June and Darren rented their commercial property to a tenant of good character for a number of years. In August 2015 their tenant sold his business and arranged for an employee, Jamie, to take over both the business and the lease.
In December 2015, Jamie stopped paying rent and was uncontactable. June and Darren sent numerous letters of demand before terminating the lease. In March 2016, June and Darren re-entered the property.
June and Darren found a number of unauthorised modifications to their commercial property including the installation of a vent in the roof (which leaked when it rained), alterations to the kitchenette, a shower in the office area, a number of additional electrical sockets and a mezzanine floor with no safe access. There was also a considerable amount of debris leftover which June and Darren had to dispose of.
June and Darren’s claim
June and Darren claimed under their material damage policy for:
- $453.20 in costs for the removal of unauthorised alterations and the disposal of the debris left behind
- $4,301.50 in legal fees incurred in cancelling the lease and re-entering the property,
- $2,379.70 for the rectification of the unauthorised vent
- $9,098.25 in rent for the period from first missed payment on 1 December, until re-entry on 14 March
- $2,599.50 in rent for the period between re-entry and the new lessee’s occupation (given they had to return the unit to the state it was in prior to the alterations)
June and Darren did not claim for the alterations to the kitchenette or the shower unit because, although unauthorised alterations, they could see some benefit to the property.
The insurer declined June and Darren’s claim saying the policy would not respond as there had not been any damage. June and Darren complained to FSCL.
The insurer’s view
The insurer believed the removal of debris was not related to any damage to the property. The insurer also said the leaking vent was not covered because it leaked due to defective workmanship, excluded under the policy.
In the insurer’s eyes, loss of rent between the tenant ceasing payment and June and Darren’s re-entry, as well as the associated legal costs to do with terminating the lease, did not relate to damage either. The period between re-entry and finding a new tenant, the insurer claimed, related to the leaking roof vent, rather than any covered damage.
In any event, the insurer argued the alterations could not be damage as they had not adversely affected the building’s value.
June and Darren’s view
June and Darren felt the insurer had taken an unfairly narrow view of what constituted damage in order to decline the claim. June and Darren said, because they had not authorised any of the changes, the changes constituted ‘damage.’ Their claim was to cover the necessary remedial work to return the property to its original lettable state. June and Darren also felt they had to provide a rent ‘abatement’ of one month’s rent upon re-letting because the leaking roof vent was yet to be fixed.
June and Darren’s insurance policy said that the insurer would provide cover against “physical loss or damage, unintended and unforeseen by the insured to any insured property being buildings.”
There was no definition of ‘damage’ in the policy and June and Darren and the insurer had differing interpretations of damage and how the policy should respond.
We reviewed the law and considered the widely accepted definition of damage in insurance common law should apply to the policy. Damage has been defined as “a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged”.
Because the unauthorised alterations were physical changes to the premises, we considered they could constitute damage where they impaired the value or usefulness of a space. We determined that some of the costs associated with returning the property to its lettable state were related to this damage.
It was key to determine whether the physical changes impaired the usefulness of the space. Practically, the mezzanine alterations reduced the unit’s utility to a single-story space. The space was less useful in its altered state as it could not be used as a full height workshop, nor could its storage capabilities be utilised. The new vent leaked and the resulting water leak would restrict the uses of the workshop until it was fixed.
In a general sense, any unauthorised or unconsented to work, regardless of the standard it is completed to, was also likely to affect the value of the building because the owner would not be able to warrant that the alterations met the building code where it applied.
We partially upheld June and Darren’s complaint. We recommended the insurer accept and pay aspects of the claim where the physical changes had adversely affected both the property’s usefulness and value.
The rent abatement period which stemmed from the roof vent alteration, the disposal of the debris left behind, and returning the roof vent to its original state were all valid claims.
The legal costs associated with terminating the lease, and cover for the rent lost from the start of December until the cancellation of the lease were not covered as these did not arise from damage to the property, rather an uncooperative tenant.
The insurance company accepted June and Darren’s claim to the value of $3,118.09.
Key insight for consumers
Insurers will pay claims where the events or circumstances are covered by the policy, however this may not always be clear. If you disagree with your insurer about the meaning of a word or phrase in your policy, you can complain to FSCL. We can provide a view on the interpretation of your insurance policy having regard to the law and usual industry practice.