When a landlord rented out a detached family house in a quiet residential area in Su olk, he had little cause for concern. The tenant, a well presented businessman with a young family – and a smart car parked in the driveway – appeared to be the height of respectability. The fact that he was able to put down a cash deposit and commit to a tenancy agreement only added to his credibility.
However, a few months later, acting on a tip-o from a neighbour, police raided the four bedroom house and the landlord discovered the investment property, which had recently been refurbished, had been turned into a cannabis factory, growing plants with a street value of £150,000. “It was like a jungle,” the 41-year-old landlord said. “I’d spent thousands refurbishing the house only to find everything had been ripped out and replaced with cannabis plants.”
However, the landlord was in for another shock when he phoned his insurer to make a claim for damages, only to discover that he was not covered for malicious damage.
He added, “It was only then I discovered in the small print an illegal activities exclusion clause preventing me from making a claim. It cost me a fortune to make good the damage.” Cannabis farms are an increasing problem. According to the police, police seized 456,911 cannabis plants across the UK last year, reflecting a sharp rise in home-based cannabis cultivation.
“The consequences of a cannabis farm on a landlord’s property can be financially catastrophic,” said Jane Guaschi, Business Manager at Direct Line for Business. “Landlords should check to see if their insurance policy covers them for malicious damage as it’s not just the structural damage that could have insurance implications.”
Often the best way for a landlord to protect themselves, their property and indeed their tenant is to take out appropriate landlords’ insurance, which differs from standard home insurance which generally does not cover any claims made against a Buy to Let property; leaving the actual property, its contents, the landlord and the tenants occupying the dwelling vulnerable.
In fact, a recent study by AXA estimated that as many as a quarter of residential landlords in the UK have the wrong insurance, or no insurance at all. “It is important that landlords understand that renting a property is a business and standard home insurance may leave them vulnerable and open to injury claims from their tenants,” said Gary Holmes, Product Manager at Direct Line for Business.
Public liability cover comes standard with landlord insurance, with policies typically ranging from £100 to £250 annually depending on the type of property and risk being insured, and will provide cover for third party claims that are related to their property.
A standard home policy won’t cover the potential risks that landlords face such as loss of rent and costs of alternative accommodation.” Julie McMullan, HomeLet
Julie McMullan, Head of Insurance at Barbon Insurance Group, which owns HomeLet, commented, “A standard home buildings or contents policy won’t consider the potential risks that landlords face, such as loss of rent and accommodation costs, should the tenants have to move out after an insured event.
“Also, the landlord wouldn’t be covered for liability as a landlord if, for example, the tenant hurts themselves on a faulty cooker, or if an employee – such as a gardener – harms him or herself whilst on the property.”
It is also worth noting that while there is no legal obligation for landlords to take out landlord insurance to cover the property owner from financial losses connected with rental properties, a policy may be required as a condition by their mortgage lender.
If a tenant with criminal intent, establishes a cannabis factory, a standard home policy would not cover the landlord’s losses.” Steve Jones, Rentguard
“If a Buy to Let mortgage is in place the lender may specify that such insurance must be in place,” said Steve Jones, Managing Director at Rentguard Insurance, Perils such as floods, fire, subsidence, theft, lightning, explosion, earthquake, storm, escape of water and oil, are among some of the main things that a landlord insurance policy will cover, along with general cover for the building, as well as potentially the internal contents belonging to the landlord or tenant.
Jones continued, “Additional covers can be added to landlord insurance policies, such as malicious damage caused by the tenant.
“Should a landlord let their property to a tenant who has criminal intent, then a standard buildings cover would be highly unlikely to cover the landlord in the event that a cannabis factory, for instance, is discovered – and the costs of putting this right could run into tens of thousands of pounds.”
Landlords may also care to ensure that the policy provides for, somewhat crucially, rent guarantee and legal protection insurance.
