By Gary Hunter, Insurance Expert at Finder
If you have an investment property, you’ve probably thought about how you can protect your income. One of the most common ways to do this is landlord insurance.
It can come in handy if you get a bad tenant, your property is damaged or there’s a legal issue – but if you already have the bond to fall back on and you’re very careful about the tenants you lease the property to, is it actually worth getting?
So, what is landlord insurance and what does it cover?
In a nutshell, landlord insurance covers you for the most common risks associated with owning an investment property. These include:
1. Damage from unexpected events
Landlord insurance covers a long list of unexpected events including fires, bushfires, storms, floods, escaped water (such as a burst pipe) and theft.
In this sense, it’s similar to home insurance but it goes a little further – some policies can also cover you if your tenant or their guest damages or vandalises your property.
How much does it pay out? Is there a catch?
All landlord insurance policies will pay you for the full cost of repairs or replacement in these situations – but only up to the amount you’ve insured your property for (you’ll usually be asked to select an insured amount when you buy a policy).
So for example, if a storm damages the roof of your property, a landlord insurance policy should pay for all of the repair costs.
However, you might not be fully covered if something major happens and your property is completely destroyed.
For instance, if you’ve insured your property for $750,000 but it actually costs $900,000 to rebuild, you would have to fork out $150,000. To make sure this doesn’t happen, it’s worth using a building calculator to help you work out how much to insure your property for.
2. Loss of rent
Loss of rent makes sure you keep receiving a rental income if your property becomes uninhabitable because of an insured event such as a fire, storm or flood.
For example, if a burst pipe causes serious damage to your property and it’s not safe for your tenant to stay there anymore, most policies can cover your rent for up to a year.
3. Rent default
There’s also a risk that your tenant will default on their rent payments. While the majority pay their rent on time every month, anyone can fall on hard times, especially during economic downturns.
If your tenant can’t pay the rent because they lose their job, landlord insurance can cover you. In most cases though, you’ll need to pay extra to have this benefit included.
4. Legal fees
Landlord insurance can also cover legal expenses up to $20 million or $30 million in case the tenant or a visitor injures themselves at your property and they sue you.
It may not be that common but when it does occur, it’s often an extremely costly expense.
What type of landlord insurance is right for me?
There are 3 types of landlord insurance. The type you need will depend on the property you own:
● Building insurance. This covers loss or damage to the building. It's probably best suited to anyone who owns a freestanding house that isn’t furnished.
● Contents insurance. This covers damage to the items you own and keep at the property – for example, whitegoods and furniture. It's best for landlords who own a furnished strata property such as an apartment because the strata insurance you pay should cover the building. It doesn’t cover your tenant’s belongings.
● Building and contents. As the name suggests, this protects the building and the items you keep at the property. If you rent out a furnished house, this might be your best option.
How much does landlord insurance cost?
Based on costs for a $1 million property, a landlord insurance policy is likely to cost you around $200 a month. That’s not particularly cheap. However, you can usually claim your landlord insurance premium as a tax deduction.
Also, prices vary massively based on a bunch of different factors. These include:
● The value of the property and its contents.
● The type of dwelling and its structural integrity – the older the property, the more it will likely cost to insure.
● The property’s location – flood, storm or fire-prone areas will typically pay more.
● The type of insurance policy – contents-only policies are usually cheapest.
What are the risks if you don’t get landlord insurance?
There are a couple reasons you might think you can get away with not having landlord insurance.
The bond is enough
In some cases, it might be enough to cover minor damage. However, a bond is usually only equal to 4 weeks of rent. It’s fine for small mishaps but for more expensive issues, a landlord insurance policy is better.
Your lease contract can protect you
In addition to going through a rigorous screening process to prevent any bad tenants, you can also include lease clauses in your legal contract. These include:
● Tenants are prohibited from smoking inside the rental property
● Tenants must put felt pads on all furniture feet and will be responsible for floor repairs if the floors are scratched
● Tenants mustn’t mount TVs to the wall
● The home must be kept clean and is subject to inspection
While these measures can ensure you’re not the one who has to pay up if any of these rules are broken, they can’t completely eliminate risk.
If you’re worried about more serious damage occurring or losing your rental income, particularly if you rely on your rental income to pay your own bills, then there’s no substitute for landlord insurance.
What’s the claim process like?
Insurers are legally obligated to respond to your claim within 10 business days of receiving it. In the majority of cases, the claim should be processed within this time.
If there’s been a major catastrophe though, like the recent floods in Queensland and New South Wales, claim process times can be much slower.
For example, during 2021–22, the top 4 insurance companies received almost 10,000 complaints – a jump of nearly 20% on the previous year – according to the Australian Financial Complaints Authority (AFCA). The key reason for this was due to delays in claims handling.
In most cases though, your claim will still be paid. Insurers have paid more than $2 billion to customers impacted by the February–March floods in South East Queensland and several parts of New South Wales.
What if your claim is rejected?
If your insurer does reject your claim and you’re not happy with its decision, you have options.
Firstly, you should make an internal complaint to the insurer. If the matter still isn’t resolved, you can contact AFCA. Hopefully it never comes to this, but it doesn’t hurt to be prepared.
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