Pursuing a mountain of debt: Landlords’ Insurance

Elsewhere I spoke of ‘Avoiding the spring of carnage’ with a focus on rental assistance programs during the COVID-19 crisis. So, how might this mountain of debt be played out.

Here, I examine landlords’ insurance. Two clear issues appear to be emerging:

1. When a tenant falls into rent arrears, the landlord is required to mitigate their loss and, in normal times, this is achieved by commencing eviction action against the tenant ... is this still the case?
2. The insurance company can step into the shoes of the landlord and commence action to recover rent arrears through the court system.

On 15 April 2020, the NSW Government implemented a partial moratorium on evictions. Clause 41C (2) (b) of the Residential Tenancies Regulation 2019 requires that a ‘landlord has participated, in good faith, in a formal rent negotiation process with the impacted tenant’ before they can commence eviction action. (Check out the Tenants’ Union of NSW blog here.) So, evictions for impacted tenants are restricted. How is landlords’ insurance responding to the moratorium measures and the possibility of rent arrears accruing?

When a tenant falls into rent arrears, the general wisdom has been that the landlord is required to mitigate their loss and this is achieved by commencing eviction action against the tenant. But this story on the ABC also tells us ‘thousands of mum-and-dad investors are being caught out by insurance companies refusing to cover them when they cut rent for tenants under financial stress due to coronavirus restrictions.’

It is currently the case that some landlord insurance policies state they will not pay claims made by landlords where rent has been reduced, only where rent is not paid at all. Not all insurers with these policies are taking this approach. However there is a lot of uncertainty in relation to this, as well as confusion regarding how a landlord’s ability to make a claim interacts with rent reduction negotiations. Whatever the scenario, lessors’ insurance is being used by some parts of the real estate industry as a reason for the lack of negotiation on rent reductions.

This more recent development, with some insurers waiving a requirement to issue an eviction notice, appears to be in line with the opinion provided to the Tenants’ Union of NSW by the Consumer Action Law Centre:

"It appears many insurers require landlords to 'take all reasonable steps' to remedy non-payment/evict before agreeing to pay a claim for loss of rent. [...] We think that section 54 of the Insurance Contracts Act 1984 should apply here to prevent an insurer from relying on such a clause during the six month moratorium, and insurers should be telling all their landlord policy holders that taking steps toward eviction will not help them claim on their policy. If we say the omission under section 54 is the failure to send the eviction notice, it is very clear that during this six month Government moratorium period at least, there is no way that this failure could cause or contribute to the insurer's loss. Given this, together with the strong public policy reasons to keep people in their homes, these exclusions should not be relied on by insurers to deny claims."

The Insurance Council of Australia says that, in cases where a residential tenant is suffering genuine financial hardship as a direct result of COVID-19 and cannot fulfil their rental obligations, insurers will not pursue the tenant for unpaid rent. But it also says that new landlord insurance policies are adjusting the Tenant Default component of the policy ‘due to the financial uncertainty created by the economic downturn, and the various government announcements about tenant protection measures and the impact on landlords, tenants and insurers.’ Meaning, that many insurers have either ceased to offer landlord insurance to new applicants or, if they still do, then rental default cover is no longer available.

Some landlords want to do the right thing. They are prepared to negotiate rent reductions or waivers of rent arrears and do this ‘in good faith’. However, these landlords are not able to recover the lost rent from most landlord insurance policies. This is clearly a disincentive for landlords who otherwise might wish to demonstrate good will and share the burden with their tenants. Indeed, one insurer (AON) makes it very clear that, if a landlord and a tenant mutually agree to a reduction in the weekly rental payments, then the difference in weekly rent is not claimable because this is a mutual agreement between them.

In correspondence with the Tenants’ Union of NSW, Financial Rights Legal Centre (FRLC) states:

"The Australian Financial Complaints Authority (AFCA) is the financial services ombudsman where a landlord could take a dispute with their insurer for free after first trying to resolve the dispute with the insurer directly.

Some landlord insurance policies say they won’t pay where rent is reduced, only where rent is not paid at all. We hope insurers take a pragmatic approach and consider paying on reduction anyway. We understand from our stakeholder engagement, not all insurers with these policies are buying into this approach, but some are. If they do not, a dispute should be raised to AFCA, although we cannot guarantee the outcome but there is no cost or risk to raising a dispute. Some insurers may be more hard-nosed than others, because of their level of exposure to this issue - that is the amount of policies they write and the potential amount of money they need to pay out.  Some insurers specialise in landlord’s insurance for example, and may be harder hit by this problem than others who offer a range of products."

The second emerging issue is that the insurance company can step into the shoes of the landlord and commence action to recover rent areas through the court system.

The Insurance Council of Australia (ICA) told the Australian Parliament in April that at that point around 3,000 claims have been made against landlord insurance policies for rent lost because of the COVID-19 downturn. The ICA when questioned would also not rule out insurers going after tenants to recover sums once the coronavirus crisis is over. Unfortunately we have heard from colleagues in Queensland they are already aware of moves by insurers to chase individual tenants impacted by COVID-19.

Financial Rights Legal Centre along with other consumer advocates are strongly advocating for insurers to waive their right to recover later. They also want tenants to be aware they have rights about financial hardship under the General Insurance Code of Practice in the event an insurer does pop up later. In fact, they can exercise this right in most states for 6 years.

No one should want to see tenants pursued for these debts given the circumstances. The best way to ensure this doesn't happen is for the NSW Civil and Administrative Tribunal to be given the power to set a fair reduced rent where negotiations have failed, as happened in a recent Queensland decision (their moratorium measures did provide the Tribunal with this power). In terms of landlords’ insurance, a landlord should be able to make a claim for rent arrears during COVID-19 without having to commence eviction proceedings against the tenant.

The question arises whether an insurance company should be bound to pay a claim for the difference in rent where the landlord agrees to rent reduction. We think insurance companies should bear the burden: that is what their product is there for - they attempted to calculate risk of rent loss and sold a gamble based on that risk. If they are good at their job they need to include in their calculations all scenarios, including the possibility of an economic meltdown. They didn't do that very well, in that they haven't structured the bet in a way that matches the reality and now are trying to avoid paying out. In any case, many policies have a limit on how much rent a landlord may claim, which already splits the burden if it is more than the insurer was willing to gamble. No insurance company should be chasing impacted tenants for compensation where the insurer was required to settle a landlord's claim.

Long term, as part of creating a different culture of housing provision, we think it would be useful if all landlords were required to have insurance in the same way other forms of insurance are required for businesses. At the moment, we understand that landlord's insurance (as opposed to building insurance) may be only held by roughly around 40% of landlords.

We hope that insurers - as some have done during the crisis - act in a way to ensure they come out of this with credibility. It's in their long term interest - they will gain more business in the future. Unfortunately, at the moment, many are sending a signal that landlords’ insurance is not worth buying.

Thank you to Consumer Action Law Centre and Financial Rights Legal Centre for providing their expertise to the Tenants’ Union of NSW on these issues.