Insurance companies limit their liability for rent default, if there is no current tenancy agreement!
Yes, it’s true: Most insurance companies will limit a rent default claim, if there is no current tenancy agreement in place. I found that out the hard way, and I am still not very happy about it.
Insurance companies will limit a rent default claim, if there is no current tenancy agreement in place!
But let me start at the beginning.
Whilst always hating having to pay Landlord Insurance and mind you I have quite a few of those, I have always done the “right thing” and, same as many others, bought a policy at the time of purchasing each property. Over the years, like the good conscientious investor that I am, I would blindly pay their renewals, then was happy to claim the expense on my tax return at the end of the year. I am saying “blindly”, as I never shopped around and never read the PDS (Product Disclosure Statement), even though I, as I am sure all of us, kept ticking the “I have read the PDS” box on the application, simply because it wouldn’t let me go any further with my purchase otherwise!
Truth be told, in over 20 years of investing in residential property, I was lucky to have never needed to put in a claim, but given that it it could be hundred of thousands worth of personal and financial exposure, I always felt that, for a tax deductible fee of around $300 – depending on excess, property type and State – this was a well worth investment.
Recently though, my luck changed. First it was a major flood in one of my apartments. The claim process was a straightforward exercise and surprisingly quick! 2 days before Christmas 2016, quite a few thousand of dollars suddenly appeared on my nominated account, covering most of my losses. Best Christmas present ever!
And life went on, now a little happier to pay my insurances when they came up for renewal.
Then, one of my long standing tenants began falling behind on their rent. They had been pretty good up to that point, so in consultation with the property manager I had managing my property at the time, it was decided to let go but monitor closely. Whilst things didn’t get any better, the tenant would always eventually deposit the rent after being chased a couple of times.
And then, the rent stopped altogether. From what the property manager mentioned at the time, there was a heated conversation between them, which included shouting and threats over the phone. By the time, the property manager sprang into action, the rent was already 3.5 weeks behind and, having no other communication with the tenant who was ignoring phone calls and emails, they were served with a eviction notice.
Now it would have been the end of the story if they had packed up and left immediately as requested. My losses would have been mostly covered by the Bond. I suspect mostly out of spite for the property manager though – they decided to dispute the eviction. The property manager filed for a hearing at the Tribunal which was heard 3.5 weeks later. The tenant never showed up and the member ruled in our favour awarding us the back rent we had asked for – which at that point had mounted to a few thousand dollars.
Great. Except, literally on the day that the hearing was being held, the tenant packed up their furniture and disappeared in the middle of the night, never to be seen or heard of again! The place was a mess and needed cleaning and a few repairs. We also needed to get new locks and building security passes which consumed most of the Bond money.
With no other avenue to crawl back some of my rent losses, and encouraged by my earlier positive experience, I decided to put in a claim to my insurer for over $4,000!
All paperwork was supplied, the insurer agent assessed it all and out came the verdict! The payout was only going to be $150!!!!! The following explanation was supplied: “Because there is no current agreement in place, we can only cover you for 2 weeks’ rent ($850), minus excess of $700 ($200 normal excess plus $500 additional for rent default), the payout therefore is $150!”
Because there was no current agreement in place, my insurer would only cover 2 weeks’ rent for rent default
Even forgetting the additional $500 excess for rent default – which I must admit I wasn’t aware of, because my agreement was “not current”, my claim was limited to only TWO weeks of rent, not FIFTEEN (15) as it would have been otherwise.
For those that are not familiar, a “periodic agreement” is the agreement a tenant rolls onto once the initial fixed term period expires. Now there is nothing wrong with this type of agreement and all States’ relevant Act have made provisions for it. When you roll onto a periodic agreement, the terms and conditions roll on. Coupled with how painful it is to draw up a new agreement every time the fixed term expires, periodic agreements are accepted widely throughout Australia. I am saying “painful” because the standard tenancy agreement is one of the last tenancy forms that requires the property manager to physically have to print 3 copies, find and take a witness with them, go out and meet the tenant face to face, then proceed to initial every page and sign at the back! If you are a busy property manager like most of us are, this is work you don’t want!
