Do I need insurance if I have great tenants?

It’s a simple question a lot of landlords ask. But the answer is a bit more complex.  Read on to find out why.

Landlord insurance is all about protecting owners from the unique risks they face when leasing their investment property. In general, the insurance can cover the property itself and/or its contents from a range of insured events like fire or damage from storms.

It can also provide cover for tenant-related losses. These losses include loss of rent and tenant damage. Of course, coverage depends on the policy so you should always read the PDS.

Now protecting the property itself is usually a no-brainer for owners and the structure is generally insured via a building policy or through strata insurance.

When it comes to insurance for tenant-related risks, landlords may question whether a policy is necessary. The argument often put, is that they don’t need cover because they have great tenants – ones who always pay their rent on time and in full and look after the home like it was their own. Another argument put by owners is that they have a property manager and, if their agent is doing their job properly, they shouldn’t experience any of those tenant-related losses. 

If only.

The problem with this thinking is that the agent isn’t some omnipotent presence in every rental property, standing guard to prevent the unexpected. And no-one has a crystal ball – they can’t know what is going to happen in the future.

Like the weather, life can be very unpredictable. Circumstances change and things happen that can derail the best intentions of even the most reliable tenants.

Take, for example, job loss. Unemployment may be at historic lows now, but it wasn’t that long ago that millions of Australians were experiencing financial hardship due to COVID-19 as businesses shut down and many saw their hours reduced or lost their jobs completely. If your tenant loses their job, they may not be able to pay all or any of their rent. And it can take time for them to catch-up on the arrears, if ever, leaving you out-of-pocket.

The same is often the case if a tenant becomes ill and cannot keep on top of rent payments – the arrears quickly add up and can become insurmountable. A tenant passing away can also result in financial losses for landlords. It’s an awful thought, but unfortunately it does happen.

The bottom line – building and strata insurance will not pay for such losses.

Another common scenario is the breakdown of a relationship. Whether it’s a couple separating or a rift between housemates, when relationships go sour, it can result in the person remaining at the rental being unable to meet the financial commitment. In some nasty cases, it can also result in the property bearing some of the brunt through malicious damage.

Speaking of damage… Tenants are responsible for repairing damage they have caused and often tenants make good on their obligation – but sometimes they don’t or can’t. Either way, the landlord can be left with the repair bill or the prospect of trying to chase the tenant for compensation through the courts.

Tenant theft can also be an issue. And again, it is not covered by a building or strata policy. This is where the tenant steals fittings/fixtures and contents owned by the landlord. Don’t think it never happens – it does. We’ve had claims for everything from stolen blinds to entire hot water systems, even the proverbial kitchen sink, and (would you believe it) toilets!  

Another thing a building or strata policy won’t cover is legal costs, if you have to go to court or tribunal over loss of rent claims. Ditto if you must replace the locks if a sheriff or bailiff has ordered them to be changed.

We are not finished… legal liability is another feature in specialist landlord insurance policies that should not be overlooked. What exactly is legal liability? Well, according to the Cambridge Dictionary, it is: ‘responsibility that someone has for their actions, for example the responsibility to pay another person for harm or damage that is a result of these actions’. In a nutshell, if you are responsible for something happening that injures a tenant, then you are liable for compensating the injured party. It doesn’t matter if a tenant is great or not, accidents do happen. And when they do, legal liability claims can stretch into the millions of dollars, leaving landlords well out of pocket if they don’t have the right cover.

As for the argument that a property manager, if they’re doing their job, will render insurance for tenant-related losses and legal liability redundant… see above. While it’s true that a great agent can reduce the risk of renting to a ‘bad’ tenant in the first place with a thorough vetting process and by keeping on top of any issues like late rent payments or damage – they don’t know what is around the corner either.

The simple fact is, you can have an amazing tenant and an incredibly diligent property manager, but you can’t know what the future holds. Lives can be uprooted due to something unexpected – and you can be left to deal with the fallout. This is where having landlord insurance that includes cover for tenant-related losses and legal liability is invaluable. It provides the financial protection you need to safeguard your investment from the unexpected.

So to the question – do I need insurance if I have great tenants? The answer is almost certainly ‘yes’. Every year we settle thousands of claims (around half of all claims) for tenant-related losses – losses that those landlords didn’t foresee and for which they never expected to be making a claim.  Many of those landlords had great tenants too – until things went pear-shaped.

*While we have taken care to ensure the information above is true and correct at the time of publication, changes in circumstances and legislation after the displayed date may impact the accuracy of this article. If you need us we are here, contact 1800 661 662 if you have any questions.