding.
Contents insurance covers the fittings inside your home (for example, carpets and curtains) and your personal possessions. You are not responsible for a tenant’s possessions, however, it is important to cover your fixtures and fittings with your component of contents.
You’ll need landlord’s insurance if you own an investment property that’s being rented for residential purposes. Landlord’s insurance can cover you for buildings, contents, loss of rent, rent default, theft by a tenant, and liability, among other losses. The good news is landlord’s insurance is tax deductible!
- What to look for in an insurer
The key with buying insurance is to make sure you get adequate coverage for your situation. The cost of landlord’s insurance can vary wildly, with some products costing less than half that of others. However, cover and service can vary significantly. Check how and when you can claim; most insurers now operate 24-hour claim lines. Find out what you need to provide in order to claim, and what happens in worst-case scenarios (for example, if receipts are destroyed in a fire).
2. Coverage to choose
In terms of coverage, make sure you’re covered for acts of nature. As has been highlighted by the recent spate of natural disasters that have affected Australia, damaging conditions can strike at any time. Therefore, it is important to ensure you’re covered for the unexpected.
Events to consider coverage for:
- storm (including damage from lightning strike)
- flood (look closely at the ‘type of flood’ covered, for example, some policies may not cover flooding from rivers bursting their banks)
- tsunami and ‘ocean movements’
- civil unrest and rioting
Check what your buildings cover will actually pay for. A buildings policy should protect the structure of your property, including:
- pipes and cables
- fixed appliances
- gas or plumbing systems
- fixtures and fittings (except for carpets loose floor coverings, curtains, and internal blinds)
- exterior blinds and awnings
- some external structures
Building insurance should also cover you for the complete or partial destruction of the property.
Insurance becomes a little more complicated when it comes to units. As the exterior of the building is typically insured by a body corporate, you need to rely on its insurance for damage to structures. However, you can purchase specialist insurance, usually called ‘strata title protection’, or similar, which will cover you in the event the body corporate is under-insured.
You should also be clear on where you stand on contents, even if you’re not providing a furnished property. Contents insurance covers items that are not viewed as part of the structure of the property such as:
- household goods
- internal blinds
- loose floor coverings
- light fittings that are not permanently fixed to the buildings
- domestic appliances and utensils
This is the most important aspect of landlord’s insurance, and protects you against loss of rent. Not all policies cover all events, but most should protect you against loss of rent due to:
- tenant eviction due to a court order
- tenants obtaining a hardship order
- unexpected death of tenant
3. Insurance buyer beware
In my many years of property management, and as an investor, I have found most people take up insurance for their investment property through the company they are using for their personal home or car. While this is certainly an option, it’s important to review the policy. Many insurers have what they call a ‘landlord’s policy’, but these policies can be rife with loop holes, meaning when it comes time to make a claim, the landlord can still find themselves out of pocket.
Many of these policies only kick-in after four weeks of loss, or will charge an excess equivalent to four weeks’ deposit. Claim limits also vary from insurer to insurer – some will pay 12 weeks’ rent, others up to a full year, and others up to a fixed monetary amount.
I choose not to recommend insurers by name, but I can say I have found companies that review landlord’s insurance as part of their core business typically the best providers.
Given the ice epidemic in Australia, I would also suggest if your provider offers coverage for drug lab removal and clean up, you attach it to your policy. Another option to consider is restrictions for periodic tenancies, sublet properties, or the use of short stays such as Airbnb
Making sure you’ve got the right level of cover is paramount; the last thing you need is to be lying awake at night worrying about whether your policy will pay out, especially if the worst has already happened. You should never automatically assume you’ll be covered and, if in doubt, it’s better to be over-insured than under-insured. After all, while you may save a few hundred dollars a year by plumping for what seems to be the cheaper policy, that saving could be wiped out many times over if you end up paying-out expensive repairs that aren’t covered
The most common mistakes landlords make when insuring rental properties are:
- buying on price – look for value not the lowest cost
- not including deliberate fire by tenant on the policy – some policies exclude this
- not considering excess – how much, and can the bond be used as payment?
- under-insuring – insuring for than true replacement value
- not checking if malicious damage by the tenant is covered by the policy
- not checking if accidental damage is covered by the policy – some insurers limit cover to the contents, not the building
- not checking the qualifying rules – beware of the fine print
- not check for complete cover – some combined house and landlord policies offer less cover than a specialised landlord cover
- not determining whether they need a court order to claim rent default
- assuming the body corporate already insures the property – it might not cover liability if someone hurts themselves inside the property
- not checking periodic tenancies or lease continuation – some policies won’t pay for claims if the written lease has expired
- When you figure out “you don’t need insurance” – a reliable tenant and a good property manager is not enough to protect*. 12 tips provided by EBM insurance.