Insurance Guide for Landlords
Landlords should take care to review any existing policies when letting a property for the first time as some standard insurance products will either not provide cover, or may place restrictions on cover for rented property and/or its contents. A failure to inform your insurer that you are letting a property could invalidate any subsequent claim.
It is the responsibility of the landlord to insure the building and its contents, fixtures and fittings. The tenants are responsible for insuring any of their own possessions. There are various specialist insurance products designed for landlords detailed below.
- Buildings Insurance
- Contents Insurance
- Emergency Assistance
- Legal Expenses Insurance
- Rent Guarantee Insurance
Rebuild costs - not market valuation
It is essential that your property is adequately insured. The sum insured should represent the full RE-BUILDING cost of your property not its market value. In some instances the re-building value will be considerably lower or higher than its market value. Older properties in the lower priced areas in the UK will cost much more to re-build that their market value.
Almost 40% of UK properties are under insured, which means in the event of a claim, insurers will not pay the full amount of the claim. Ideally, to ensure you are not under-insured you need to have a professional re-build cost calculated by a qualified surveyor although some insurance companies will provide quotes direct based on information provided; E.g. style, type, size, condition, age, improvements, area etc. All buildings policies will be index linked to reflect building costs increases annually. This is only effective if the original valuation was correct to start with.
It is essential that you advise and obtain consent to let your property from your mortgage lender, existing insurer and head lessee (for leasehold properties). Failure to obtain written consent from these parties may render your insurance void in the event of a claim. Sadly there have been many instances where buildings claims have been totally rejected because the insurer and or mortgage lender was not advised the property was let.
High Risk Tenants
Many mortgage lenders and general insures will not grant cover if you intend to place certain categories of tenants in your property i.e. Student, Multiple single sharers and tenants in receipt of State Benefits.
Usually buildings policies will provide an element of Employers Liability cover. This covers claims for death or injury to anyone you employ at your property i.e. a gardener, painter etc. If you are letting to students or to tenants in receipt of state benefit the university / local authority will normally require a minimum of £5m cover.
Property Owners Liability
It is also essential that your policy includes Property Owners liability cover to a similar limit to cover injury, death or damage to individuals on or adjacent to your property i.e. Postman, meter reader, council employee etc. Some basic low cost polices do not include any cover.
The main insured perils which should be included in the building policy should be:
- Burst pipes or leakage of oil
- Storm or flood
- Malicious damage
Some policies will give the option of malicious damage caused by the tenants - a valuable option for let properties.
Loss of Rent
Most policies will compensate you for loss of rent following damage from one of the above perils if the property is uninhabitable usually 20% of the sum insured but some policies are up to 30%. Not to be confused with Rent Guarantee policies.
Limited Contents Cover
Most specialist insurers will offer the option of a full contents policy or a limited contents policy. Most UK properties are currently let unfurnished or part furnished. A limited contents policy would typically give a fixed limit of around £5,000 of cover items such as: Carpets, Curtains, Light fixtures and fittings, Kitchen white goods on a new for old basis.
In addition to the normal insured perils most such policies will provide the landlord with Employers Liability and Landlords Liability in relation to the contents. Again these limits need to be adequate and at least £5m.
Examples of injuries to tenants or their guests caused by defective cookers, light fittings and loose carpets have resulted in substantial compensation claims. It is strongly recommended even for sparsely furnished properties that landlords have at least this basic contents and liability cover. Premiums for limited contents cover are quite modest at around £50-£70 per year. The liability cover alone is worth the peace of mind. Personal injury claims have increased by 85% since 1990 and awards of £100,000+ for modest injuries is not uncommon.
Full Contents Cover
If your property is fully furnished or the limited contents would cost more than £5,000 to replace, you should have a full contents policy. You would normally select the sum you wish to insure for; again this should be adequate to replace all of the contents on a new for old basis.
Over 50% of UK owner occupied properties are under-insured for the contents. Generally individuals place a value of what the contents are worth not what it would cost to replace them with new items.
This type of cover will provide assistance for the landlord in the event of an emergency at the property such as:
- Failure of the electricity supply
- Failure of the cooking facilities
- Lost keys
- Plumbing problems
- Leaking roofs or guttering
- Security of doors and windows
Typical policies will provide parts and labour cover up to a specified amount and either the landlord or the tenant can call a 24 hour Helpline all year round.
If you have not taken a full management service from your letting agent or do not live near your property this can be a cost effective solution.
It should be stressed that all of these policies cover Emergency Assistance only and do not operate as a repair service for lack of routine maintenance.
Legal Expenses Insurance
Even when using the services of a professional letting agent, problems with tenants can occur. In many cases the tenants personal circumstances have changed during the term of the tenancy.
Situations like loss of their job, failure of their business, a relationship break-up, accident or illness will effect the tenants ability to pay the rent or their inclination to move out at the end of the tenancy.
All these situations can be resolved but will usually involve a Court hearing and solicitors costs. Legal expenses insurance will usually cover all of your legal costs, solicitors/barristers fees, Court and bailiffs' costs. Most such policies will cost well under £100 which represent less than 45 minutes of a specialist solicitors time on a normal fee paying basis. The average legal cost of a possession hearing in 2001 was £785, many cost well over £1,000.
Rent Guarantee Insurance
These policies are invaluable for most landlords. As a tax deductible premium this will guarantee you receive the rent you are expecting from your property regardless of your tenants personal circumstances, ability or willingness to pay the rent.
If you have a mortgage on the property or have calculated your rental income verses your outgoings this will ensure you do receive your rent. Most such policies will include the legal expenses, as detailed above. You will receive your rent and the legal fees to obtain vacant possession will be covered.
Policies will usually guarantee your rental for a fixed period, typically 6 or 12 months. Some policies will provide additional cover once you have obtained vacant possession until you are able to re-let your policy.
There were over 150,000 possession hearings in 2001 in relation to the 2.7m lets that took place the risk is relatively small but if you need to have your rent on a regular and guaranteed basis this insurance should be a high priority.
The costs vary from a fixed cost policy or are commonly rated as a percentage of the annual rental figure, typically 3-4%.
(Source: ARLA, 2016)