Owning an investment property is not without risk
Pipes can burst, gutters can overflow, and drains can get blocked. Having the right property insurance in place to cover these unbudgeted losses is an important feature of a successful investment property strategy.
Here are 5 things you should consider when organising insurance for your rental property:
1. Setting the correct Sum Insured
Previously you could simply insure for the rebuild of your property based upon the square metre floor area of the building. You’d tell your insurer the floor area and they’d provide premium terms based on that.
Losses as a result of the Christchurch earthquakes changed that position when it became clear that insurers (and the re-insurers) exposure to loss was far greater than had been previously estimated. To better assess their exposure, insurers moved away from the floor area method and instead introduced a capped Sum Insured basis of settlement. This meant the onus is on the insured to provide an appropriate amount which, in the event of a loss, will be the maximum amount that the insurer will pay.
So, how do you go about guaranteeing that you have insured your asset for the right amount?
There are several online tools, such as the Cordell calculator, which can help you to determine an appropriate amount. The downside with online calculators is that they don’t account for any unusual or high value features of a building, or where there might be access difficulties which make the cost of demolition and re-build more expensive. There’s also the issue of other items not associated with the floor space such as swimming pools and retaining walls.
The safest way to ensure the amount is correct is to organise a ‘Valuation for Insurance Purposes’ through a registered valuer. Using a registered valuer will guarantee that you are not under insuring (leaving you short in the event of a loss) or over insuring (meaning that you are paying additional premiums unnecessarily).
2. Understand the impact of any special Landlord related warranties
When you purchase Building Insurance for your investment property, it’s important that the insurer is made aware that the building will be rented out, otherwise the policy cover will be voided in the event of a claim.
Prior to purchasing the policy make sure you are aware of any Warranties (conditions that you are required to comply with in order for the policy to be valid). The conditions can vary from one insurer to the next but may include:
- you must exercise reasonable care in the selection of your tenants, which will include obtaining references for each adult tenant;
- at regular intervals you or your managing agent must complete a property inspection and keep written and photographic records;
- collect a total of 3 weeks rent in any combination of rent in advance and bond that will be registered with Tenancy Services.
3. Buy a policy that includes the Landlord extension cover
- Look for a policy that includes specific cover for Landlords and rental properties as they should include cover for:
- Malicious Damage or Theft committed by the tenant(s) or persons at the home with your tenants’ permission.
- Landlord’s Furnishings
- Loss of Rent due to loss covered by the policy: If your home is uninhabitable because of loss covered by the policy, the policy will pay or reimburse you for loss of rent from the date that the home becomes uninhabitable.
Landlords of residential property should also be aware of the new tenancy legislation that was passed on 30 July 2019 (effective 27th August 2019) which affects landlords and tenants in several ways. For more information please visit www.tenancy.govt.nz/about-tenancy-services/news/rta2-passed.
4. Premium Payment Options
Managing cash flow is an important part of a successful investment property strategy. Insurance brokers will normally offer a monthly payment option which can be implemented for low finance rate allowing the premium to be spread over 10 or 12 months.
5. Policy Excess Options
The cost of insurance has increased over the last few years. One way to reduce the premium cost is to increase your policy excess levels (the first amount of the claim that you are not covered for).
As insurance brokers to over 100,000 Kiwi businesses, Aon understands the vital contribution that Small and Medium business makes to New Zealand’s local and global success. Aon has the expertise to develop innovative solutions for these businesses by leveraging data and analytic capability to prepare clients for the future. If you’d like to talk to your local Aon Broker about any of these 5 things to consider when taking out insurance for your retail business, please contact the team on 0800 266 276.