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Simon Webster
Many first-time landlords assume they will be covered if their home is damaged or unforeseen circumstances leave tenants unable to pay rent. But too often, the reality can be different – and potentially much costlier.
Standard home insurance, owners corporation insurance and tenants’ bonds will provide some cover. But having specialist landlord insurance in place can be important, says Stavros Ambatzidis, co-founder of OBrien Real Estate in Melbourne.
“The biggest risk for first-time landlords is assuming that because they own a property, they’re automatically protected,” says Ambatzidis, who often sees people move out of their homes and rent them out, thinking their existing insurance is all they need.
It can be helpful to consider how your investment might perform under downside scenarios, says Carolyn Parrella, head of customer service at landlord insurance specialist Terri Scheer. “For example, as a landlord, how would you cope financially with the possibility of a prolonged period of vacancy, major repairs, litigation, natural disasters or regulatory change? Having steps in place to manage these risks is important.”
Rental income can stop or be reduced for any number of reasons, from the property becoming untenantable while repairs are carried out, to tenants suffering hardship after losing their jobs. It may happen more than you might expect; loss of rent is the third most common landlord insurance claim, Terri Scheer data indicates.
Here are five common myths about insurance on rental properties, and the realities that landlords need to understand.
Misconception: “I already have home insurance, so I’m covered.”
Reality: Once a property becomes tenanted, the risk profile changes significantly. Owner-occupier policies often do not cover rent default, tenant damage or landlord legal liability, for example.
Consequence: “The landlord may have a valid building claim but no cover for the rental-related loss that caused the biggest financial hit,” Ambatzidis says
Misconception: “The owners corporation insurance and the bond will cover everything.”
Reality: “One of the biggest misunderstandings is the belief that strata insurance always provides full protection for all risks,” says Parrella. “It is very much focused on the structure and common property, and generally will not provide cover for the interior of a lot, such as carpets, curtains, blinds or light fittings.”
And while tenants’ bonds can be useful, they only stretch so far. “They will provide limited cover in the event of tenant damage or unpaid rent, but this may be unlikely to cover more than a few weeks of rent.”
Consequence: Landlords taking this approach may have significant gaps in their cover, including unpaid rent, internal fittings, legal costs and major tenant damage.
Misconception: “I just need to insure for the basics.”
Reality: While paying for minimal cover to reduce your insurance premium may seem like a good idea at the time, it can leave you exposed. “Many landlords underestimate the replacement value of fixtures, floor coverings, appliances, window furnishings and rent-loss exposure,” Ambatzidis says.
Consequence: “In a major event, they may only recover part of the overall loss, leaving them to fund the shortfall.”
Misconception: “My insurance will cover whatever goes wrong.”
Reality: Even with a good landlord insurance policy in place, property investors still have maintenance and repair obligations. “Some risks can be transferred to insurance, while other risks need to be managed by the landlord, such as maintenance issues,” Parrella explains.
“If a leak, mould issue, rotted deck, failed waterproofing, or termite damage stems from lack of maintenance, insurers may decline the claim,” says Ambatzidis.
It is also worth noting that insurance typically doesn’t cover wear, tear and gradual deterioration.
Consequence: “The landlord may bear the full repair cost and the associated rent loss,” says Ambatzidis.
Misconception: “If the tenant has a dog, any damage is insured.”
Reality: “Some policies cover domestic pet damage, while others exclude it or limit the amount claimable,” Ambatzidis says. “Policy wording matters enormously here. For example, some specialist policies include pet damage but cap the claim.”
Consequence: “Scratched floors, chewed skirting boards, or urine-damaged carpets can become an out-of-pocket expense.”
Do your research
Ambatzidis recommends reviewing your insurance carefully to ensure you have a policy in place that covers your needs.
“Many experienced landlords treat insurance the same way they treat leases and maintenance: as an active risk-management tool, not just a compliance exercise,” he says. “The cheapest policy is rarely the most cost-effective if the wording leaves critical gaps.”
Parrella’s top lesson for property investors: “It’s not a set-and-forget process. Constant engagement with those who take care of it – property managers, tenants, finance brokers and insurers – is essential.”
Terri Scheer is Australia’s leading landlord insurance specialist. For more information, visit www.terrischeer.com.au.
This article is general information only and does not take into account your objectives, financial situation or needs. Consider whether it is appropriate for you and seek independent advice before making any decisions.
Insurance is issued by AAI Limited ABN 48 005 297 807, trading as Terri Scheer. Before buying insurance, read the Product Disclosure Statement (PDS) and Target Market Determination (TMD) available at www.terrischeer.com.au.
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