Are rent reductions covered by landlord insurance?

author-avatar By on May 12, 2020
Are rent reductions covered by landlord insurance?

Photo by Haley Phelps on Unsplash

If you’re offering a rent reduction to a tenant suffering hardship from COVID-19, you might be wondering whether you can claim that on your landlord insurance policy.

The coronavirus pandemic (COVID-19) has turned many people’s worlds upside down, sending stock markets tumbling, unemployment soaring and confining us all into our homes.

Millions of Australians are suddenly finding themselves without work or with reduced hours, and are now struggling to afford to pay their rent or mortgage repayments.

While lenders are allowing those with mortgages to defer their repayments, many landlords are faced with the conundrum over what to do if their tenant can’t afford to pay their rent during the economic shutdown. Some landlords are either temporarily discounting, deferring or even waiving rent for struggling tenants, but others have not offered assistance.

Accepting a temporary rent reduction for tenants experiencing hardship is, in most cases, the right thing to do, and can be beneficial for the tenant-landlord relationship especially considering the moratoriums placed on rental evictions by state governments.

But the general consensus among insurers at the moment is that if you do offer a rent reduction to tenants, you will not be able to claim the loss of rent on your landlord insurance policy. This could be bad news for landlords who may find themselves struggling to pay their mortgage repayments with less rental income.

We’ll explain how this works, and why it is the case.

Buying an investment property or looking to refinance? The table below features home loans with some of the lowest variable interest rates on the market for investors.

Base criteria of: a $400,000 loan amount, variable, principal and interest (P&I) investment home loans with an LVR (loan-to-value) ratio of at least 80%. If products listed have an LVR <80%, they will be clearly identified in the product name along with the specific LVR. Monthly repayments were calculated based on the selected products’ advertised rates, applied to a $400,000 loan with a 30-year loan term.

Read: Coronavirus support for landlords.

What is landlord insurance?

To put it simply, landlord insurance is a type of insurance policy specifically designed to protect those who own investment properties from the risks that come with renting it out.

Landlord home and contents insurance is like a standard home and contents insurance policy, except it includes extra coverage for the additional risks that come with renting out a property.

Does landlord insurance generally cover rental income loss?

Most decent landlord insurance policies, if you have tenancy cover, should cover you from a loss of rental income, as well as:

  • Damage or theft by tenants or the tenants’ invited guests
  • Rent default
  • Legal expenses taking tenants to court 
  • Liability

The loss of rent, as specified by most policies, generally covers landlords for situations when they are unable to collect the full rental amount from a tenant. This might be because they refuse to pay it, abandon the property, experience financial hardship, or pass away.

The level of cover offered and the circumstances it is offered in will vary from insurer to insurer and in each different policy, so double-check the terms and conditions of a policy before signing up.

If landlord insurance covers rental loss, what’s the deal with COVID-19?

Many landlords are finding themselves stuck between a rock and a hard place, having to choose between doing the right thing by offering a rental discount and not being covered under insurance, or not offering a rent reduction at all.

“In the current circumstances, it would be great to see insurance companies taking a more flexible approach and being more supportive of their insureds in the current environment,” Real Estate Institute of Queensland CEO Antonia Mercorella said in April.

“Many landlords are now suffering potentially their own financial detriment because of COVID-19. Further to that, they might be receiving a lot less rent from their tenants.

“I would like to see more of a focus on residential landlords, because these are mum and dad investors. They are everyday Australians who are feeling the pain, and it would be great to see insurance companies offering more support.”

But according to Ms Mercorella, insurance firms are not ripping people off as they are legally within their rights to not offer cover for rental discounts under the terms of their policy.

"Morally, it is the wrong thing to do. (But) legally, under the terms of their policy, they are well within their rights to deny those claims," she told the ABC.

"But from a moral or ethical perspective, you might take a different view about their conduct."

Let’s explore how exactly doing so is allowed under the terms of a landlord insurance policy.

Why landlord insurance (generally) doesn’t cover COVID-19 rent reductions

Landlord insurance policies generally aren’t covering rent reductions offered to tenants during COVID-19 because of one simple reason.

If you negotiate a rental decrease with a tenant for a certain period of time, then this decrease will need to be lodged with your state’s residential tenancy authority (RTA). When the agreement has been reached, the new rent being offered is the new rental agreement, and as long as the tenant pays that amount, then as per the terms of your rental agreement, you as the landlord are being paid full rent.

As mentioned, loss of rental income is only covered if you aren’t paid what is specified in the lease and is usually only covered in certain situations, such as the death of the tenant or their abandoning of the property. So if you negotiate a rent reduction, and still aren’t paid the newly negotiated amount, then you might qualify for rental income cover, although you’d have to check with your insurer.

According to Terri Scheer’s terms and conditions:

A renegotiated reduction in rent is not considered a default by a tenant, so the gap between the original rent and your renegotiated rent will not be covered under your Terri Scheer policy.

However, if a tenant stops paying rent at the renegotiated amount and vacates the property, there may be a valid trigger for a claim.

"These measures are intended to help tenants remain in their homes, rather than be evicted for non-payment or part-payment of their rent," Insurance Council of Australia spokesman Campbell Fuller told the ABC in April.

"Cover for loss of rent is not always included in a landlord policy and may be added as required [at extra cost].

"Landlord insurance covers the full default, though it does not cover part-payments or part non-payments. These products were never designed for insurance to catch up on missing part-payments of rental.

