Court decision ‘out of step’ with how insurance operates

by Maryvonne Gray 29 Apr 2016

Court decision ‘out of step’ with how insurance operates

An insurer says lobbying Parliament is the only recourse following a recent Court of Appeal ruling that means landlords are now liable for negligent and accidental damage caused by their tenants, whether or not they have insurance.

IAG brand AMI had been fighting to reclaim over $216,000 from tenants Kenji and Tieko Osaki who were living in a house their landlords had insured with AMI.

The house burned down after the Osakis left a pot of oil unattended, and AMI, acting in the name of the landlords, pursued the Osakis in the Tenancy Tribunal for the huge repair bill, and won.

However, the Osakis argued that residential tenants should be treated the same as commercial tenants, who have immunity if there is accidental damage, and three subsequent court rulings – in the District Court, the High Court, and now the Court of Appeal - have backed their argument.
IAG deputy general counsel – enterprise, Seamus Donegan, told Insurance Business the decision was contrary to existing legislation and prompted a ‘worrying disconnect’.

“Over the long term there are worrying disconnects that this decision opens up,” he said. “On the one hand a party who now bears the full financial consequences of careless damage – the landlord – is not the party who has control of whether the damage happens – ie the tenant.

“It creates a situation which is really out of step to the way insurance operates more generally. Normally, the ultimate financial cost rests with the insurer of the person who caused the damage, not the insurer of the innocent party.”

Donegan said the knock-on effects of the decision were wide-reaching.

“From our perspective it means we’re going to have to take a very close look at pricing, underwriting criteria and the claims handling process.”

He said some actions to be taken could include more frequent landlord inspections, disclosure questions at the time of underwriting, obtaining privacy waivers from tenants in order to gain more information, or tenant questionnaires.

“It may mean landlords enter into leases with a residential tenant subject to approval by their insurer. It might mean we have a tenant who on further enquiry turned out to be an unacceptable moral hazard that we would require the landlord to terminate that tenancy or failing that we would cancel cover.

“The implications for us an insurer is that we are effectively insuring anonymous persons and we have no idea whether or not these people present an extreme moral hazard or are going to be good insurance risks. So all these things become important factors for us.”

Donegan cited the potential for bizarre scenarios to occur.

“If for example a tenant was occupying Unit A in a block of three connected units, and they left some oil on the stove like Mrs Osaki did and the fire spread to the neighbouring flats, the tenant would still be liable civilly for the damage to the neighbouring flats, but not for the one they lived in.

The precedent-setting decision was also contrary to powers in the Residential Tenancies Act for the Tribunal to order a tenant to pay a landlord money by way of damages or compensation for any breach of the tenancy agreement, which was ‘difficult to reconcile’, Donegan said.

There were fundamental differences between commercial and residential tenants which meant aligning them legally didn’t work.

If the insurer faced increased pricing or greater operational costs it could result in increased premiums for landlords who may well pass the cost on to tenants.

Donegan said therefore it was actually in tenants’ as well as landlords’ interests not to back this decision either.

“We strongly felt that the way the law stood before the appeal was determined was far more fair, far more balanced, and far more in line with how insurance responds to careless damage.

“We will be working through with the ICNZ what the appropriate response is going to be and I understand ICNZ are going to in turn have conversations with organisations like the NZ Property Investors Association who have expressed serious concern with this as well.”

Speaking to Radio New Zealand, ICNZ CEO Tim Grafton said the Council, like various landlord associations, would be asking the question whether Parliament intended an outcome which left two pieces of legislation contradicting each other.
6 Comments
  • Boomer 29/04/2016 11:43:35 a.m.
    Madness!
    Who in their right mind would rent to a family with small children, Pets, Teenagers, Students ... the list goes on. Surely a law change is urgently required.
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  • Common Sense 29/04/2016 12:00:43 p.m.
    Non sensical to say the least.

    Would not a tenant’s extension and waiver of subrogation be the simplest solution? This is how I've experienced the underwriting in other geographies?
    Post a reply
  • Chris 29/04/2016 12:08:30 p.m.
    The law change occurred in 2010 when the PLA was drafted. There was a lack of clarity in the way the interaction between the RTA and the PLA were drafted but the District Court, High Court, and now the Court of Appeal have all found that Parliament intended residential tenants to be included in the protections in S269 of the PLA.

    Can Seamus explain how this is not a problem for commercial tenancies where leases are for longer periods that in the residential context, so there is more difficulty in proving the cause of the damage?

    What this really affects is insurer's ability to make subrogated recoveries against uninsured (and often uninsurable) tenants. This floodgates panic seems to be rife and if it leads to Parliament spending time on a narrow issue which the Courts have and will deal with, rather than other much needed law reform it will be a waste.
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