Insurance - Landlord & Tenant Obligations

Note: This ruling was subsequently successfully appealed. See details here

Picture this: You have worked hard and saved for ten years. You have built up enough equity to purchase a rental property (they are paying for themselves at the moment, so why wouldn’t you?) You arrange for tenants to move in and all seems well. That is, until the tenants leave and you discover they’ve trashed the place. Until recently you would have been able to claim the cost of repair of this damage from the Tenant under the Residential Tenancies Act 1986. However, this position has recently changed.

The Court of Appeal decision of Holler v Osaki changed the way landlord/tenant disputes are determined when the tenant has caused damage to the property. The facts of Holler v Osaki are simple: tenant leaves hot oil on stovetop, oil catches fire, and the fire burns the place down. The Court decided that the insurance provisions in the Property Law Act 2007 (PLA) applied to residential tenancies. This means that if the landlord has insurance that covers the damage caused, then the tenant does not have to pay.

Exceptions to new rule

There are exceptions to this rule, being:

  1. If the damage was caused intentionally, or
  2. The damage occurred in the commission of an imprisonable crime, or
  3. The damage occurred in circumstances which would void the Landlord’s insurance.

Alarmingly, if the damage is unintentional but the Landlord does not have insurance, then the tenant would be required to pay compensation to the Landlord.

‘Specifically’ insurable damage

The PLA also states that where the damage caused is “specifically” insurable damage, such as by earthquake and fire, the tenant does not have to pay regardless of whether the landlord has insurance or not.

In Holler v Osaki, the Osaki’s did not have to pay because the landlord had insurance. Since the decision, the Tenancy Tribunal (the Tribunal) appears to be applying the rationale from Osaki rather strictly.

Breach of tenancy agreement not necessarily intentional

Recently, a Foxton landlord had to pay to repair damage even though the tenant breached their tenancy agreement by having dogs in the property. The dogs urinated and defecated throughout the house and left the carpets in such a state that the landlord had to replace the carpet in every room. The Tribunal found that even though there was an intentional breach of the tenancy agreement, this did not mean the tenant intended to cause the damage. The landlord had to pay because he had insurance.

Insurance excess leaves landlord out of pocket

To make matters worse, the landlord’s insurer stated that each identifiable instance of damage caused by the dog’s waste represented an individual claim, and therefore excess was payable on each spot where there was damage. The excess on this claim would have been $25,000 for the landlord due to the extent of the damage. It was not worth the excess, so the landlord decided to replace the carpet with his own money. There have been a number of other cases heard since Osaki (albeit with much less damage to the properties involved) where the Tribunal has similarly applied a strict interpretation of Osaki.

What does this mean for residential investment property owners?

Firstly, insurance premiums will likely increase. Landlord’s insurers will no longer be able to pursue Tenants for damage. This means insurers will have to pay out more often and will not be able to recover losses.

Property Investors will need to be more particular about their insurance policies for any rental property they own. Each insurance provider will have different terms and conditions in respect of the type of damage caused. To avoid any doubt Property Investors should ask their insurer about excesses payable and what the outcomes are likely to be in the event they needed to make a claim. No one wants to end up like the Foxton landlord above, paying for damage out of your own pocket despite having insurance.

Difficulty for landlords recovering loss

Another implication of this decision is that landlords may find it hard to recover loss from tenants for any extensive intentional damage. Tenants often get indemnity insurance as a precaution for damage caused by them during the course of their tenancy because even careless or reckless damage was claimable by landlords. Osaki changes this position, and it is likely that tenants will save themselves the cost of this insurance. Even where tenants have indemnity insurance, intentional damage will not be covered by their policy. The consequence of this is that landlords will have a right to recover from their tenants but they might not actually get any money (or may spend thousands trying to recover the money from their tenants).

Choose your tenants carefully

The moral of the story is choose good tenants. Always check potential tenants’ references from previous landlords. The right choice of tenant at the beginning of the relationship could literally save you thousands of dollars. That is not to say that a good tenant will not cause damage, but any steps to mitigate your loss will help in preserving your asset for the future.