"Landlord cover continues on building and contents and liability protection, which is actually the most common reason for claiming landlord insurance.”

So how does this work?

Let’s say you have two tenants who pay you a combined $450 per week in rent. They both had their working hours reduced by 30%, so they ask you for a 30% rent reduction for the next few months until their normal hours resume.

You agree to their request, taking your new rental income to $315 per week. You lodge this request with the RTA, and your new rental agreement specifies $315 per week is to be paid for the next six months, or until your tenants resume normal work.

  • If the tenants continue to pay that $315 amount, then in most cases you’ll have no cause to claim the rental loss
  • However, if they only pay you $250 per week (almost half of your original amount), then you MAY be able to claim the $65 per week loss.

There’s no guarantee your claim will be successful in that second scenario, as it will depend on the terms of the policy.


Are general rental defaults still covered during COVID-19?

Under normal circumstances, claiming rental defaults on your insurance policy often requires the landlord to provide proof of an eviction notice to the insurer, i.e you have to move to evict the tenant before you claim their inability or refusal to pay rent. However, this has become a bit of a grey area in COVID-19, due to the six-month moratorium on housing evictions.

However, Domain reported recently that large insurers Allianz, NRMA, CGU, SGIO and SGIC, WFI and Terri Scheer have all scrapped this requirement for landlords to claim rental defaults, as long as they are in a fixed-lease. Other insurers may well have followed suit, so this is important to check. Remember though, you can only claim if the tenant is not paying the negotiated amount, so voluntary reductions don’t count.

This may only apply if you already had a policy in place

According to residential and commercial insurance broker Whitbread, landlords probably won’t be covered for any sort of rental default if they took out a policy after 28 March 2020. This is a fairly standard move by insurers, as taking out rental default cover at a time when large portions of the renting population are struggling to find work would be like taking out earthquake cover as the ground is shaking.

To curb the losses they’d incur by allowing new customers to claim for a loss of rent, most insurers are temporarily ceasing to offer rental default cover.

“Given the devastating number of job losses throughout the Australian economy, and ongoing uncertainty, insurance companies believe the number of “rent default” and “theft by tenant” claims will increase substantially,” the insurance broker said.

“Unfortunately many landlords did not opt to insure with this cover until COVID-19 hit, but have since tried to take out the cover mid-term. Insurers are not financially able to cover an event deemed a certainty.  

“For insurers, it is not cost viable to pay the number of claims they will likely receive for these events, as they simply could not afford to do so. It would deplete their premium pool and they would likely collapse.”

So it might be wise to stick with your current landlord insurance provider in the short-term.

Savings.com.au’s two cents

In summary, landlords aren’t able to claim voluntary rent reductions offered to tenants due to COVID-19, while they may still be able to claim rental defaults depending on their policy. And no, you can’t tell your tenant to pay you less than the specified amount and give you cash for the rest, then claim a rental default, as that would be insurance fraud and is highly illegal.

While it’s likely that policies will stay this way for the remainder of COVID-19 restrictions and potentially beyond, there is still a push by some in the industry to get insurers to provide relief for those offering rental discounts to tenants, as in their words, good landlords are being punished for doing the right thing.

“In the current circumstances, it would be great to see insurance companies taking a more flexible approach and being more supportive of their insureds in the current environment,” Ms Mercorella told insurancenews.com.au.

“Many landlords are now suffering potentially their own financial detriment because of COVID-19. Further to that, they might be receiving a lot less rent from their tenants.

“I would like to see more of a focus on residential landlords, because these are mum and dad investors. They are everyday Australians who are feeling the pain, and it would be great to see insurance companies offering more support.”

In the meantime, it’s wise to contact your insurer for any insurance-related queries you might have regarding an investment property. If you’re a landlord who’s struggling financially because of all this, then you could also try doing any of the following:

Offering a tenant a temporary rent reduction, while painful in the short-term, could prove to be the most beneficial option in the long-term.


Disclaimers

The entire market was not considered in selecting the above products. Rather, a cut-down portion of the market has been considered which includes retail products from at least the big four banks, the top 10 customer-owned institutions and Australia’s larger non-banks:

  • The big four banks are: ANZ, CBA, NAB and Westpac
  • The top 10 customer-owned Institutions are the ten largest mutual banks, credit unions and building societies in Australia, ranked by assets under management in November 2019. They are (in descending order): Credit Union Australia, Newcastle Permanent, Heritage Bank, Peoples’ Choice Credit Union, Teachers Mutual Bank, Greater Bank, IMB Bank, Beyond Bank, Bank Australia and P&N Bank.
  • The larger non-bank lenders are those who (in 2020) has more than $9 billion in Australian funded loans and advances. These groups are: Resimac, Pepper, Liberty and Firstmac.

Some providers' products may not be available in all states. To be considered, the product and rate must be clearly published on the product provider's web site.

In the interests of full disclosure, Savings.com.au, Performance Drive and Loans.com.au are part of the Firstmac Group. To read about how Savings.com.au manages potential conflicts of interest, along with how we get paid, please click through onto the web site links.

*The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

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author-avatar
William Jolly joined Savings.com.au as a Financial Journalist in 2018, after spending two years at financial research firm Canstar. In William's articles, you're likely to find complex financial topics and products broken down into everyday language. He is deeply passionate about improving the financial literacy of Australians and providing them with resources on how to save money in their everyday lives.

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