Confusion over loss of rent cover

The story

Marilyn and Peter were experienced property owners and investors in Christchurch interested in buying an earthquake damaged apartment.  The apartment was owned as a body corporate.  The body corporate’s insurance policy would pay for the apartment’s repairs but Marilyn and Peter wanted to know whether the policy would cover them, if they purchased the apartment, for lost rent while the repairs were carried out.

Marilyn called the body corporate’s insurance broker, Roger, the day before the apartment was due to be auctioned.  Marilyn said Roger confirmed the loss of rent cover was transferable to them as the new apartment owners. 

After the conversation Marilyn emailed Roger and asked him to confirm the loss of rent cover was transferable.  Roger emailed the insurer asking for its advice.  The insurer replied to Roger the following day, before the auction, advising that only the original owner could benefit from the loss of rent cover.  Roger emailed the insurer asking it to check, because there had been no change in the policy holder – the body corporate was the policy owner.

Marilyn and Peter purchased the apartment, believing they would be covered for loss of rent while the repairs were carried out.

The day after the auction, the insurer advised that the loss of rent cover was not transferable and Roger immediately emailed Marilyn and Peter saying they would not be covered for loss of rent. 

 

Dispute

Marilyn and Peter said Roger told them the cover was transferable

Marilyn and Peter complained to Roger that they bought the apartment relying on his advice that loss of rent cover was transferable.  Marilyn and Peter considered Roger was liable for the loss they would experience while the apartment was empty for earthquake repairs. 

Marilyn and Peter did not know when the repairs would start or how long it would take.  Marilyn and Peter suggested Roger put $25,000 (the maximum loss of rent cover available under the policy) into their solicitor’s trust account until the loss was known.  The solicitor would then pay them the compensation for the lost rent and return the balance to Roger.

 

Roger unsure about loss of rent cover and said he would check

Roger agreed they discussed loss of rent cover but said he was uncertain about whether the loss of rent policy was transferable and had undertaken to check the situation with the insurer.  Roger considered he could have been clearer with Marilyn, but did not accept full responsibility for their loss.  To resolve the complaint at an early stage Roger offered Marilyn and Peter $6,000.  Roger observed that the policy entitled the original owner to 52 weeks’ rent to a maximum of $25,000.  As the apartment was currently rented at $355 a week, the maximum claim would be $18,460.

Marilyn and Peter did not accept Roger’s offer and asked us to determine reasonable compensation.

 

FSCL’s review

After careful consideration we could not decide what Roger said to Marilyn before the auction.

 

Roger’s delay

Roger knew Marilyn and Peter were taking his advice into consideration when bidding at the auction the following day.  We considered Roger’s delay in passing on the insurer’s initial advice contributed to Marilyn’s and Peter’s decision to buy the apartment under the mistaken belief that the loss of rent cover was transferable. 

 

Marilyn and Peter’s contribution

However, it was ultimately Marilyn’s and Peter’s decision to buy the apartment.  We considered Marilyn and Peter also contributed to the situation in which they found themselves.  We noted that Marilyn and Peter:

  • called Roger for advice the day before the auction
  • emailed him for confirmation and did not wait to hear back before bidding at the auction
  • did not ask their lawyer for advice before buying the apartment
  • may still have been interested in the property, even had they known lost rents were not covered by insurance, although possibly at a lower price.

 

Outcome

We considered Roger’s overall contribution was less than Marilyn’s and Peter’s contribution. We suggested Roger contribute 25% of the rent Marilyn and Peter will lose while the apartment was untenanted and undergoing repairs.  The policy allowed 52 weeks’ compensation to a maximum of $25,000.  As the apartment was rented at $355 a week the maximum compensation Roger could be liable for was $4,615.

Roger accepted our suggestion.  Marilyn and Peter asked whether Roger would consider paying them the $6,000 he originally offered.  Roger declined but said he would pay the $4,615 immediately, rather than wait for the loss to be known.  Marilyn and Peter accepted Roger’s offer and the complaint was resolved.

 

An aside

We were somewhat surprised that the loss of rent cover was not transferable to the purchaser of a body corporate apartment.  The previous owner had paid the insurer for loss of rent cover as part of the body corporate levies.  It seemed a little unjust that the insurer should benefit from the payment of premiums, and avoid liability, simply because the apartment had been sold.  We wondered whether the body corporate members could put pressure on the insurer to provide cover to Marilyn and Peter and all future purchasers.