Guide To Landlord Insurance

High rents in the private rented sector, the recent decision by the Bank of England to slash the cost of borrowing by a further 25 points, and the poor return on savings accounts continues to make buy to let investment an attractive prospect to many. Indeed, the website Money Facts reports that there are currently nearly twice as many buy to let mortgage products available to aspiring first-time landlords than there were five years ago.

The success of any buy to let business boils down to the simple equation of profits being equal to rental income received, less the overhead costs in running the business. Although mortgage costs clearly represent a major component in the second part of this equation, landlord insurance is also a further inescapable cost.

For that reason, we are publishing this guide to landlord insurance in order to consider:

just who is a landlord;
why standard home insurance is inadequate for providing the cover you need as a landlord;
what exactly landlord insurance typically covers;
the special circumstances surrounding unoccupied let property; and
the liabilities and responsibilities you take on as a landlord.

Although relatively wide-ranging, the guide is by no means exhaustive and if it leaves further questions you might want answered, you might want to consult our specialist team of experienced experts here at GSI Insurance.

Who is a landlord?

The legal dictionary defines a landlord as someone who owns property and lets someone (a tenant) use all or part of that property in return for the payment of rent. The landlord/tenant relationship generally refers to the ownership and occupation of residential property, with commercial property typically referred to as being leased, says this source. The distinction between landlord and tenant and lessor and lessee is commonly blurred, however, so that you may be the landlord of a commercial property which you let to tenants.

In legal terms, a landlord and tenant relationship is typically held to exist if:

the owner of the property allows a tenant to occupy any part of the premises;
the tenant recognises and accepts that the landlord owns the property and has a continuing interest in it;
the owner has definite title to the let property;
the tenant enjoys a limited right to occupy the premises;
the landlord transfers actual control and possession of the let property to the tenant; and
a rental contract (either verbal or in writing) exists between landlord and tenant.

This is all very well, but what does it actually mean in practice? Who falls under this definition of a landlord?

In practice, the owner of many different kinds of property may take on the role of landlord to tenants who rent those premises. Because of that, all of the following might be occupied under a landlord and tenant agreement:

a complete house – whether terraced, semi-detached or detached;
a house which has been converted and divided into two or more flats or apartments;
a flat or apartment in a block of flats;
a room in the home in which you continue to live (including bed and breakfast and a guesthouse), in which case you are described as a resident landlord and qualify for certain tax relief;
a house in multiple occupancy (an HMO), where more than three tenants live as more than two separate households and share facilities such as kitchen, bathroom or toilet; and
all manner of commercial let property.

There is one further apparent distinction that it is worth mentioning and that is the difference between a so-called “accidental” landlord and the “professional” landlord. The first case typically refers to a property owner who has become a landlord almost by accident and without any serious prior intention. Thus, you might have inherited a property which might otherwise stand empty but for your letting it to tenants, or you might have moved home and decided temporarily to let your former home to tenants rather than sell it straight away.

The professional landlord, on the other hand, is one who sets out with the specific intention of running a business by investing in property which may be let out to tenants.

In either case – whether accidental or professional – it is important to remember that you are still a landlord.

Why standard home insurance won’t provide the cover you need

Any landlord is going to want to protect the value represented in their let property and to safeguard this source of generating an income from the rents received from tenants. Landlord insurance provides the way of doing just that.

This might beg the question, however, about why the home insurance you are likely to have arranged for your own home is inadequate when it comes to safeguarding your buy to let property.

In fact, the answer to the question is very straight forward and rests on the very process involved in arranging any kind of insurance. That is a process which relies upon the insurer assessing the risks involved in providing the relevant cover.

The simple fact is that the risks faced by a property that is occupied by tenants, and the landlord’s reasons for owning that property, are quite different to those of a home which is owner occupied.

This is a distinction likely to have been made when you first became a landlord and purchased your buy to let property. The Council of Mortgage Lenders (CML) makes very clear that a buy to let mortgage is quite different to a mortgage advanced for the purchase of the owner occupier’s home.

