Why You Need landlord Insurance

It’s one of those rare things – an aspect of owning and renting out property that isn’t controlled by highly specific laws. There is no legal obligation to have landlord insurance. Some landlords treat it as an optional extra, others join landlord organisations instead.

The reality is that landlord insurance will protect you from any financial loss caused by damage or disaster that happens to your investment property. It means you, your investment and your tenants have security should the worst happen.

 

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It’s not a legal obligation, but

Most mortgage lenders will include a clause in their lending that makes it obligatory to have a certain amount of insurance on the properties you are renting out. This is to cover the cost of the amount you are borrowing, should you lose your rental income. Each lender will have their own minimum amount of cover, which they will explain as part of your application.

If you are converting a family home into a rented property, you will need to let your mortgage provider know. Many will have clauses stipulating what purposes the property can be used for. In an extreme case, changing a property’s use without informing your lender could see them demanding full repayment of your loan.

Why you can’t use regular home insurance

Landlord insurance has been described as ‘home insurance plus’, which might make the lazy amongst us think that perhaps normal home and contents insurance will suffice to cover a rental property.

Unfortunately, your insurer is unlikely to pay out, as your regular home insurance will be invalidated if you are using a property to rent to tenants rather than your own house.

So, getting landlord insurance is a smart idea. Not only will it help you protect your property and tenants, it means your money is protected, if the worse should happen.

Landlords with student accommodation especially should consider getting landlord insurance. Properties that are rented to student tenants tend to have a higher number of tenants living there. It’s also likely that the tenants will have lots of regular visitors. As the landlord it will be impossible to know who is coming and going – students are a convivial bunch and will have friends and guests popping in.

We can also assume that they have a more…hectic…lifestyle than if you were renting to a middle-aged couple.

What is landlord insurance?

As with your normal household insurance, your landlord cover can go from a basic policy up to fully comprehensive cover which protects you against all eventualities. The amount of cover you will need will depend on your own attitude towards risk, the money you want to spend, as well as the type of property and tenants that you have.

How to work out the cost of landlord insurance

The best way to calculate what’s the right amount of cover for your property is to ask how you would cover the costs if any of the following happened:

• The property is damaged
• You need to replace the contents that belongs to you
• Someone is injured because of something you are responsible for
• Someone who works for you is injured while at the property.

The core of any policy should focus on three things:

1. Buildings insurance

In short, the bricks and mortar aspect of the property. Although this will also cover your fitted kitchen and bathroom suite. Sometimes it will also cover your boiler, depending on the insurance agent and policy you choose.

Some policies also cover the costs for something called ‘Trace and Access’. This is damage caused when contractors are searching for the source of a leak. This might require them to knock down walls, dig up external areas or remove floorboards. There are scenarios when searching for the cause of a problem can be more expensive than the problem itself.

Your building insurance should cover you if you need to rebuild the property from scratch. There’s more information below about the cost of rebuilding and why it’s different to market value. There’s also information on how to calculate this cost.

If your property is part of a larger building, for instance it’s a flat or a student pod in a purpose-built student block, the freeholder will already have building insurance to cover the cost of rebuilding. This cost would be included in an service charge you pay.

However, while the freeholder’s insurance would cover the walls and ceiling, it might not include built-in parts of the property that you own, for instance the fitted kitchen, or pipework.

In cases like this, your landlord insurance would only need to cover your own fixtures and fittings. You would need to consult your lease to know how the cost of repairs would be divided between the freeholder and you.

2. Contents insurance

This would cover the non-fitted items in your rental property that you own. The majority of student accommodation is supplied full- or part-furnished. Often you will have included value-added extras, such as TVs and speaker systems, in the communal areas and bedrooms. There will also be free-standing white goods, like fridge freezers, dishwashers and washing machines in the kitchen areas.

As its name suggests, this aspect of landlord insurance covers any loss or damage to these items caused by accidents, malicious damage or theft.

