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Airbnb: Short term gain or long term pain?

Reproduced from REINSW Journal Feb 2016

By Helen Hull

There are an increasing number of reports of tenants regularly sub-letting their spare bedroom or subsidising an overseas trip by renting out the property via Airbnb – all without telling their landlord or property manager. But what are the insurance implications?

Where there’s a spare bed, there’s money to be made. That’s the mantra of Airbnb converts across the country. And it’s not just owner-occupiers who are taking advantage of short-term letting sites. More and more tenants are now setting their sights on making a few extra dollars.

But what happens when something goes wrong? Who is responsible for damage caused by the short-term tenant? Will insurance cover the damage?

A scenario

An owner has an investment property in a strata building and they take out a landlords insurance policy to protect that property. A property manager leases the apartment to a tenant. The tenant decides to go on holidays for six weeks and during that period, in order to offset their rent while away, they list the property on Airbnb and subsequently let it out.

"Even the most experienced property manager can potentially get caught out if they don’t know that a property on their rent roll is being sublet via. Airbnb"
Unfortunately, the person that the tenant lets the property to causes substantial damage. An overflowing bathtub causes damage to the property, including carpets, paint and other fixtures. The water overflow also causes damage to the property below and common property.

Will insurance help the landlord recoup the cost of the damage?

The impact

Gary Triganza, Property Manager at Miles Felstead Realty and member of the REINSW Property Management Chapter Committee, said even the most experienced property manager can potentially get caught out if they don’t know that a property on their rent roll is being sublet via Airbnb.

“Most of the time you just won’t know it’s happening,” he said. “You might find out because there has been property damage or something has been reported to the strata manager. But in most instances, if the tenant is paying their rent on time it doesn’t trigger any warning signs unless it becomes obvious during a periodic inspection.

“A scenario [such as the one above] really underlines the importance of having the right insurance in place and understanding what is covered and what is not,” he said.

Landlords insurance

Landlords insurance covers a property owner for tenant-related risks, including loss of rental income and loss or damage to the building and landlord’s contents by the tenant.

It’s important to remember that there is a lack of consistency in how insurers treat short-term lettings. Some insurers cover the letting period, as long as the property owner informs them beforehand. Others view short-term lettings as carrying on a business, which voids the cover unless the landlord pays an additional premium.

Carlos Hernandez, Strata Unit Underwriters State Manager for Victoria, South Australia and Tasmania at CGU, said that if CGU have a policy with a landlord who has a long-term lease or periodic lease following a fixed term lease, and the landlord is unaware the tenant has sublet the property, any damage will be covered up to the limits of the policy.

“However if they are aware of the sublet, we may cancel the policy or certain sections may not apply,” he said.

“Our contract is with the landlord and our limit of liability is determined by both parties meeting the terms of the policy wording.

“We protect the landlord for deliberate and malicious damage, but it ultimately comes down to whether they are abiding by the conditions of the policy. If they are using the property as a short-term rental, landlords insurance is not the right policy for them. If they are responsibly unaware it is being sublet, and in their best endeavours would not be aware, we will cover them,” Mr Hernandez said.

Strata insurance

Strata insurance generally covers the building and common property and contents as defined on the title for the property. This might include common areas, garden equipment, wiring, lifts, swimming pools, car parks, walls, windows, ceilings and floors. 

Carlos Hernandez, Strata Unit Underwriters State Manager for Victoria, South Australia and Tasmania at CGU, said the circumstances surrounding who caused the damage does not play a role in whether a claim will be successful.

“The fact that the damage was caused by a person residing in the property under a short-term letting arrangement does not have an impact on the building insurance,” Mr Hernandez said.

Mr Hernandez said in order for the Owners’ Corporation to take action against the landlord to recoup the costs of any repairs to the common property, they would need to prove that they knowingly breached their duty of care and obligations as a lot owner.

Professional indemnity insurance

Professional indemnity insurance protects agents against legal costs and claims for damages by third parties arising out of an act, omission or breach of professional duty in the course of business. It is mandatory for all licensees in NSW to carry professional indemnity insurance.

Realcover Claims & Compliance Manager Nancy Rainbird said that it’s not outside the realm of possibility that a scenario such as the one set out might give rise to a professional indemnity insurance claim.

“At Realcover we haven’t yet seen such a claim. But with the rise in popularity of short-term letting websites such as Airbnb, it’s not difficult to see that it may well be a possibility in the near future,” she said.

“If a landlord can’t make a claim under their landlords insurance policy, they may well point the finger at their managing agent and make a claim.”

For such a claim to be successful there must be an allegation of negligence or wrongdoing, Ms Rainbird explained.

“For example, the landlord may allege that if the managing agent had been diligent in carrying out comprehensive and regular periodic inspections they would have known that the tenant was sub-letting.

“In such a case, Realcover would step in and defend the action, protecting the reputation of the agent up to the value limit of their policy,” she said.