Safe as Houses

A residential investor received a nasty jolt in South Australia recently when his tenant damaged the property and did not pay the rent. Despite a subsequent order by the tenancy tribunal, the tenant still failed to pay and an eviction notice was issued. The landlord was granted an order of possession and the tenants moved out (albeit several days after the nominated eviction date).

In all, the landlord lost nine weeks’ rent worth $2115, and was forced to pay the cost of rubbish removal. He was so distressed by the experience that he took the property off the rental market.

Although the landlord couldn’t have foreseen the situation with his tenants, he could have covered himself against the financial loss by taking out landlord protection insurance (LPI). “Despite follow-up calls by his property manager, the landlord simply hadn’t gotten round to organising it,” says Carolyn Majda, marketing and operations manager with Terri Scheer Insurance Brokers. The firm is the leading provider of LPI in South Australia, and ranks among the top three or four in other states.

“In this instance, LPI would have cost the landlord about one week’s rent '” a small price to pay compared with his ultimate loss.”

What is landlord protection insurance, and what does it cover? LPI covers risks associated with renting out a property that may not be covered by a typical home and contents or strata title insurance policy. Common situations covered can include:

• Malicious or intentional damage to the property by the tenant or guests;
• Theft by the tenant or guests;
• Loss of rent if the tenant defaults on their payments;
• Liability, including for a claim against the landlord by the tenant; and
• Legal expenses incurred in taking action against a tenant.

Some policies also cover lost rent if the building becomes untenantable after damage caused by events such as a fire or storm.

Whether it’s because they’re overly idealistic about their tenants’ behaviour, or simply because they’re uniformed about insurance issues, relatively few landlords know about LPI and even fewer understand it.

“Our own statistics indicate that as little as 20% of landlords have LPI,” Majda says. “Many landlords don’t realise there’s a difference between a standard home and contents policy and one that protects them as a landlord. They don’t understand that there are specific risks associated with investment property that may not be covered by their existing policies.

"For example, you might have great tenants at the start of the tenancy but things could change quickly if they go through a traumatic event such as a job loss or marriage breakdown. People can do strange things when their lives get out of control, such as abandon the property and cause malicious damage on the way out.”

Statistics from AAMI, another LPI provider, indicate that ignorance among landlords goes beyond LPI. “Nearly half of every Australian dollar lent for housing goes to residential property investors,” says spokeswoman Christine Elmer.

We believe the low take-up rate may have something to do with the way LPI products are distributed. Some industry players, such as AAMI and St George, market direct to the public. However, they’re relatively new in the LPI field, and are yet to build market share.

Established LPI industry players such as Terri Scheer distribute their products primarily through real estate agents, so rely on someone else to create awareness among landlords.

Majda says most landlords are keen to take out LPI once their property manager lets them know it is available. “The challenge is raising this awareness in the first place.”

What’s more, considering that only 44% of landlords in Australia use professional property managers (source: ABS 2001 Census / REIV) a heck of a lot of investors may be missing out on information about an essential kind of insurance.

Who provides it, and what does it cost? Although a definitive figure is not available, our research indicates there are about 20 providers in Australia. Broadly speaking, they offer two types of policy pricing structures: fixed and variable. Fixed price policies cover several defined events such as loss of rent, loss of contents, accidental or malicious damage to contents (and building if not already covered by a body corporate) and public liability.

Policy premiums vary according to the state or territory your property is in, largely because each jurisdiction has different stamp duty and fire levy rates. (In some cases, such as NSW, the price can vary between regions within a state). Differences in excesses can also affect the price.

Variable price policies generally offer tailored coverage for individual requirements; for example, building only, building and contents, rent and/or public liability. Premiums may vary depending on which suburb your property is in, whether it’s brick or weatherboard, whether a no-claim bonus applies, and/or what level of security you’ve installed.

Generally speaking, brokers such as EBM and Terri Scheer tend to offer fixed-price policies, while direct insurers such as AAMI and St George tend to offer variable price policies. Some providers, including AON, offer both.

The range of factors influencing variable price policies makes it difficult to undertake a meaningful comparison of premiums. The situation is clearer with fixed-price policies. As you’ll see from the table below, premiums are relatively similar between providers, with substantial variations between Tasmania (cheapest) and NSW (dearest) because of state-based differences in stamp duties and fire levies. Our brief survey found comparable coverage costs $270 in NSW, and just $207 in Tasmania.

Patrick Flynn, of the Insurance Council of Australia, says the variation in coverage and premiums makes it essential investors do some research before selecting the most appropriate policy for your situation. “You should also read the product disclosure statement carefully,” he says, “to be sure that you understand what the policy covers.”

The relatively minor outlay of LPI is made more palatable by the fact that the tax office recognises it as a legitimate cost associated with holding your investment. LPI is tax deductible at your marginal rate. If, for example, your annual premium is $250 and your top tax rate is 47 cents in the dollar, you’re effectively only paying around $130. That’s small potatoes compared with the losses you could incur if you’re uninsured.

ACTION PLAN

Decide on the type of cover you need. For example, do you need cover for loss or damage to the building and/or contents, loss of rent, and/or legal liability? Some policies cover all these eventualities, others only some. Still others may cover things not listed here.

Look at the policy excess. Premiums can vary greatly depending on the excess attached to them. If you have to pay a large excess on making a claim, a policy that seemed cheap when you bought it could turn out to be rather costly in the long run.

While you’re at it, check your other insurances. It’s not tenant behaviour and natural disasters that can affect the viability of your investment property. For example, do you have income protection insurance to provide income in the event of a serious accident or long-term illness that stops you from working? Do you have life insurance? If you owe money on the property, you don't want your beneficiaries to be saddled with the pressure of mortgage payments or a forced sale. Other forms of insurance may be relevant to your situation; check with your insurer or broker.

Take action. Provided you choose the policy that’s appropriate for your needs, LPI can be an invaluable way of protecting your investment. With its relative affordability and tax deductibility, there’s really no excuse for leaving yourself wide open to heartache and financial loss.