Insights
It is important to check your policy and talk to your insurer if you are reducing a tenant’s rent because of damage to the rental property. You should make sure that the insurer accepts the amount of the rental reduction and that it will be covered under your policy.
What happened?
In April 2023, Nathan told his insurance broker about a leak in his rental property that was causing water damage to the carpets. The broker helped Nathan file a claim with his insurer, including a claim for loss of rent.
Nathan then engaged a carpet company to investigate the leak and pull up the carpet to allow it to dry out. The carpet company did not find the source of the leak, but did manage to dry the carpet. In June 2023, heavy rain caused further water damage to the carpet. Nathan engaged various services to dry the carpet, find the source of the leak, and to repair it. The leak was successfully located and repaired in July 2023.
For a period of fourteen weeks between May and July 2023, Nathan agreed to reduce his tenant’s rent by 50% per week ($400 reduced to $200) due to the water damage. He did not consult the insurer before decreasing his tenant’s rent.
The insurer accepted Nathan’s claim, offering a payment of $830, being fourteen weeks of lost rent at 25% of the rent ($100), the cost of the additional power to dry the carpet, and the carpet company’s invoice to dry the carpet, less three excesses. The insurer later amended this to $1,250, after reducing the excesses from three to two.
Nathan did not agree with the claim outcome, and he complained to FSCL.
What were the parties’ views?
The insurer explained that Nathan’s rental property was still habitable because only a small area of the carpet was wet. Their view was that a 25% discount in rent would have been generous given the small area impacted by the water, instead of the 50% that Nathan gave to his tenant. The insurer said that two excesses applied, one covering the water damage in April 2023 and the other covering the water damage in June 2023.
Nathan said that the claim should cover the full 50% loss of rental income, because the tenant had received a 50% rent reduction. Nathan said that only one excess should apply, because the damage was an on-going issue with the same leak, not a new leak.
What was FSCL’s view?
After reviewing the file, we could see that Nathan’s tenant’s rent had been reduced for ten weeks, not fourteen weeks, by 50% of the tenant’s usual rent payment. We explained this to Nathan and the insurer, who both accepted ten weeks as the correct amount of time.
We could also see that Nathan’s insurance policy defined an “event”, which an excess would apply to, as “an event or series of events arising from any one cause during any period of 72 consecutive hours”. Because there had been water damage in April 2023 and further damage in June 2023, we agreed with the insurer that there had been two events, so two excesses should apply.
How did FSCL suggest that the complaint should be resolved?
Both the insurer and Nathan wanted to work together to resolve the complaint. We suggested to the insurer that they might want to think about making an offer to Nathan to resolve the complaint. The insurer took this suggestion on board, and offered Nathan $2,000 to settle the complaint, made up of ten weeks of 50% loss of rent, the cost of drying the carpet, and the cost of the power to dry the carpet, less two excesses.
Nathan accepted the insurer’s offer, and we closed the file.
