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Holler Practice Note from an insurance perspective

Tuesday, August 16, 2016

 

Less than one month in, the Holler Practice Note is already causing ripples in the property industry.  Anecdotally we are aware of several Tribunal adjudications absolving tenants of any responsibilities as to damages to the property.  Since Holler goes into the heart of the insurer's right of subrogation, many landlords will be asking What does that mean to my insurance coverage?  

Related article: Holler practice note changes the rules of damage claims to the Tribunal

Firstly, it should be pointed out that the Holler approach is not new to the insurance industry.  Under the Property Law Act (Part 4), insurance details and arrangements are standard provisions in a commercial lease.  Before Holler, the presumption was that the principles of Part 4 have no effect on residential leases.  Holler changed all that.  But PLA and residential tenancies form an uncomfortable alliance, 'in our experience,' says Gary van Zijl, Business Manager of Initio Online Insurance, 'commercial agreements tend to operate very differently to their residential counterparts.'  Thrusting a well-practiced commercial principle onto a residential business framework does not produce an equitable outcome at all.  While commercial landlords can financially redress the effects of the PLA, the Residential Tenancies Act does not give residential landlords the same luxury.

For now, residential landlords should brace ourselves for the following effects Holler has on the way we do business: 

1. Insurance Premiums
The direct consequence of Holler is that residential property insurers no longer have the right of subrogation against tenants.  In simpler terms, it means that once an insurance claim has been paid out, the insurer no longer has the right to recover any of the costs from the tenants (who caused the damage in the first place).  We expect ‘the bottom line losses are set to increase across the board for landlord insurance as a product’ say van Zijl.  
 
However, price increases will not be as sharp as some might expect because subrogation has never been a matter of fact following every claim pay-out.  ‘It had not been standard practice, before Holler, to recover all claims for every responsible party.’ says van Zijl, ‘Inversely, however, Holler may induce a minor reduction in the tenant’s insurance premium.  Since they are no longer as likely to be liable for damage done to a rental property. Their premiums are likely to decrease to reflect the diminished liability portion of the cover.’

Related article: Holler v Osaki and how it affects landlords

2. Excesses
The Practice Note unequivocally prohibits landlords from recovering claim excesses which is in line with standard rules governing commercial leases.  ‘However,’ observes van Zijl, ‘typically a commercial landlord would account for the risk of a claim and then compute the excess into the property's outgoings that is then charged back to the tenant.’  The ability to chargeback significantly diminishes the financial impact any damages to the property would have on a commercial landlord.  For now, residential landlords need to be ‘prepared to wear excesses on all claims and consider higher premium covers for lower excesses on claims.”
 
3. Tenant’s behaviours/risk
Before Holler, tenants had skin in the game.  Any damages, accidental or malicious, could mean the loss of their bonds or be made to pay their insurance excess, at the very least.  With Holler, tenants now risk nothing.  Would the removal of financial accountability lower the standard of tenants' behaviours and lead to more incidents of property damages?  ‘It is, of course, speculative at this stage to say that this would be the case,’ says van Zijl, ‘But should it become the case that tenants become increasingly more careless then that will lead to an overall increase in the number of claims from the tenants’ actions. Higher number of claims overall in the landlord’s insurance book of business will lead to increased pricing.’

Related article: How to deal with difficult tenants?

 


In term of specific opinions regarding Holler?  'This is something we stay neutral on,' says van Zijl.  'The decision was made by the courts and brings all lease agreements in line for more consistency across the risk management and insurance space.  It is likely that there will be some risk and cost increases for landlords in the short-to-medium term.  Of interest would be the legislative response to the decision, and whether the issue to taken up in Parliament or otherwise appealed in due course.'  

Related article: How to survive and thrive from changes you didn't ask for?

This post is sponsored by Initio Online Insurance, a specialist in rental property insurance.  

 

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