When a landlord is faced with a disaster of this magnitude, the financial headache of the clean-up is not the only thing that will hurt the landlord’s back pocket, the property owner could also face loss of rent, not to mention hefty legal costs, as well as repair and eviction expenses.
There are times when a landlord will have no alternative but to make a claim for possession of their property because their tenant has failed to pay the rent. Unfortunately the process of evicting tenants to regain vacant possession can often prove to be onerous and expensive, which is why rent guarantee and legal expenses insurance should be strongly considered as part of every let.
Steve added, “Legal expenses and rent guarantee insurance provides landlords with a safety net should one of their tenants default on the rent.
“It gives landlords peace of mind that they will be able to cover their costs associated with the property, i.e. the mortgage and any other bills, without the rental income.”
Different insurers’ policies will vary, with prices for this extra service starting from about £50 for six months protection, with most covering the rent for a period of six to 12 months, while the cost of legal and eviction proceedings against the tenant will also be covered up to around £50,000 per claim.
“It is one of those policies that may seem like an extra unwanted expense at the beginning of the tenancy, when so many other costs come into play, but landlords soon appreciate the value of as soon as they’ve had to make a claim,” said Jones, who added that getting tenants referenced is often a condition of the policy “to safeguard ourselves”.
A detailed inventory of a property is often used to help settle tenancy deposit disputes at the end of a tenancy, but Jones points out that they, supported by photographic evidence, are also useful when it comes to any potential insurance claims.
“There are many inventory templates available online to make things as simple as possible for landlords,” he added.
In addition to presenting landlords with genuine peace of mind, landlord insurance, including rent guarantee and legal expenses insurance, also provide letting and managing agents with the potential to earn additional income through referrals.
But unless a letting or managing agent is authorised by the Financial Conduct Authority (FCA), enabling them to offer advice about insurance, then they should not do so. However, they could potentially act as an introducer appointed representative, permitting them to potentially refer business to a broker, earning a referral fee of typically five to 25 per cent of the new business value of the policy from the insurance firm.
“We offer commission of 20 per cent upwards to letting agents and brokers for landlord building insurance policies placed with us, and similar rates for legal expenses and rent guarantee policies,” Jones explained.
Aside from the opportunity to earn extra income through referrals, insurance policies also present some agents with the chance to add an extra string to their bow, in terms of the services that they provide their clients with.
Many agents now offer a bespoke range of insurance services tailored specifically for landlords that offer them greater peace of mind by guaranteeing to pay their rent, as part of a full comprehensive property management service, which can be packaged with other services and sold to landlords, who in turn can tax deduct this expense against the levy that they have to pay on their rental income.
All rent guarantee policies provided by Let Alliance, for instance, are nil excess and are designed to provide comprehensive cover for letting agents.
What’s more, Let Alliance’s ‘Portfolio Transfer’ scheme allows agents to cover their entire managed portfolio in a single transaction, as long as the tenants have been referenced by the company or an approved agency without arrears or dispute.
“We are the only providers in the market that offer this exceptional proposition, adding £100 per property to your bottom line every year,” said, Joanna Dickens, Head of Customer Development at Let Alliance.
So simply put – if your firm manages 200 properties, the Let Alliance Portfolio Transfer could be worth as much as £20,000 per annum, straight to your bottom line! But aside from generating additional income from this growing sector of the property market, this level of service should also help to reinforce your firm’s reputation as a leading player in the letting sector, helping to improve customer retention in the process.
Contacts: Major insurance providers:
- Assurant Let www.assurantintermediary.co.uk
- Endsleigh Insurance www.endsleigh.co.uk
- HomeLet www.homelet.co.uk
- Just Landlords www.justlandlords.co.uk
- Legal 4 Landlords www.legal4landlords.com
- LetAlliance www.letalliance.co.uk
- LetRisks www.letrisks.com
- Rentguard www.rentguard.co.uk
- SourceLet www.sourcelet.co.uk
- Total Landlords Insurance ww.totallandlordinsurance.co.uk