Whereas, the purchase of a home is to provide a place of residence in which the owner and his family intends to live, the purchase of buy to let property is essentially a business proposition, relying upon the generation of a rental income from letting the property to tenants.

Buy to let mortgages

As a result, mortgage lenders adopt different measures for assessing the affordability of the loan and the borrower’s ability to repay it. For a standard home mortgage advance, that assessment is likely to be based on the earned income of the borrower; in the case of a buy to let mortgage, it is typically based on the insurer’s assessment of the estimated returns from the receipt of rent, less the costs to the landlord in running what is effectively a buy to let business.

Landlord insurance follows a similar line of reasoning and assesses the insured risks in the light of your running a business from the let property – resulting in a significant difference in the risks that need to be covered.

What this means is that if you rely upon standard home insurance to protect a property that is in fact let to tenants, the insurer may reject any claim you make for loss or damage.

Therefore, specialist landlord insurance – rather than standard home insurance – is required. The distinction, and the need to make sure you have the necessary, specialist landlord insurance may be even more important to bear in mind if you are an accidental rather than professional landlord.

What does landlord insurance cover?

When you arrange any kind of insurance, it is important to keep in mind that different insurers and different policies provide different levels of protection. This is especially true of landlord insurance, where there is a wide range of providers from which to choose and policies which offer widely differing safeguards.

When arranging your landlord insurance, therefore, you may want to ensure that it is tailored to your particular, individual needs and circumstances as a landlord and meets the closest possible match with the cover available.

Making that match might prove more complicated than it first appears, so you might want to draw on the expertise and experience of specialist brokers of landlord insurance – such as us here at GSI Insurance – before making your commitment to any particular policy, which you expect to be competitively priced and represent good value for money of course.

Although you may need to tailor your landlord insurance to meet your particular needs, however, there are a number of features likely to be common to any such cover:

The building

at the heart of the insurance is likely to be protection of the structure and fabric of the building itself against a wide range of potentially serious threats;
typically, these threats include fire, flooding, storm damage, escape of water, impacts (from falling trees and branches, vehicles or aircraft), vandalism and theft;
some policies – but by no means all – also include cover against subsidence;
some landlords may find the protection offered by some policies against malicious damage caused by tenants;

Index linking

when determining the sum to which the building needs to be insured, it is important to anticipate a worst case scenario in which it is totally destroyed and needs to be rebuilt;
the total building sum insured, therefore, needs to reflect these reconstructions costs – rather than the price you paid for the property or its current market value;
since reconstruction costs may vary from one year to the next, it is possible to index link the total sum insured with reference, for example, to the building reconstruction costs index compiled by the Royal Institute of Chartered Surveys (RICS);

The contents

the value of contents owned by the landlord in a let property may vary quite widely;
cover may therefore be as comprehensive to protect relatively high value contents, or limited to such basic items as carpets and curtains;

Public liability insurance

as a landlord, you have a duty of care towards your tenants, their visitors and members of the public to take all reasonable precautions to prevent their being injured or having their property damaged because of contact with your let property;
if it is alleged that you have breached this duty of care, you may face claims for substantial damages by way of compensation – and for that reason, public liability insurance typically offers indemnity of at least £1 million;

Compensation for loss of rental income

your let property is a business asset, used to generate income from rents collected;
in the event of a serious insured incident, however, the property may be temporarily uninhabitable and you stand to lose that rental income for the duration of necessary repairs;
some landlord insurance policies typically provide an element of financial compensation – up to a prescribed maximum amount or a percentage of the building’s total insured sum – in that event;

Employer’s liability insurance

if you employ anyone else to help run your buy to let business, you are almost certain to face the legal requirement for employer’s liability insurance;
the law requires that you hold at least £5 million of cover for the settlement of claims arising from employees who may have been injured or have contracted an illness or other medical condition in the course of their employment by you;

Controlling the cost of your landlord insurance

as with many other forms of general insurance, landlord insurance typically attracts a no claims discount if you have not had to make a claim during the previous year;
you may also help to control the cost of the cover by accepting a higher than usual excess on any claims you make.

