What is landlord insurance? How does landlord insurance work? And most of all, do you need landlord insurance?
What’s in this guide:
- What is landlord insurance?
- What does landlord insurance cover?
- What does landlord insurance not cover?
- Does landlord insurance cover you for AirBnb?
- How much does landlord insurance cost?
- Are landlord insurance premiums tax-deductible?
- Do you really need landlord insurance?
Even the most hands-off property investors should consider whether landlord insurance is worth having, as having someone who isn’t you living in your house presents a whole new raft of potential dangers…
What is landlord insurance?
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. It generally covers events that cause a loss of rental income, theft or damage to your property.
Landlord insurance is offered by most of the major general insurance providers in Australia, so you’ve got plenty of different products to compare.
There are generally three components of landlord insurance:
- The part that covers loss of rental income
- ‘Building insurance’ which covers damage to the property’s structure
- ‘Contents insurance’ for protection against damage to what’s inside the property (e.g. carpet, appliances)
Landlord insurance can apply to all sorts of investment properties, whether it’s a house, unit, apartment or townhouse.
How is landlord insurance different from home insurance?
Landlord insurance can offer the same level of coverage as a standard home insurance policy (e.g. storm damage, damage to contents) but with extra coverage to protect against loss or damage arising from tenancy issues.
What does landlord insurance cover?
A landlord insurance policy may cover you for the following things:
- Damage or theft by tenants or the tenants’ invited guests
- Loss of rent
- Rent default
- Legal expenses taking tenants to court
Damage to the building structure as a result of:
- Lightning strikes
- Storm damage
- Falling trees
- Vehicle collisions
- Water damage
Damage to contents (e.g. curtains, carpet, appliances, light fittings) as a result of:
- Lightning strikes
- Storm damage
- Falling trees
- Vehicle collisions
- Water damage
These are just some of the more prominent examples of what’s covered by landlord insurance – there are more obscure things that will vary from provider to provider, like the replacement of locks.
Let’s look at a few examples of how landlord insurance can bail you out.
Case study #1: Damien has a tree-reffic policy
Damien owned a nice little investment property that he collects a sturdy rental income from but during a big storm, the tree in the backyard fell on the roof, rendering it unliveable for two months.
Per the terms and conditions of his policy, Damien is covered for ‘impact’ caused by falling trees, and his policy covered him for both the rental income he lost while his tenants were displaced as well as the cost of fixing the roof.
His tenants were back in the house to help line his pockets in no time.
Case study #2: Julia’s tenants try to take her for a ride
Julia also owns an investment property and the current tenants are moving out at the end of her lease. The fridge in the property is owned by her and was on the lease, but after the tenants move out she realised it’s not there – they’ve stolen it!
Her policy states she is covered for theft or burglary by her tenants or their guests worth up to four times her weekly rental amount. Since the fridge was worth about $1,000, her insurer is able to replace the fridge for her. Thankfully, those tenants were blacklisted by her rental agency.
As with pretty much every type of insurance, landlord insurance isn’t perfect and won’t always cover you for these things based on the terms and conditions of the policy.
What does landlord insurance not cover?
Although most things that cause damage to the property or loss of rental income are covered, there are a few things that aren’t. This will again depend on the T’s and C’s, but here are some of the common exclusions:
- General wear and tear – not covered
- If you damage the property yourself, or someone damages it under your instruction
- If you breach the leasing agreement instead of the tenants
- Damage caused by insects and rodents
- Any parts of the property you don’t rent out – living in one room of the property mean that room is not covered by landlord insurance
- Damage caused by pets (some policies cover the damage they cause to visitors)
Case study #3: Damien in a ruff spot
Poor Damien has had to make another claim – this time because his tenants left their pet dog Spot alone in the house for the weekend. Since the dog hasn’t yet mastered the art of using the toilet, it did its business multiple times all over the carpet, leaving some nasty stains all over the place.
While Damien allowed the tenants to keep their pet, his insurance policy explicitly states it does not cover damage caused by pets or other animals. His claim is rejected, and he has to pay to get the carpet cleaned himself.
Knowing the exclusions of a particular policy can help you make a decision when you compare it to your investment property and the tenants within.
Does landlord insurance cover you for AirBnb?
Certain short-term landlord insurance policies exist for people who choose to rent out their property for a short period of time, such as those listed through Airbnb. These policies cover situations unique to short-term rentals, such as a guest’s failure to get out when their stay is complete. IAG is one such insurer who offers a short-term cover called ‘ShareCover’, where customers only pay premiums on nights the property is rented.
The rental listing sites themselves (like Airbnb and Stayz) also offer their own form of protection. Airbnb, for example, has ‘Host Protection Insurance’ and ‘Host Guarantee’ policies which provide up to $1 million US worth of liability cover and protection against damages caused to the property and usually excludes the same things that standard landlord insurance policies typically exclude.
