Thursday, 8 November 2012

My Investment Property caught on fire am I covered

                         Landlord Insurance

Property Fire
In light of my recent and first ever fire in one of my properties it has reminded me of what I preach to my clients on a daily basis about the importance of property and landlord insurance and to ensure that the quality of their cover and the amount of their insurance provides adequate cover.
I have been doing some research on this topic since then and find that very few articles go beyond just mentioning ‘landlord insurance.’  Very few articles explain in depth, the need and reasons for landlord insurance, nor do they talk about what the consequences are for a landlord who is not covered.
When you sign a contract to purchase an investment property, you should take out building and contents insurance on the property, as does a home owner (vendor).  This covers the time between signing the contract (which is the purchase date) and the handover date of the property (settlement).  This is the minimum insurance that should be taken out at that time.
Landlord Insurance
If you do already have landlord insurance, do you understand what you are / aren’t covered for? Not all insurance companies, for example will cover loss of rent for the period of time that the property is vacant due to an insurable event.  If the lease is periodical they may not pay the rent, if the lease only has three months remaining till it expires they may not pay after that.
Landlord insurance has several aspects to it, far more than just building and contents because there are other issues at risk with an investment property.
Listed below is the minimum coverage that a landlord should consider:
  • Loss or damage: Building – the usual coverage plus any damage caused by tenants or visitors to the property
  • Loss or damage: Contents – covers general household contents owned by the landlord which are provided and listed in the lease, such as carpets, curtains, stove, air conditioners and heaters etc, and any other fittings that may be included.  Ensure that your cover extends to include any malicious or accidental damage caused by the tenant or anyone else visiting the property.
  • Loss of Rent – covers you for loss of rent from your property due to default, broken leases, death of the tenant, denial of access or tenant hardship. With some companies this will only be paid if your leases are up to date – a technicality, but one that could cost you a lot of money if the damage is severe… make sure that you will be covered for the length of time that the property is untenable.  For default, break lease and denial of access situations cover of loss of rent can also be voided if appropriate bonds, or the correct notification process to tenants in breach are not followed.
  • Legal Liability – covers legal liability for damage to other people’s property, or death or bodily injury to other people if the fire is caused by a problem at your property, such as faulty wiring causing a fire
  • Tax Audit  – pays professional fees in relation to a taxation audit in relation to your rental property
Other Costs You May Face And Should Be Covered
Most landlords would think of the first four items listed above for coverage, and feel that they would have costs covered but there are two factors that could blow out any major repair costs to a property:
  1. Not allowing for an increase in materials and labour costs for any work done on the property in the overall insurance cover
  2. Removal of debris from the property
If you have severe damage to a property and a substantial portion of the house has to be rebuilt then the above expenses alone could add at least another $30,000 to the rebuild costs.
If the property has been owned for a number of years there is the chance that the insurance cover is well below the actual cost of replacement, should it be necessary.
Removal costs would depend on several factors depending on where the property is, how much rubbish is to be removed and where it is to be taken to.
Many insurance companies have removed the “under insurance clause” from their policies.  It’s worth checking that your policy won’t be impacted if the insurance company believes your property is under insured.  In these circumstances for example, if you are 50% below what they believe you should be covered for, then the overall amount of your claim could also be reduced by 50%.
How To Calculate How Much Insurance You Need
This is an example only but you will see some of the costs that need to be allowed for when estimating your level of insurance cover.
You bought a property in 2000 at a cost of $215,000 (land value $95,000), the building is valued at $120,000.
  • You take out building and contents insurance of $120,000
  • You currently, in 2012, have the property rented at $1950 per month
  • The property is currently valued at $435,000
  • The building is valued at $85,000
During your ownership you have:
  • reduced your building insurance because you know that the value is depreciating 
  • been able to claim depreciation because the building was only 2 years old when you bought
  • been able to increase rent because of demand
  • used the equity to purchase further investment properties.
You now have a fire at the property which does more than 50% damage to the building:
  • you now have no rental income but still have to pay a mortgage
  • the quotes and repairs are going to take 4 months to complete so you will lose at least $7,800 in rent, maybe more if it remains vacant after repair
  • you have had quotes on replacement and it is going to cost $120,000 to replace the damaged area and repair the smoke damage, etc. to the rest of the building
  • you have a bill for $20,000 for rubbish disposal
  • the tenants are claiming for damage and relocation a cost of $12,000 because the fire was caused by faults in the wiring
  • on top of this, some personal down time or costs should also be factored in
A quick calculation of these costs for the four months is:
$7200             mortgage repayments
$6280             loss of rent
$120,000       replacement costs
$20,000          rubbish removal
$12,000          claimed by tenant
$5,000            personal down time or costs
$170,480       total bill for restoring the property to a tenantable condition
At the end of the day you may have a building worth $100,000 but that is still a far cry from the $170,480 you have to outlay to have the house rentable again.
This means that you will be out of pocket by $70,480 in value of the property, but if you only had $85,000 insurance to start with you will actually have to find $85,480 for the total repair.
I can tell you that to have a fire in an investment property isn’t an experience that you would want and I would like to stress that you take notice of the above scenario as all of us landlords carry this risk as investors.
You can see that what was most likely thought of as a situation you may not face, you could actually do so and not only that, you would lose a lot of money if you were not sufficiently covered.
The roll on effect in relation to other properties or the damage to your portfolio could be enormous.
Remember insurance costs are tax deductible so I urge you to reassess your insurances, if your level of cover is inadequate or the circumstances and disclaimers are too limiting consider switching to an appropriate level of cover, the small amount extra you may have to pay is justifiable for not only the adequate cover but also for your peace of mind.
Paul Wilson is an Independent Property Investing Expert and the founder of We Find Houses, Educating Property Investors & We Find Finance. Paul provides valuable, independent guidance and support by teaching strategies on how you can invest successfully while protecting yourself from commission hungry sales agents and property spruikers.
Protect yourself with knowledge, contact Paul today for a complimentary consultation
on 1800 600 890 or email