RESOURCES: Got insurance? (No, really?)

Having a specialised insurance policy to cover your property is one of the most important considerations as a property owner and landlord. There are risks associated with being a landlord that many dwelling insurance policies do not cover.

Check your policy covers you for short term holiday rental tenancy

Does your holiday home have the correct insurance coverage for short term holiday rental?  Many property owners believe that because they have insurance, they will be covered.  What needs to be considered is the actual extent of that cover.  Claim time is when your insurance matters, and gaps in your insurance are best dealt with now, before a loss occurs, otherwise you could find yourself without the cover you expected.

The main insurers

We made some calls to New Zealand’s top-3 home insurers, AMI, State Insurance and Tower Insurance.  For the purpose of our evaluation our “control property” was a 130 sq.m. 1960’s weatherboard bach in Mount Maunganui.

We were specifically interested in how these insurers handled what we consider to be the top three areas where standard policies can fall short. So we asked:

AMI

AMI refused to insure the property once they found out that it was to be rented out as short term holiday accommodation.  We said, “so AMI will not insure these types of properties”  their response was, “No they would not insure them” and they then suggested we go to IAG (which is NZI and State).

Total call time: 7 minutes. 

State Insurance

We explained the type of property and they said that they wouldn’t provide cover under their dwelling policy.  Their reasoning was that because the property was rented out for short term tenancies it was a business rather than a rental property or holiday home.  They referred us to the State Business division.  State Business said that they were prepared to cover the property under a commercial policy with a specified sum insured, with added business interruption (for loss of rental) and liability cover.  The cost of this business package would be $1,359 (incl. GST)
They referred us to their policy wording for answers to our questions.

Total call time: 35 minutes (including 15 minutes on hold).

TOWER Insurance

TOWER would cover the property under a holiday home/rental property policy, as long as there were less than 10 bookings per month. TOWER would not insure if there were to be more than 10 bookings per month. 

Answers to our questions:

1) Yes the policy does cover damage and theft by short term holiday tenants.  Malicious/deliberate damage by tenants is covered by the policy, but this only covers the house and not the landlords fixtures and furnishings.  The total excess for each malicious/deliberate damage claim appears to be $1,100.

2) The property is covered while vacant but once the property is vacant for more than 60 days cover is suspended immediately unless Tower are advised.  They will then continue to provide cover at their option and different terms may apply, e.g. a higher excess.

3) Your liability as an owner is covered up to a maximum of $2,000,000, with bodily injury and legal fees cover limited to $100,000 each.  We were directed to policy wording for full details of this cover.
The annual premium for our holiday home was $665.93 (incl. GST).

Total call time: 30 minutes

Update provided by TOWER Insurance on 04-Apr-2012:

TOWER is able to insure holiday homes under a standard dwelling policy.  However, holiday homes that are used for short term rentals are generally not able to be insured under this policy as short term rentals are considered a commercial activity.  TOWER currently does not have a commercial policy that can cover a property used for commercial activity with a residential aspect to it.

TOWER may be able to offer cover for a house if it is used primarily as a holiday home and is only rented out for a certain period in the year, for example, over the summer season.  This would be considered on a case by case basis and terms (if any) applied accordingly.

Please call TOWER on 0800 808 808 to discuss your situation.

The problem with standard insurance

The problem with having a standard dwelling insurance policy is that you are exposing yourself to a number of significant risks. To highlight a few of these:

• Claim declinature: Many insurers will not provide cover for dwellings rented out on a short term basis.  If your insurer becomes aware that your dwelling is being let for short term rental they could outright decline your claim on the basis of ‘material non-disclosure’.  This means your policy will be void and that no claims will be paid, even if you have a rental insurance policy. 
• Theft or damage by tenants: In the event that a tenant steals from you, or causes damage of a minor or major nature you could be out of pocket without the right insurance cover. Total loss in a house fire or having your holiday home converted to a P-lab is probably the worst case scenario here.
• Landlords furnishings and chattels: Curtains, floor coverings, appliances and furniture are not considered to be a part of your dwelling. Without the right insurance policy you will not be covered for these valuable items, as the policy will only cover the physical dwelling and not what’s inside.   
• Cover during periods of un-occupancy:  If your property is unoccupied for more than 60 days it is likely that your policy will cease to provide cover.  When it comes to short term rental properties this can be a major issue.  If your house was to suffer a major loss on the 61st day the insurer could decline your claim under their occupancy condition.  It is crucial that you select the right insurance policy that will continue to provide cover during all periods of unoccupancy.
• Loss of rents: After a major loss it will be likely that your dwelling cannot be tenanted.  This in itself creates a major financial exposure, especially if you are leveraged-up and dependent on rental income for ongoing obligations such as rates and loan repayments.  Without the right insurance policy you will not be covered for the lost rental income from confirmed and potential bookings.
• Landlords liability: Landlords and property owners owe a duty of care to their tenants. As a landlord you could be held personally responsible for damage to your tenant’s property or worse still for personal injury to your tenant.  Without the right insurance policy you may be forced to bear the significant cost of any damages and legal fees yourself.

As a property owner and landlord you face some considerable risks.  Because these risks can jeopardise the sustainability of your investment it is very important that you manage them correctly.  Having just any insurance policy does not mean you’re automatically covered, good risk management is about putting in place a policy that will cover these insurable risks. 

Our recommendations

Check your existing insurance.  Don’t think that just because you’ve got insurance that you’re covered. Gaps in your insurance cover are best dealt with now, before you have a claim. 

Bookabach has put together an insurance product in collaboration with Inito and Lumley General Insurance. Click here to find out more about this (and get an online quotation).

DISCLAIMER:  The information contained in this article is generalised insurance advice only.  Please consult with your insurance company or broker about your specific needs.