It is late one evening and you receive a call from the Fire Service. They advise that one of your rental properties has been seriously damaged by a fire caused by a tenant leaving something cooking on the stove. Your first concern is for the health and safety of your tenants and the caller assures you that the family is unharmed. Your second thought is the level of damage to the property. You check your insurance policy and find that you are fully covered for such events and you are up to date with payment of your premiums. You are relieved that the damage will be covered and aside from payment of the excess as you have a good insurance policy so you should not be out of pocket.
This is presumably more or less how the landlord would have reacted in the recent case heard in the Court of Appeal, Holler & Rouse v Osaki & Anor [2016] NZCA 130 [15 April 2016]. The facts of that case are similar to our scenario: Mr Holler and Ms Rouse (“the Landlords”) owned a house rented
to Mr Osaki and Mr Osaki’s family including his wife lived in the house (“the Tenants”). The house was insured by AMI Insurance Limited (“AMI”). In
2009, Mrs Osaki left a pot of oil on high heat unattended for a few minutes. A fire broke out and caused extensive damage to the house.
The Landlords claimed under their policy with AMI and they were covered for the cost of repairs amounting to $216,413.28. AMI exercised their right of
subrogation in the insurance policy. Subrogation is the legal term for the process when an insurer pursues the tenants as the party that the insurer
claimed caused the damage. Due to the subrogation process the court documents were issued in the Landlord’s names. The Tenants defended the claim on
the basis that sections 268 and 269 of the Property Law Act 2007 (“PLA”) allowed them to rely on and be protected by the insurance policy the Landlord
held. These sections of the PLA provide that a Landlord must not require their Tenant to meet or indemnify the landlord for costs of repair for damage
or to pay damages when a Landlord holds insurance that would cover the damage. The intent of that section is to protect tenants from paying out if
a landlord has insurance but could otherwise sue the tenant instead of claiming on their insurance policy.
AMI claimed that the PLA didn’t apply to residential tenancies and therefore the “insurance reliance” or “exoneration” provisions would not protect the
Tenants in this case. AMI looked to the responsibilities set out in section 40 of the Residential Tenancies Act 1977 (RTA) where tenants agree that
they will not intentionally or carelessly damage or permit anyone else to damage the property, and on the basis of the alleged carelessness of the
tenant, claimed against the tenants for the full damage to the property. The claim was initially heard in the Tenancy Tribunal, appealed to the High
Court and appealed again by AMI under the Landlord’s name to the Court of Appeal.
The Court of Appeal analysed the PLA and the RTA and discussed the interplay of the two statutes and ultimately determined that the PLA and its insurance
“exoneration” provisions applied to both commercial tenancies and residential tenancies. Accordingly the Tenants were protected from the claim from
the Landlord via the insurer AMI.
For a case that ultimately is a very interesting and lengthy discussion of the principles of statutory interpretation for those in the legal profession,
there has been a huge amount of media attention since the decision was released. Many of the articles on the case suggest that it creates some radical
new liability for Landlords. Why?
Looking at the decision the opening summary seems pretty dramatic for landlords as it states:
“Question 1
Whether Residential Tenants are immune from a claim by the landlord where the rental property suffers loss or damage caused intentionally or carelessly
by the tenant or the tenant’s guests?
Answer: Yes, to the extent provided in ss268 and 269 of the Property Law Act 2007.”
From this statement, it is easy to jump to the conclusion that now tenants are never liable for any damage caused to a rental property. Fortunately the
provisions of the PLA in sections 268 and 269 are a handbrake on total tenant immunity. Where landlords are insured against loss and the loss was caused
by an accident or even negligence, the tenants have the benefit of the landlord’s insurance and the insurers cannot recover any loss from the tenants.
However if the tenant has caused the damage intentionally, whilst committing a serious crime, or does something else that voids the landlord’s insurance
cover, the landlord or their insurer can still recover from the tenant.