As a landlord, your insurance isn’t expected to cover your tenants’ possessions. In fact, it is unlikely that you will find a policy that will. Your renters will need to supply their own policies, or as Purple Frog tenants, they get basic contents cover free when they find the house.

A more noteworthy aspect of this type of insurance is that your policy will not cover wear and tear. As things get older and more used, they will wear out, get scruffy and eventually need to be replaced. You will have to factor those costs into the normal expenses of operating a rental business.

While insurance companies won’t pay for items that need to be replaced through normal use, they will let you claim for problems caused by wear and tear. For instance, an old and dilapidated single pane window has caused significant damp in a room. This in turn has caused the walls to need repair. While your policy will cover repairing the damaged walls, you will need to pay for replacing the windows yourself.

Even if you are providing your property unfurnished, some level of contents insurance might be required to cover carpets, curtains and kitchen appliances, such as microwaves.

3. Liability insurance

Imagine if one of your tenants trips on a piece of loose carpet and tumbles to the bottom of the stairs. As repairing this is your responsibility, they might sue you for compensation.

Liability insurance covers you if you are sued or you have to foot the bill for medical treatment following an accident in your property, which was your fault.

Liability can be a huge sum – up to £5 million – but legal costs, paying compensation or medical treatment can add up. A serious injury might leave you needing to pay a huge settlement.

The liability claim could come from a tenant or visitor. However, they can only claim if the accident is your fault, for instance it was caused by unresolved maintenance issues. If a tenant trips over their own feet you are not liable. As well as being a reason to make sure maintenance is up-to-date, the cost of a lawsuit means it’s best to be covered.

You might also be liable for damage that is caused to another person’s property. For instance, a leaking roof ruining a tenant’s computer.

You would not be expected to cover the cost of a tenant’s possessions if the loss or damage is not your fault – for instance it was destroyed in a storm.

Other types of landlord insurance

The above are the basic requirements of landlord insurance. Different polices will have slightly different levels of cover, so it’s always wise to read the policy documents carefully before signing them. Overall, the main aspects of your landlord insurance are indeed modified versions of a homeowner’s policies.

However, owning a rented property is also a business that throws up some unique issues that you will also need to consider. As well as the normal risks of owning a home, there are risks which are unique to any property you are offering to let.

The core benefit to buying landlord insurance is that you can normally build a package that reflects the aspects of your letting business that you feel you need to protect.

Other types of insurance that you should consider include the following:

Public liability insurance

If you employ a tradesperson or contractor to do work at your rented properties, you should consider public liability. This will cover your costs should someone you employ be hurt or injured while at the property doing work for you.

Like your liability cover, this will help you to cover legal costs, medical bills and compensation if you are sued.

Loss of rent insurance

How would you cover the financial loss you’d suffer if your rented property became uninhabitable and the tenants moved out?

Covering this cost is especially important if you use rent from your tenants to pay the mortgage on the property. Loss of rent insurance means that you don’t lose the income, even if the tenants are gone.

This would cover if the property suffered significant damage due to an insured event such as a fire, or storm damage.

It is different to having an unoccupied property or if a tenant defaults on their rent.

Unoccupied property insurance

This would cover any void periods, when a property is empty. Some landlord insurance policies are only valid while the place has tenants living in it. Unoccupied property insurance covers a landlord for any problems that might happen while the house was empty.

A usual stipulation for this type of insurance is that the property is still maintained in a fit state. This would mean that you still carried out regular inspections and maintenance checks to prevent damage which might result in a claim.

Often, these policies have a payout window that covers the property if it is empty for up to 30 days.

Tenant default insurance

While the majority of tenants pay their rent on time, occasionally someone might fall into serious arrears.

If these arrears escalate, it can quickly become a costly problem for the landlord. You might find yourself in a situation where you cannot afford to lose this income while you are waiting to recover the money.

By buying tenant default cover you are able to guarantee you receive income for at least eight months, while you are working towards recovering the rent.

