Rental properties have become a popular investment option among Australians as they offer property owners the opportunity to generate positive cash flow while also holding onto an asset that can potentially grow in value. Renting out a property, however, does expose investors to a range of risks.
In Australia, investors are not legally required to take out landlord insurance, but because of the benefits this type of coverage provides, it has become best practice in the industry.
Landlord insurance provides protection against possible financial loss related to owning a rental property – and because paying for such coverage is considered as an investment expense, the premiums are tax-deductible.
Most insurance companies in Australia provide this type of policy, which generally covers loss of rental income, and damage to the property’s structure and the contents inside it.
Landlord insurance applies to all kinds of investment properties – including houses, apartments, flats, and townhouses. However, it is different from homeowners’ insurance, which only provides coverage to owner-occupied dwellings.
What’s covered and not covered by a landlord insurance policy, along with what can be added, varies between providers, but standard coverage includes the following:
|
Coverage |
What it pays for |
|---|---|
|
Building |
Damage to the structure of the property caused by a covered event such as fire, flooding, theft, and vandalism |
|
Contents |
Damage to detachable items within the property, including blinds and curtains, carpets, kitchen appliances, and lighting fixtures |
|
Loss of rent |
Rental income lost in an event the property is uninhabitable due to damage, or if a tenant defaults on their payment |
|
Public liability |
Medical and legal costs resulting from injuries occurring within the rental property’s premises |
|
Legal expenses |
Costs incurred from the litigation, settlement, and punitive damages resulting from injuries, illnesses, and death within the rental property’s premises |
Landlords can also purchase these optional extras:
|
Coverage |
What it pays for |
|---|---|
|
Pet damage* |
Repair and replacement costs for damage caused by pets |
|
Disaster-prone areas |
Damage or lost rental income caused by flooding or bushfire if the property is located in a high-risk area |
|
Change of locks |
Cost to change the locks of a rental property, especially if the previous tenant left with the keys |
*While Victorian tenants who want to bring pets are required to seek permission from their landlords, landlords must have a good reason to refuse this request, according to Consumer Affairs Victoria. Rental property owners can apply to the Victorian Civil and Administrative Tribunal (VCAT) for an order to refuse permission.
Not all types of damage, however, are covered by landlord insurance. Some of the common exclusions are general wear and tear, and damage caused by insects and rodents. Portions of the property that are not rented out are likewise not covered. Similarly, coverage does not apply if the landlord has breached their leasing agreement with the tenants.
A range of factors come into play when it comes to determining the premium of a landlord insurance policy. These include the value of the property and its contents, the type of dwelling and its structural integrity, previously paid out claims, the property’s geographical location, and additional coverages.
Several comparison websites peg the cost between $1,000 and $2,000 annually. However, yearly premiums in some locations, including North Queensland, which is prone to cyclones, can reach $3,000 to $4,000.
It is the landlord’s responsibility to keep their rental properties in a safe and habitable condition, but sometimes issues can arise even with the most reliable tenants. Here’s what landlord insurance specialists say are the most common claims rental property owners make.
Landlords can lose rental income for several reasons, including if the tenant defaults on their rent or abandons the property while owing rent. Damages to the home, which render it unhabitable, can also cost rental property owners financial losses.
Carolyn Parrella, head of niche distribution at specialist Terri Scheer Insurance (TSI) told the Sydney Morning Herald that loss of rent accounted for 40% of the claims that the company dealt with last year. Recent figures from EBM RentCover, meanwhile, revealed that “straight loss of rent” made up more than half of insurance claims it has received from landlords, with 80% of claims for accidental and malicious damage also claiming for loss of rent.
At QBE, storm and flood damage topped the insurance claims list, comprising 34% of all landlords’ claims in 2019, according to chief customer officer of customer lines at Frank Costigan.
“It’s not possible to avoid severe weather, but landlords can act to stay on top of property care and general maintenance,” Costigan added.
Storm damage is also on the top five of TSI’s list.
“If a storm wrecks a carpet or curtains or furniture, it’s good to know you’re covered,” Parrella said. “Again, any contents damaged in a storm would be covered by a landlord policy; the building may be covered by a building policy.”
More than a fifth of claims from landlords at QBE are for water damage, which includes bursting pipes, overflowing baths, leaking roofs, and sewage back-up.
“Our most current data indicates that more than half of landlord insurance claims are caused by two factors – weather issues and water damage,” Costigan said.
Water damage has also cost EBM RentCover more than $2.4 million in insured losses in 2019.
The majority of claims at EBM RentCover were for tenant-related issues, including accidental damage. Combined with loss of rental income, claims were worth more than $13.6 million.
Parrella, meanwhile, categorised tenant damage, which accounted for 17% of the insurance claims the company received from landlords, into three groups.
“This could be accidental damage, or malicious damage, or damage that’s deliberately caused but without malicious intent,” she said. “Malicious damage can be things like holes kicked or punched in the walls. Accidental damage could be something that has been spilt on a carpet, and the carpet’s ruined. Deliberate damage is something the tenants have done deliberately but not with malicious intent, like hammering nails into the wall to hang pictures without permission.”
This can be caused by an electrical fault or something left burning like a stove or a candle.
“There are a lot of fires in winter in tenanted properties,” Parrella said, adding that this type of damage can be “devastating” for rental property owners.
“Having building insurance in place may cover the loss of your building up to the sum insured,” she said.
Injuries occurring within the rental property’s premises are also among the top claims insurers receive.
“If tenants or visitors are injured on a property, the landlord can be liable because it’s their legal obligation to keep the property in a safe and habitable condition,” Parrella said. “Swimming pools are a perfect example of that. Landlords must make sure they comply with the relevant safety regulations.”
Glass breakage is considered an insured event and not accidental damage, according to EBM RentCover. In 2019, the specialist received 208 claims for broken windows, shower screens, basins, and sinks, totalling almost $335,000.
Motor fusing does not usually come into mind when it comes to common landlord insurance claims, but EBM RentCover’s recent figures showed about 150 claims of this type were worth about $226,000. Culprits include air condition units, fridges, freezers, ovens, stoves, dishwashers, washing machines, and dryers, according to the insurer.