Tp put things into perspective, signing a standard management agreement (the agreement between an agency and the owner) is done remotely in a matter of seconds. It is therefore the norm to be on a periodic agreement, with some coming over to our agency having been on one for over 15 years!
Periodic Tenancy Agreements are the norm.
So, absolutely nothing wrong with periodic agreements in the eyes of the various State legislations, except my insurance company at the time (or so I thought), used it to limit their losses at my expense. Needless say, I was furious, and no matter how much I fought the outcome and threatened to leave them, the decision stood. I should also say that, having had about 15 policies with them, I felt I could mount a pretty strong case. I failed.
So, having learned my lesson and being bitter about the outcome – I asked all my property managers to “make sure they had a current tenancy in place”, then proceeded to “pack up my insurances” and transition them to another provider who didn’t have this particular clause in their 100-odd page PDS. This new provider which I am still with, is more reputable and specialises in Landlord Insurances, so at the time I felt it was the right decision.
And that’s was all fine, except just this week, whilst I was renewing yet another policy, I thought I’d check their PDS… “just in case”… To my utter surprise, somewhere hidden around page 68, in small writing, they too now have the same clause! What is even more worrisome is that when I asked them to confirm, I received this reply: “I can confirm that the maximum we will pay out for loss of rent in VIC under a periodic lease is 4 weeks. For properties in NSW it is 3 weeks.”
In other words, even with the same reputable, specialist provider, there are different rules in place, depending on the State the property is in. I also assume, given that insurance companies, often change their PDSs, what you are covered for will depend on the PDS that is in place at the time that you buy your policy. Who in all honesty has time to read the PDSs, as well as the Supplementary documents? No wonder the bad press on insurance companies!
My reputable, specialist Landlord Insurer has different types of rent default coverage depending on the State the property is in!
Don’t take me wrong, insurances are important. And whilst it might not feel like it when you have to keep paying these premiums for seemingly no reason, if and when you need them, you will be grateful to have them! And I am not talking about just landlord insurances here.
So what should your biggest take away be from reading this blog?
Whilst I could say to make sure to read the Product Disclosure Statement every time you purchase a new policy, the reality is that you probably won’t, given that they seem to be long boring documents full of clauses that are hard to understand!
The biggest take away therefore for anyone reading this, as was the case for me, is to remember that right now, IF YOUR TENANT IS IN A PERIODIC AGREEMENT AND THEY DEFAULT, you are most likely not going to be covered for much.
I learned that lesson the hard way, which is why our policy at NextGen now is to always have a current tenancy agreement with our tenants, even though that adds a lot more work for us.
Why don’t you ask your property manager right now to confirm the kind of agreement they have in place for you with your tenant???? Is it Fixed or Periodic? If it is indeed periodic, you may be able to claim as little as 2 weeks for any rent default.
Who we are:
NextGen Property Mgmt (www.nextgenpm.com.au) is a boutique Real Estate licensed agency that specialises in property management. NextGen Property Mgmt does NOT has a sales team unlike most other agencies that specialise in Sales and have Property Management as a side business.
Our area of focus is residential property and we operate in Inner and South West Sydney, as well as St George.
NextGen was created from its infancy to cater for investors as it was founded by investors who quickly realised that in a highly regulated industry like Real Estate – competence, expertise, care and service by property managers varies greatly.
As an investor, you need to have trust for and feel valued by your property manager. You need to know that your property is being looked after with minimal disruption and you are getting maximum return for your investment. At NextGen we understand that because we are investors living busy lives ourselves, so our promise to you is that you will no longer have to worry about your most valued asset because we will make sure to take care of it as if it is our own.