Again, the insurance companies will need you to have done some due diligence. For instance, you will be expected to credit check and get references for each tenant, before signing the contract.

In the case of student tenants, they will not have built up a credit history, so these checks aren’t possible. It is worth making sure that the policy you take out valid or whether competing checks on guarantors will be sufficient.

You would also need to be clear when you can claim on the policy. Most claims will be valid after two months that the tenant has defaulted on their rent. You will, of course, need to make sure you know the time scales and how to claim when you choose your policy.

Legal expenses insurance

This is different to liability, which covers court costs if you are sued. Legal expenses insurance covers a situation where you might need to take someone else to court.

This might include so you can retrieve rent arrears, or you need to evict a tenant.

Some insurers will also give you free legal advice as part of this cover. This means you can pick up the phone and speak to a legal expert straightaway.

Alternative accommodation insurance

Some tenancy contracts have a clause which means that the landlord will need to find their tenants alternative accommodation if the rented property becomes uninhabitable.

Rather than having to shoulder this cost yourself, a policy with alternative accommodation insurance means that the expense of rehousing your tenants is covered for you.

It goes without saying that this would only cover situations caused by insurable incidents, such as weather damage or gas leaks. You wouldn’t be able to claim if your builders overrun.

Home emergency insurance

It’s three in the morning, your tenant calls to tell you that a pipe has burst and the kitchen is flooded. Or it’s December, the boiler has broken and they’re sitting in the house shivering.

Having a managing agent means that someone else will handle that call and organise the emergency call out. If you do your own property maintenance, taking that 3 am call can be draining. You also need to source qualified tradespeople at short notice.

Home emergency cover means that you don’t have to worry about this. In an emergency, like a burst pipe, you can call on someone and know they’ll be on hand to help.

In some cases, tenants can call the helpline themselves. As with all landlord insurance, policies will change between providers. For instance, some might bundle alternative accommodation insurance into this service.

It is worth checking if the cover includes labour and materials, as well as the call out charge. You should also check if there’s a yearly maximum cost or number of call outs.

Landlord insurance – useful terms

As with all industries, insurance companies and brokers have their own jargon. Below is a quick overview of the most common terms you’ll encounter when arranging your cover.

Perils

Although it sounds ominous, this is a standard insurance term. It simply means the insurable events that might cause damage to the property, your fixtures and fittings, and contents.

Perils might include things like:

• Fire and lightning
• Flood, storm and weather damage
• Escape of water – leaks, burst pipes
• Loss of metered water/oil
• Earthquakes
• Explosions
• Subsidence
• Theft, malicious damage and vandalism

Some of these problems will be covered in a standard policy, others will need extra cover. This depends on your policy. For instance, some policies will also include illegal activity by tenants as a peril.

Sum insured

This is the maximum amount that the insurer will pay in one claim. This usually equals the rebuild value of the house.

Rebuild value

This is literally the amount of money it would cost to build an identical property on the same plot of land, if the original was destroyed.

The rebuild value should include labour and materials.

It is calculated on the external square footage of the property. If your property has the same layout for its ground floor and then all its subsequent stories, you need to know the square-footage for one floor and multiple by the number of floors.

If each floor has different dimensions, you would need to work out the square-footage of each and then add them together.

Once you have this information, there are three ways to work out the rebuild cost:

• Yourself, using an online converter (https://abi.bcis.co.uk/calculator/calculator.aspx)
• Looking at a recent survey, for instance when you bought the property
• Pay for a Royal Institution of Chartered Surveyors (RICS) surveyor to do a new survey

Some insurers will offer incentives to landlords who pay for a new survey or have a recent RICS survey.

Average

Between buying a policy and it expiration, the cost of a rebuild might change. If the difference between the original amount that the property was insured for and the actual cost has risen by too great a sum, some insurers insist on only paying the ‘average’ cost.