Airbnb and Stayz’s policies are not a substitute for landlord insurance. The Insurance Council of Australia (ICA) last year warned that people who rent their properties out on a short-term basis might not be covered if they don’t have any landlord insurance.
How much does landlord insurance cost?
There is no one set premium for landlord insurance policies. The cost of a policy is determined by a very broad range of factors like:
- The value of your property and the contents within: the more you insure the higher the premiums as a general rule
- The type of property you have: houses tend to be more expensive to cover than units or townhouses
- The structural integrity of the property: buildings made of sturdier materials tend to be cheaper to insure since they’re seen as safer
- Your claims history: insurers can increase premiums if you’ve made lots of other claims before
- The location of the property: riskier areas (based on crime stats, history of flooding etc.) will attract higher premiums
- The security of the property: bolted doors, alarms and security cameras make theft less likely and can also boost your chances when making a claim
- The state you live in: North Queenslanders have to pay far more on average thanks to those pesky cyclones
- Additional inclusions: choosing to include additional things in your coverage can make a policy more expensive
After factoring all of this in, it’s pretty impossible to give an exact number for how much a policy costs. It’s common for average policy prices to hover between $1,000 to $2,000 in the different states, with North Queensland seeing premiums upwards of $3,000 and even $4,000 per year.
To get an estimate of how much you could have to pay, most insurers allow you to generate a quote online. Just be prepared to enter a lot of information.
Don’t pay a ‘loyalty penalty’
Be aware that landlord insurance premiums tend to rise year-to-year, although not always. If you stay on as a customer with a certain insurer, your premiums will increase by a certain amount they’ve agreed upon – an amount that could see you paying more compared to other insurers.
In July 2019 there was a bit of commotion about ‘loyalty penalties’ or ‘loyalty taxes’ these customers end up paying. While new customers often get discounts on their insurance, existing customers get stuck with their premium increases which can be huge, and could be worth hundreds of dollars on certain policies. The Australian Competition and Consumer Commission concluded that ‘loyal’ customers pay a total of $3.6 billion more, which is $140 per person each year.
Make sure you compare your insurance policy annually to make sure you’re not getting ripped off.
Are landlord insurance premiums tax-deductible?
To be more specific than a Simpsons Gif, the Australian Taxation Office (ATO) states that investment expenses on a property are tax-deductible, and insurance premiums are counted as such. Interest repayments on an investment home loan are also claimable, as-is:
- Advertising to find new tenants
- Bank fees and loan charges
- Body corporate fees, cleaning costs and council rates
- Electricity and gas not paid by the tenant
- Legal expenses and land tax
- Property manager fees and commissions
- Repairs and maintenance
- Travel and car expenses for rent collection or inspections
- Costs incurred for the inspection or maintenance
We have an article on the ins and outs of tax on investment properties to help you understand more, but you should also consult a tax professional if it’s personal advice you’re after.
So is landlord insurance necessary?
This has been a question since the concept of insurance was first invented: is it worth paying the premium, which isn’t always cheap, for something that might not even happen?
For some, the answer to this is no. And that’s not necessarily a bad idea, but you’re counting on getting a good roll of the dice that way. Landlord insurance premiums might be pretty costly, but if you keep a record of them then they’re tax-deductible, so cost shouldn’t be as much of an issue.
Plus, the potential payouts of landlord insurance can vastly outweigh the costs – it’s common for policies to cover as much as millions of dollars for various inclusions like legal liability, while other inclusions can be covered for tens if not hundreds of thousands of dollars. And claims on home and landlord insurance aren’t all that uncommon – research from the Insurance Council of Australia (ICA) found there were 30,000 claims made in 2018 just for water damage.
According to similar research from QBE Insurance, 34% of all landlord insurance claims are for storm and flood damage, while damage from pipes accounts for 21%. Tenants defaulting on rent (12%) and theft (10%) are also big ones, as is, unfortunately, the death of a tenant, which can also stop you from receiving an income.
As a property investor, landlord insurance is at least worth considering, as it could bail you out of potentially catastrophic situations. But ultimately, that decision will come down to you.
Savings.com.au’s two cents
If you rent out an investment property, landlord insurance can give you protection for a wide range of events like natural disasters, water damage, theft, tenants vanishing or just a general loss of rental income. And as an investment expense, the premiums are tax-deductible – as long as you’re claiming the portion of the house used as a rental.
Doing a thorough check of a number of different PDS documents will help you get an idea of what you are and aren’t covered for, but you can also reduce the likelihood of ever having to make a claim by:
- Picking a house in an area with minimal risk of natural disasters (like flooding or fires)
- Picking a house in a good area free of crime
- Picking good, trustworthy tenants
It’s also important for landlords to keep up regular (scheduled) property inspections and to have a valid lease agreement in place. This will help make the claims process easier.