By Jenée Tibshraeny
Landlords are being warned they should consider a Court of Appeal judgement that’s ruled they’re now liable for any damage their tenants accidentally cause to their properties, as a timely reminder to check their insurance is up to scratch.
Insurance Australia Group (IAG) – New Zealand’s largest general insurer, which is at the centre of the case – says the landmark judgement underlines how important it is for landlords to make sure the sum-insured on their rental properties is updated.
On the flipside, IAG’s Deputy General Counsel of Enterprise Seamus Donegan, says tenants shouldn’t see the ruling as an opportunity for them to ditch their personal liability insurance cover.
The warnings stem from the ‘Holler and Rouse vs Osaki and Anor’ judgement, released earlier this month, which rules:
1. Residential tenants are immune from a claim by the landlord where the rental property suffers loss or damage caused intentionally or carelessly by the tenant or the tenant’s guests.
2. By enacting the Property Law Act 2007 Parliament didn’t intentionally adopt different positions for commercial and residential tenancies and has expressed this clearly so that it is inappropriate for the Court to construe the Property Law Act 2007 and the Residential Tenancies Act 1986 in a manner which achieves a different effect.
The ruling has meant the landlords of a property, burnt down after the tenants left a pot of boiling oil unattended on a stove for five minutes in 2009, liable for the damage. This has seen the landlord’s insurer, AMI (part of IAG), fork out $216,000 to cover the costs.
Donegan clarifies the judgement means that if there’s a shortfall between the money an insurer pays a landlord to repair the damage, and the actual cost of repairing the damage, the landlord can’t pass the bill on to the tenant. They also can’t get the tenant to cover the cost of the excess they pay on their insurance.
Due to the path the legal battle has taken over the last seven years, Donegan says the matter can’t progress to Supreme Court.
So what does this mean for you and I? Donegan has the following advice:
Tips for landlords:
- Make sure you have enough insurance to meet the cost of repairing any damage caused to your property by a tenant. Ensure your sum-insured is updated in line with current building costs, so there won’t be a shortfall in insurance cover.
- Double check your insurance policy document to make sure you’re meeting all the conditions of your cover. Most policies require landlords to document an inspection of their property every three months for example. It may be prudent for landlords to do more frequent inspections to key an eye on how the property is being cared for, particularly if the tenants are new.
Tips for tenants:
- Think twice before ditching the contents insurance you took out for its personal liability cover, which would have kicked in if you accidentally damaged the property you rent. While the Court of Appeal ruling means you won’t need to use this personal liability cover if you damage your landlord’s property, it will come in handy if you damage anyone else’s property – your neighbour’s house or your mate’s boat stored at the property you rent, for example.
People who rent apartments, townhouses, or units, should be particularly conscious of this, as it’s easy for a fire you start where you live, to spread next door.
A partner at Fee Langstone law firm, Craig Langstone, also points out that landlords won’t be covered if the damage caused by their tenants is intentional or through criminal activity – IE an explosion caused by the tenant using the house as a meth lab. See this story for more on insurance and meth-ridden properties.
What the ruling means for the insurance industry
“We were surprised and a little disappointed with the outcome,” Donegan says.
“At the moment, when we underwrite a landlord cover, we ask many questions about who the landlord is, to ensure, not only we have adequately calibrated the amount of cover required, but we’ve looked at who the landlord is as a person to look at the moral hazard. Is this person likely to be honest? Is this person likely to care for the property which we’re insuring?
“Now we’re also at risk for the actions of the tenant, and at present we know nothing about the tenants who are occupying these properties. All we have in the policies is a requirement for the landlord to conduct inspections at three-monthly intervals.
“Going forward, we may have to start asking landlords to give us information about the tenant who’s occupying it, and if necessary get privacy disclosures from that tenant, so we can find out a little bit more about what sort of risk we’re taking on with that tenant.”
Whether we should expect premiums to change
Donegan says it is possible insurers may change the way they price the premiums landlords pay, as they take their tenants’ risk profiles into consideration.
“The fact is most of our pricing is also based on the assumption that we can, if a loss occurs, make a subrogated recovery against the party who’s caused it. We no longer can price based on that assumption.”
He says this uncertainly may mean landlords will have to pay higher premiums, but it’s too early to say for definite.
Donegan doesn’t clarify whether on the other side of the coin, insurers would consider dropping premiums tenants pay for contents insurance, as they will no longer make claims under their personal liability cover if they damage the properties they rent.
“It does eliminate the exposure in terms of potential claims by landlords against their own tenants. It doesn’t take away anything from the exposure for claims by third parties against those tenants. So again we’d have to look carefully at how that might affect pricing.”
While each insurer will have to access how they’ll adapt their underwriting and pricing mechanisms in light of the decision, Donegan says the industry is considering whether to ask the Government to make some legislative changes around the matter.
“We’re reading the ruling very carefully, looking at what parts of the Property Law Act and the Residential Tenancies Act have led to this outcome, and we’ll be discussing that internally within the ICNZ [Insurance Council of New Zealand] and perhaps looking to make representations to Government.
“There are changes that could be made to the Residential Tenancies Act to make it more clear what the underlying intention was at the time it was enacted.”