The precise nature and scope of your landlord insurance depends on your particular needs and circumstances and the type of buy to let business you are running.

What about periods of unoccupancy?

For the majority of the time, of course, you are likely to be aiming to keep your let property continuously occupied by tenants – since that maximises the rental income available. You want to stay clear of so-called “voids”.

But there are occasions when your let property is unavoidably unoccupied and vacant – it might be under major repair or refurbishment, for instance, or you may face a relatively long delay in replacing outgoing tenants with their successors.

This presents you with a particular type of problem when it comes to maintaining insurance cover for your empty property. The problem arises because of the particular risks faced by an empty property – compared to one in which tenants are in more or less continuous occupation:

a vacant property tends to act as a magnet for all manner of unwanted attention – from vandals, burglars, squatters and arsonists. Property management firm VPS, for instance, estimates that up to 60 fires a day are started in empty properties around the UK;
what is more, a need for otherwise relatively minor repairs or maintenance to the property might develop into a major incident if there is no one on hand to report the problem.

For reasons such as these, practically any insurer of your let property is going to restrict or lift altogether the cover on your let accommodation if it has been unoccupied for longer than a month or so (the exact period depends on the insurer, but is typically in the period of 30 to 60 days).

In order to maintain the protection which your vacant property still requires, therefore, it is necessary to arrange specialist unoccupied property insurance for however long it remains empty.

Further reading: Guide to Unoccupied Property.

Don’t forget your liabilities as a landlord

In addition to the public liabilities and your liabilities as an employer, as a landlord you also have further liabilities and responsibilities under the law.

These regulations relate in one way or another to your legal responsibility for ensuring the safety and well-being of your tenants – the accommodation you let needs to be safe and to provide a generally healthy environment for habitation.

The regulations may be liable to change and new ones introduced, so the following information should be used as a guide only.

Currently, here are just some of the particular regulations relating to:

Gas safety

In accordance with the Gas Safety (Installation and Use) Regulations 1998, you must ensure that all gas supplies, appliances and installations are safe.

To achieve this level of confidence, the law requires that you commission an annual inspection by a qualified engineer registered in the official Gas Safe register;
The report of that inspection needs to be kept for a minimum of two years and copy needs to be made available to any sitting tenants within 28 days or new tenants immediately at the start of their tenancy;
As the Residential Landlords’ Association (RLA) noted at the time, landlords have also been required to install both smoke alarms and carbon monoxide detectors in the let property with effect from the 1st of October 2015;

Electrical safety

You are also required to ensure that all electrical supplies and appliances are safe for your tenants to use;
Although the law does not require any annual inspection of electrical installations, periodic inspection by a qualified electrician clearly gives some comfort that all is in safe working order;

Fire safety

You are required to comply with any local fire safety regulations – including, for example, free and unobstructed passage through any exit routes from the property;

Health and Safety Executive

You might want to keep in mind that both your local council and the Health and Safety Executive (HSE) have the right to enter and inspect your property if there is reasonable suspicion that conditions for tenants are unsafe or pose an environmental health risk;
In a word, therefore, it is important not to forget these additional liabilities and responsibilities you assume from the moment you become a landlord – whether an accidental or a professional landlord;
Your breach of regulations clearly set down in the relevant legislation may be grounds for an insurer rejecting any claim for loss or damage you may make.

The Government website is a good source for further information.

Summary

It is clear that landlord insurance is one of the more critical overhead expenses you are likely to bear as any kind of landlord. It offers protection to your tenants, your buy to let property and to the business you are running.

It might also be apparent that landlord insurance may be more complicated and involved than it seems at first sight. To help ensure that you secure the insurance cover you need – at a competitive price – you might want to consult a specialist landlord insurance provider.

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