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Peter Lewis: Insurer's duck-and-dive move can spell disaster for landlords and tenants

Friday, February 01, 2019

The basic principles of property insurance are relatively simple. Let us say that there are 100 houses in a town, and looking back over many years we find each year one of those houses burns down and then must be rebuilt at the owner’s cost. So each owner faces a one-in-a-hundred chance of incurring that expense. Of course, at 1% those odds are reasonably good, but if you are unlucky enough to be the one whose house is burnt you do face a substantial and possibly crippling loss.

We instinctively rebel against uncertainty, so all the house owners get together and decide that every year, each person will pay into a fund 1% of the cost of rebuilding a house. When disaster strikes, the unlucky owner of the destroyed house that year gets the payout to restore his property. Essentially, each owner exchanges the uncertainty of a potentially massive loss for the certainty of a relatively small one. Sure, you will lose a small amount of money each year when your house does not burn down, but your loss will be no greater than that even if it does.

That is the fundamental premise on which property insurance exists — the elimination of the possibility of a large loss by accepting the certainty of a small cost.

Of course, the reality is far more complex. For starters, in the modern world, the insurance scheme is run not by a cooperative of property owners but by profit-seeking businesses. These businesses, of course, have substantial overheads in staff, offices, paper, and systems, on top of achieving an operating profit. Therefore the payout to the policyholders will be less than all the premiums received. That is business, and as the insured, we accept the reality of that.

However, over recent years, insurance companies have moved to limit and reduce their liability by unilaterally imposing various limits requirements and restrictions on the insured. Before the Christchurch earthquakes, most property policies promised to rebuild the damaged property to its pre-incident state regardless of the cost. Since that unfortunate event, the insurers have moved as a bloc to impose maximum limits on the payout. Apparently, they (insurance 'experts') are unable to assess the current value of your property, but you (a school teacher, a baker or even an old-aged pensioner) are expected to know and advise them the actual costs of rebuilding your property. And that’s the amount on which they will base the premium.

As well as limiting the value of the claim, the insurers have also moved to tighten the rules around the validity of your claim. As a landlord, in order to make any claim acceptable, you must now be able to show that you have taken due care in checking out any tenants that you allow into the property, that you have maintained the property to an acceptable standard, and that you have carried out and recorded the results of a recent property inspection. It should not come as a surprise that the cynics amongst us would consider these to be 'gotcha' clauses to help the insurer evade a payout.

Stranger still, the Residential Tenancies Act does not mandate property inspections to take place at all (though it does lay out the parameters within which inspections can be carried out). Yet insurers are increasingly requiring landlords to inspect to the maximum frequency permitted by the law. Tenants find frequent inspections intrusive. Nobody wants to live under the scrutiny of a magnifying glass. I used to inspect no more than twice a year. Now, to comply with my policy, I inspect three times a year and often find myself having to explain to my tenants why I am doing so.

Imagine my disappointment when I recently discovered that my renewed policy requires no more than three months between inspections. That is four times a year! Surely this does nothing but creates excessive work for the landlord and often unnecessary intrusion on the tenant's private enjoyment. It seems to me that there is a lack of fundamental understanding of how rental inspections work in the first place.

There seems to be a belief among the desk-bound that it’s all quick and easy. You contact the tenant to say you are coming around, pop in, say hello, run a few checks take a few photos, and then after a chat and a cup of tea with the occupants you wander off into the sunset. Job done.

No. Not at all.

The Act lays down in some detail that the notice of inspection must be given to the tenants at least 48 hours before the inspection, and you must allow for service times as well. In the case of written notice this service time could be four days, so you need to start the process about a week before the inspection date. Then, in the course of the inspection, you may find some deficiencies in the tenant’s behaviour. That means issuing them with a 14-day notice to rectify. If you don’t happen to have that form handy so you can hand it over on the spot, then you are faced with a further delay in starting that process. Then there may well be maintenance or repairs that are required, so after the inspection, you will need to contact your tradies to carry out that work. They will not be sitting twiddling thumbs waiting for your call. You will have to take a number.

So as a result of your inspection you are probably going to need to reinspect after 14 days have elapsed to make sure that the tenants have reformed, and then go back again some weeks later and check out the tradies work before you pay their bill. So that one-day inspection actually starts a week earlier and may well run to four or six weeks after the event.

The reality is that a three-monthly inspection cycle is probably going to mean an almost continual interruption to the tenant, with both the landlord, the property manager, and various hangers-on disturbing the tenants and checking the property over many more weeks of the year. What happened to the requirement for ‘quiet enjoyment of the tenancy’?

Understandably the tenants will resent all the intrusion on their lives. I know that if I were in their shoes, I would.


This is a guest blog submission from APIA member Peter Lewis. Guest submissions are a way for APIA members to share their views and experiences with each other and do not necessarily reflect the views and position of the APIA.



Peter Lewis 

Peter is the Vice President of the Auckland Property Investors' Association and sits on the board of the New Zealand Property Investors' Federation. 








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