By Frank Newman on 22nd November 2014
Little do renters know the potential liability they face should they damage their landlords property, even when it is through no fault of their own.
Here’s a worst case scenario; it dates back to 1999 but is equally relevant today.
It was breakfast time and one of the tenants in a student flat in Dunedin was frying up some bacon. He popped next door for some tomatoes (as one does). Next thing he knows not only has he burnt the bacon, he burnt the house down too! Shortly after the landlords insurance company contacted the hapless cook and handed him a bill for $150,000 in damages. To make matters worse, the insurance company also pursued the other four tenants named in the tenancy agreement, even though they were not in the house at the time!
But that’s not fair, you say – surely the landlord has insurance? Yes, the landlord did have insurance and was able to rebuild the house thanks to the payout he received, but the insurer has every right to recover their loss from those responsible for the damage.
As unreasonable as this may seem, in this case the courts held every party to the tenancy agreement was liable. Saying ‘sorry, I did not mean to do it” or “But I was not even in the house!” does not cut it. (A lawyer may argue a tenant who suffers a loss arising from the actions of another party may recover damages from that third party, but that’s another matter, and likely to benefit lawyers more than anyone else.)
It’s a horrific situation, but one that would have been avoided had the tenants taken out contents insurance, as was the case with a group of renters in Auckland. In that instance one of the three flatmates hung a coat hanger on a fire sprinkler nozzle, which one has to concede is well designed for that purpose.
It seems they lived on the eight floor because the result was eight floors of their apartment building were flooded, causing $26,000 worth of damage! All three tenants were found to be liable but one of the tenants had contents insurance which covered the entire bill.
Most renters don’t realise contents insurance covers them for much more than the replacement of their contents (which for many students may not be worth insuring). As a general rule contents policies have an automatic extension for personal liability (occupiers liability), usually between $1 million and $2 million. That extension covers damage to the property arising from their actions, or those of their flatmates or guests.
The Ministry of Business, Innovation and Employment website has this advice for tenants:
“You need insurance. Your landlord’s insurance policy does not protect your belongings. Under the RTA, tenants are liable for any damage they, or their invited guests, cause intentionally or carelessly. Even if you are not named on the Tenancy Agreement, you should have a:
• contents insurance policy to protect your belongings
• personal liability policy to protect you from any careless damage you or your invited guests may cause to the property.
If an insurance company pays out a landlord for damage and believes that a tenant is liable for that damage, the insurance company may seek compensation from the tenant. Personal liability insurance may protect you in this situation.”
A survey released by Massey University in January found that 80% of students did not have any type of contents insurance. They said, cost, lack of information, or misunderstandings about coverage under their parents’ insurance are the main reasons young people don’t have insurance policies of their own.
The misunderstanding about coverage under a policy in the name of their parents is that while the policy may extend to the child’s contents, it does not cover the child for personal liability (because the parents are not a party to the tenancy agreement).
According to a local broker the premium for a basic contents policy (including a personal liability extension) is a few hundred dollars. That’s a small price to pay when the risks are so great.
Although the onus is on the tenant to ensure they protect themselves against that risk, in my view it is good practice for a landlord (or their property manager) to make the tenant aware of the risks. Doing this in a letter that includes above quote from the Ministry would be the way to go.