Landlord Insurance

Buy-to-let and commercial landlords

Forensic accountant David S Black has some practical advice for buy-to-let and commercial landlords. Many professionals and business owners in practice are landlords and most have clients who are landlords to some extent or other. As such, some have insurance policies that are variants on domestic policies but most will have policies specifically designed for landlords, whether they specialise in domestic or commercial properties or a mixture thereof.

In recent years, I have had a few clients who have been surprised by the result when they submitted claims, because they had not understood the meaning of everything within a long document and their insurance broker had not brought to their attention and explained the significance of some key clauses buried within the policy wording.

The fundamental importance of disclosure

If you have been involved in obtaining professional indemnity insurance or in the annual renewal process, you will be aware that there is a fairly detailed questionnaire to complete before a quotation is obtained and cover secured. If you think about your business or household insurance, you might realise that proposal forms are much shorter, with less detail being requested but with a form of catch-all question to the effect ‘Please disclose anything else that that could be relevant’, so putting the onus on the insured (you) to advise of anything else that you feel could influence the underwriters’ decision and premium quoted.

You might ask what could be relevant. Examples are that you have had a claim under another policy (not motor generally) for another business enterprise or that you have a garage attached to your premises in which motor enthusiasts do DIY repairs to cars. A third example is where you have had involvement with a business that has failed. The thing about these situations is that they can change from year to year so it is better to advise at the next renewal than to have some awkward questions in the event of a claim several years later.

disclosure pitfalls come at renewal

Questions on claims and other matters arise at the initial proposal stage but the disclosure pitfalls come at renewal, as you often have no contact with the insurer or broker other than a letter setting out a renewal summary and inviting you to renew by payment and return of a form. The renewal summary pack tends to include a statement of facts with all answers prepopulated, so putting the onus on the insured to advise of all changes in circumstances. The effect of such an approach, which is relevant in much of household and small business insurance, including landlord policies, has long been considered unfair on the insured and there have been changes in the law with the passing of the Consumer Insurance (Disclosure and Representations) Act 2012 that alter the expectations from insureds. A subsequent article will explain changes and proposals in relation to commercial insurance.

Devilish detail in the Conditions and Warranties

I have a 66 page Property Owners Policy Document to hand with General Conditions and General Exclusions at pages 59 to 64. The Contents page at the front identifies those sections of the policy, so one knows where to look. However we then find Supplementary Conditions applicable to Section A at page 13 and we find Special Conditions applicable to individual clauses within the policy as one reads through. We then end up with Additional Conditions listed from pages 23 to 27, some of which have Warranty as part of the title. These do not tend to be brought to your attention in either the renewal summary or in the initial proposal questions, so you are unlikely to know about them in advance of cover commencing. In essence, these policies have a lot of detail in them that may be helpful to address in preparing the lease in the first place, because you as landlord may need to take action yourself or place a duty on the tenant. The case I came across was an accountant as landlord of a commercial business (as an independent investment) so the comments relate to a commercial lease, but some of the items apply to residential landlords.

Additional conditions

The Additional Conditions are the ones of most significance for this article – as most of the others relate to requirements on the insured about doing things on time – although disputes have gone to Court over alleged breaches of General Conditions. The first five conditions relate to treatment and storage of waste, so it is important that your tenant is made aware of their duties. The next few again require advice to the tenant as they affect regular operations of his business. We then get to an Electric Circuit Warranty, which is a condition precedent to liability that there exists a valid IEE test certificate obtained less than five years before. There is a similar requirement for Gas Appliances (without the five year interval between inspections).

We also have a Roof Maintenance Clause with a specific requirement for annual inspections of flat felt roofs and prompt repair of any defects. The final one is that all furniture and equipment within the premises complies with The Furniture and Furnishings (Fire) (Safety) Regulations 1988 to 2010.

The significance of these Conditions

The significance of all of these Conditions is that the landlord needs to have on file proof of compliance even if it is the tenant’s responsibility to pay for the inspections. When I queried the position on lease requirements, these items were not addressed in a way that placed an obligation on the tenant to comply and prove compliance. For those who have involvement with only one or two properties, appreciation of the requirements and the implications of being in breach may not be understood.

In simple terms, unless you are deemed to be covered by the Consumer Insurance Act 2012, non compliance, or an inability to demonstrate attempts to comply, can result in repudiation of an insurance claim. This can arise even if the reason for the claim, say flooding, is not related to breach of the Conditions. It is better for your own safety to check the policy wording and the lease requirements, and ensure that you have your own file of proof of compliance.

Business interruption and increased costs

This section of the policy covers loss of rent and costs incurred to minimise the loss. What then becomes relevant is what your lease says about rent cessation in the event of the property needing to be vacated after an incident. I had a case recently where the landlord had no idea as to why the loss adjuster wished to inspect the lease wording. It turned out that there was a rent cessor clause in the lease, so the landlord had no obligation to assist the tenants by finding temporary accommodation and paying for it, if it was going to cost him more than the rent he continued to receive.

In this case, the landlord queried his extent of cover with his broker because he continued to accept rent and pay for alternative accommodation for 12 weeks until the property was ready to re-occupy. He was told that he had cover but not that he would be responsible for all costs incurred in excess of the rent received. This is different to the alternative accommodation cover we have in our household policies, or how it might be approached if we had to relocate our offices after a fire or flood. The moral here is ‘Ensure that you understand the limits of your cover and how it can be affected by other agreements’.

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