This is a concern if the value of the property has be under reported so it is under-insured. In this case, the insurer will only pay a portion of the total costs. The formula is:

This is the reason that it's important to get your rebuild calculations correct.

Day one inflation

One of the main reasons that the cost of a rebuild will rise is normal monetary inflation.

Companies that provide landlord insurance will factor this into their rebuild calculations. This is ‘day one inflation’ and is a calculation of how much inflation might increase during the lifespan of the policy.

For instance, if your rebuild cost is said to be £75,000 when you take out the policy and the agent predicts monetary inflation will be 10%, they will automatically add  £7,500 to the amount they are willing to pay if you make a claim.

Excess

This is the amount the policy holder will be expected to pay towards any repairs or replacement when a claim is made.

For instance, if your excess is £1,000 and repairs are £3,500 the insurance company will expect to only cover £2,500 of the cost.

All insurance policies will include an excess. The amount of excess you are willing to pay will affect the cost of your premium. The less excess a landlord is willing to pay, the more expensive the premium will be.

Conditions

As a landlord you’ll be familiar with terms and conditions. In this case, the conditions in the policy documents are just that: the responsibilities you have in order to make sure the insurance is valid. Not keeping to your end of the deal might result in a claim being refused. That could be a costly mistake.

Normal conditions would include that you comply with national and regional regulations, and have up-to-date documentation, such as gas certificates. You would also need to ensure that the property has the relevant safety measures. For instance, all rented accommodation needs smoke alarms fitted on every floor. Insurance aside, this is a legal requirement to ensure your tenants are safe!

You will probably need to inform your insurer if the property is empty or you are planning on doing building work. Both of these situations mean the risk associated with the property changes.

Not following the conditions is known as ‘acting as if uninsured’. This means acting in a risky way, because the costs of your actions will be paid for out of the insurance.

Making a claim

When making a claim, you will be expected to do so as soon as possible after the event and include any evidence that will help the insurer process the claim.

Evidence would include things like police crime report numbers, photographs or videos and possibly quotes from tradespeople.

Exclusions

This is any loss or damage that is excluded from the policy. The obvious example is wear and tear.

You should also check that tenants breaking their lease agreement doesn’t leave you in a situation where damages they have caused leave you with a costly exclusion.

How much does landlord insurance cost?

As with all services, the cost is dependent on several factors.

Cost is affected by the amount of cover you want to take, but also on the type of property you wish to insure. The insurers will also account for the property’s location, the number of tenants and type of tenants you will be renting to.

Finally, rental properties are normally insured on a building by building basis. However, portfolio landlords, with more than four properties can get discounts.

Where to find landlord insurance

If you’re not sure what the best policy for you is, you should talk to a broker.

Purple Frog recommends Jelf.

Make sure that you choose the insurance that best matches your needs and that you fully understand any policies you take out. You can use this blog as a guide or seek independent advice, too.

Jelf provides lots of benefits for landlords. Again, depending on the policies you choose, you can enjoy:

• £5m Property Owners liability as standard
• £25,000 cover for contents in communal areas
• Accidental and malicious damage caused by tenants
• Illegal cultivation of drugs
• Alternative accommodation/loss of rent
• Eviction of squatters
• Trace and access
• Removing items left by fly tipping
• Removal of insect nests
• Failure of Utilities
• Day one inflation of at least 25%
• 24/7 claims service
• Rebuild Valuations can be part/full funded (BCH)

 

Purple Frog has used Jelf as our insurer for several years. While Purple Frog are paid a commission to introduce landlords to Jelf, we are happy to make this recommendation based on our existing relationship with the company and as we believe it will benefit our clients. Clients are not required to purchase Jelf insurance in order to do business with Purple Frog. We will only supply Jelf with your details if we have your express consent to do so.

Purple Frog is an Introducer Appointed Representative of Jelf Insurance Brokers Limited which is authorised and regulated by the Financial Conduct Authority (FCA). Not all products and services offered are regulated by the FCA.