Industry reacts to Minister’s Osaki response

Legislative changes to counter recent confusing court rulings affecting landlords’ insurance premiums have been proposed

Insurance News

By Maryvonne Gray

The insurance industry has welcomed news that Building and Housing Minister Dr Nick Smith wants to review the Residential Tenancy Act following the confusion caused by a recent Court of Appeal ruling.

Dr Smith said the ability of the Tenancy Tribunal to function effectively was at stake.

“The issue is tenant damage to a property through carelessness or negligence,” he said.

“The latest court rulings mean landlords cannot recover the costs of this damage where they have insurance, including for their costs such as the excess.

“The problem with this approach is that it reduces the incentive for tenants to take good care of the property they rent. It also reduces the landlord’s incentive to have insurance as it lessens tenants’ responsibilities.

“My concern about this new interpretation is that it will add to the overall costs of the residential sector, driving up insurance costs and rents.”

Insurers such as IAG, whose brand AMI insured the landlord in the Osaki case, had described the Osaki ruling as ‘out of step with how insurance operates’, with the knock-on effects likely to include an overhaul of pricing, underwriting criteria and the claims handling process.

They pointed to how the ruling ran counter to existing legislation which gave the Tenancy Tribunal the power to order a tenant to pay a landlord money by way of damages or compensation for any breach of the tenancy agreement.

IAG’s deputy general counsel – enterprise, Seamus Donegan, told Insurance Business at the time: “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 it could result in landlords only entering into leases with a residential tenant subject to approval by their insurer, with actions to be taken including 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.

“The implications for us as 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.”

Indeed, recent incidents of people drunkenly falling through skylights and dogs wrecking carpets after being locked inside had seen the landlords paying to fix the damage.

NZ Property Investors Federation executive officer Andrew King told the NZ Herald that ‘every single case’ of accidental damage that had come to his attention since the decision had ended with the tenant not being made to pay.

Dr Smith said the proposal he was considering was that tenants would be liable for damage caused by carelessness or negligence up to the value of their landlord’s insurance excess but not exceeding four weeks’ rent, which was aligned with the standard tenancy bond.

“A different amount could be mutually agreed if specifically provided for in the tenancy agreement and would enable the tenant, if they wished, to take out their own insurance,” he said.

“The tenant would remain fully liable for damage caused intentionally or caused by a criminal act, with no limitation,” he continued.

“The landlord would remain liable for fair wear and tear, and any damage caused to the property by an event beyond the tenant’s control, such as a storm or an earthquake.”

Dr Smith said he had asked the Ministry of Business, Innovation and Employment to do targeted consultation with tenant and landlord organisations and the insurance sector on possible amendments.

Tim Grafton, CEO of the Insurance Council of New Zealand (ICNZ), told Insurance Business that he welcomed the Minister’s recognition that the Osaki decision had caused a problem for the insurance sector.

He said since the ruling ICNZ had been consulting with members and stakeholder organisations on the effects and possible action to be taken.

The latest proposals would require further consultation, he said.

“The detail really rests around the limit to which the insurer could pursue the tenant or the tenant’s insurance company, around some of the damage that’s been done on a negligent or careless basis,” he said.

“But there’s clearly an opportunity to formally engage with Minister Smith on that so we will now go to our members, ask for their views on what he’s proposing and take it from there.”

He added: “It’s good that the issue is getting the focus it requires because it has left a fair bit of ambiguity in the market and concern for landlords around the exposures that they have.”
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