What does this decision really mean for the parties involved? Tenants may take a collective sigh of relief but the reality is that Tenants are more likely
to be disinterested, as they had no idea they were at any risk of a claim from their landlord or their insurer. Studies undertaken by Massey University
in 2014 indicate most tenants understood insurance was important but less than 20% of respondents actually held policies. As a result of the case,
the numbers could actually fall further as tenants may in fact be discouraged from taking up their own insurance as they can rely on their Landlord’s
insurance.
For landlords, there appears to be no immediate change. You already have the benefit of your insurance cover and would be indemnified by the insurer if
damage occurred. Landlords should review your insurance policies and consider investing in policies with the broadest range of cover so you avoid ever
having to claim against Tenants personally.
The true impact of the case will be on insurers and the flow on effect for landlords in the medium to long term in respect of the premiums charged and
new requirements for cover. Insurance companies previously could claim against tenants that caused damage via their rights of subrogation. This collection
avenue is now firmly closed unless the Osaki case is appealed successfully. Insurance companies are likely to turn back to their landlord customers
to recoup this loss via increases in premiums. It is also foreseeable that insurance companies may impose requirements on landlords to vet their tenants
more thoroughly or limit the number of tenants that may occupy the property for the insurance to be valid.
New measures requiring greater due diligence of tenants are problematic for landlords as we are concerned with accidental or negligently caused damage
as well as intention damage. A prospective tenant will not usually display any obvious indicators that they are accident prone or careless! Landlords
could consider having the tenant declare any previous insurance claims they had made (akin to declarations made when you apply for insurance) to assess
the suitability of tenants. In addition Landlords should consider setting and strictly enforcing the number of tenants that may live in the property,
as essentially this is a numbers game – the more tenants you have the greater the risk of damage.
The case creates an interesting disconnect, on one hand tenants are responsible for the properties they live in but on the other not financial liable for
a breach of these responsibilities if they are careless or negligent. As the tenants exclusively control the use of the property, the ability for landlords
to reduce risk is limited as you don’t have the ability to control whether damage occurs.
For all of this, Residential landlords should not be too disheartened. The right of subrogation has often yielded little for the insurers when chasing
residential tenants as they simply do not often have the funds to satisfy a claim. This low rate of return should already been factored into our insurance
premiums.
Kristine King
For further information please contact, [email protected]
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matters and should not be relied upon for that purpose.
268 Application of sections 269 and 270
(1) Sections 269 and 270 apply if, on or after 1 January 2008, leased premises, or the whole or any part of the land on which the leased premises are situated, are destroyed or damaged by 1 or more of the following events:
(a) fire, flood, explosion, lightning, storm, earthquake, or volcanic activity:
(b) the occurrence of any other peril against the risk of which the lessor is insured or has covenanted with the lessee to be insured.
(2) Section 269 applies even though an event that gives rise to the destruction or damage is caused or contributed to by the negligence of the lessee or the lessee’s agent.
(3) In this section and sections 269 and 270 , lessee’s agent means a person for whose acts or omissions the lessee is responsible.
269 Exoneration of lessee if lessor is insured
(1) If this section applies, the lessor must not require the lessee—
(a) to meet the cost of making good the destruction or damage; or
(b) to indemnify the lessor against the cost of making good the destruction or damage; or
(c) to pay damages in respect of the destruction or damage.
(2) If this section applies, the lessor must indemnify the lessee against the cost of carrying out any works to make good the destruction or damage if the lessee is obliged by the terms of any agreement to carry out those works.
(3) Subsection (1) does not excuse the lessee from any liability to which the lessee would otherwise be subject, and the lessor does not have to indemnify the lessee under subsection (2), if, and to the extent that,—
(a) the destruction or damage was intentionally done or caused by the lessee or the lessee’s agent; or
(b) the destruction or damage was the result of an act or omission by the lessee or the lessee’s agent that—
(i) occurred on or about the leased premises or on or about the whole or any part of the land on which the premises are situated; and
(ii) constitutes an imprisonable offence; or
(c) any insurance moneys that would otherwise have been payable to the lessor for the destruction or damage are irrecoverable because of an act or omission of the lessee or the lessee’s agent.
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