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Insurance for landlords

publication date: Jan 18, 2007
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The introduction of FSA regulations from 14th January 2005 has discouraged many agents from continuing to have involvement with insurance activities. Brian Turney, Managing Director of letting insurance specialists Letsure advises that agents have a duty of care to inform their clients of the risks involved and that whilst the regulations exclude non-regulated agents from actively selling products, they do not prevent them from informing landlord clients of the need for insurance.

In “putting the customer first” as the adage goes, an agent needs to first clearly comprehend the financial investment and expected returns of the landlord and then be able to explain the risks involved to the landlord.

There are a variety of reasons why people let property. They may have inherited property but are not ready to sell, they may wish to create an income stream or top up a pension. No matter the reason, they will be looking for a secure rent to provide a financial return on a property which represents a substantial financial investment.

The lettings market is not without risks and in many cases a landlord may not be aware that products and services exist to specifically help to reduce these risks in order to secure their investment. By ignoring these, the agent could jeopardise the landlord’s investment and anticipated return and also risks loss of time, customer goodwill and even their custom should things go wrong.

It is advisable therefore for an agent to provide a landlord with a comprehensive information pack, as part of their professional service to detail the implications of letting a property and to alert the client to the many specific risks they may face. Some landlords may have little idea or experience and will at least be grateful for the information. A landlord with a large portfolio of properties who may balance the size of their portfolio to counter the risk of loss on one or two properties will at least benefit from being brought up to date with information about the products and services that are available and may even come to realise the benefits of them.

In practice, insurance ought to be considered as part of the overall investment package and not treated as an optional additional cost. The agent should not be fearful of clearly identifying the needs and risks and providing appropriate solutions. Ultimately the landlord has the final choice of whether to purchase insurance cover or not. However, if the agent provides the information the landlord will at least be in possession of all the available options and will be able to make an informed decision based on knowing all the potential risks.

Typical products that are available that landlords should be made aware of are:

Protecting Buildings

Buildings cover is the starting point. The usual risks to a building such as fire, storm and flood are well known but it is important that policies for purchase by a landlord are designed to also reflect their more specific demands and needs. For example, by offering the widest possible cover in the event of the property being left unoccupied between lets; cover if the property is damaged by the tenant, as well as property owner’s liability cover should the tenant suffer an injury at the property and sue the landlord.

Protecting Contents

Likewise, contents insurance also needs to provide more specific covers; for example to ensure that damage by the tenant (not just the home owner and immediate family) is included.

For both buildings and contents insurance it is also important to ensure that if the landlord is unfortunate and suffers loss or damage that results in a subsequent claim, the claim is looked after efficiently by a company that understands the lettings industry.

Protecting Rent

Having identified the need for the above insurances, the landlord should also consider the risk of loss of rental income that might occur, for example, because the tenant refuses to pay it, or when it is not paid due to an incident at the property which means that the tenant cannot occupy the property, for example following a fire. Buildings and contents covers should cover loss of rent following incidents insured under the policy. Separate rent protection policies can be purchased to pay the rent if a tenant does not. Be aware that low cost products may not offer adequate cover; comprehensive covers can be purchased for a typical monthly cost of around 3 to 3.5 % of the monthly rent.

Landlords should be informed to look out for the following when they are comparing Rent Protection policies:

  • Level of excess: cheaper policies may carry higher excesses.
  • Definition of vacant possession: some companies define vacant possession as being when the tenant quits the property even when the property has been abandoned and the landlord does not have the legal right to take it back.
  • Policies that continue to pay rent after the tenancy has ended.
  • Policies that cover tenancies where the property is let to more than one tenant: where there are multiple tenants.

Covering Your Legal Costs

If landlords decide that they do not wish to arrange Rent Protection, at the very least, we suggest that they should have legal protection cover. We live in a litigious age where landlords are at risk of being sued by a tenant who has an accident in the property. Also, no matter how carefully tenants are vetted, problems arise. Legal protection insurance pays legal costs should problems arise to defend a legal action taken by tenants and to protect landlords’ legal rights in the case of a breach of tenancy agreement as well as pay costs for tenancy disputes over unpaid rent or damage to the property.

An annual premium of £85.00 including insurance premium tax can buy £50,000 of legal cover.

Assessing Your Tenants

A bad tenant can represent a huge risk. Thorough checks as those provided by a professional tenant assessment service will verify not only a tenant’s credit risk, but can also include employers’ and landlords’ checks and provide an indication as to whether the risk is minimal, a guarantor is recommended or whether it will be wiser for the landlord to decline the tenancy.

Providing full information to a landlord demonstrates that an agent has acted with a duty of care and provides a safeguard. If an agent is managing a property on behalf of a client and problems do arise, the agent will be expected to sort things out. If the landlord suffers a loss as a result of any of the events described above it is very likely that the initial response will be “why didn’t you warn me this could happen?”.

Tenants

Agents will also be looking after tenants as well as landlords. Tenants too need to ensure that the potential risks they face are adequately protected.

Insurance for tenants covers their own property plus damage to the landlords’ property. Such policies effectively provide protection for their deposit.

Tenants should be advised to fully assess the value of their contents before effecting insurance - clothes, televisions, computers, and consumer electronics – the figure soon rises.

A good professional relationship with a client calls for a full understanding of the client’s needs. Insurance protection should be regarded as a priority not an evil necessity.