Major residential losses: insurance best practice for property owners

For property owners, choosing whether to insure for the cost of residents’ alternative accommodation, or loss of rent, is a key consideration.

Often, both loss of rent (LOR) and alternative accommodation (AA) are insured together, although only one may be claimed for each loss to avoid duplication. In the interest of mitigating claims spend and claims history, it is possible to restrict cover to only one of these covers under their building insurance policies.

However, in the event of a major loss, this can limit insurer’s ability to assist or a policyholder’s resources to respond to residents and/or landlord’s requirements. The table below compares the benefits and complications for each of these options, which are commonly experienced during major losses:

Alternative accommodation only

Loss of rent only

Cost implications

The costliest option for insurers, which can impact premium e.g. if the property is in an affluent area, any AA sourced will be expensive.

Long term accommodation (often sourced via private landlords) sometimes requires a minimum of 6 or 12 months stay. Therefore, if the damaged property is repaired beforehand, the policy will still have to bear the full cost of the let.

Usually, the most cost-effective option. AA costs can be high depending on the type of accommodation and availability of hotels/serviced apartments in the area.

Assistance to residents

When a major incident occurs, the residents involved have quick access to AA which can be arranged by insurers and their suppliers.

If the policy only covers LOR when a major incident occurs, residents will cease to pay any rent and will have to arrange for their own accommodation on short notice. This can be stressful for residents involved.

PR/complaints

AA reduces negative feedback from residents on the basis that their needs are catered for – no one is left without a home.

If residents are left with nowhere to live, this could lead to complaints against the client and/or negative press.

Availability

It can be difficult to source AA depending on the area, particularly if a large number of residents are affected.

Residents simply stop paying rent and must arrange their own accommodation. Therefore, this option requires less resources from the landlord to organise on their behalf.

Requirements

Not always suitable for families, or anyone with difficulties. They may want to make their own arrangements and end the tenancy, particularly if their property is likely to be uninhabitable for a long time.

Residents can end the tenancy if they would like to and source their own accommodation which suits their needs

Control

Although tenants will still pay rent each month whilst in AA there is a risk of them ending the tenancy, leaving the landlord out of pocket. If they remain, there will be pressure from tenants to be returned to their property as soon as possible.

Pressure compounds if repairs take longer than anticipated requiring tenants to move out of their initial temporary accommodation often resulting in subsequential uninsured losses, such as travel costs and day-to-day living costs.

Having loss of rent payments each month means landlords have less urgency in getting the property back to normal, or re-letting it. Although this is beneficial to landlords, it does not provide much incentive for repairs to conclude or to keep costs at bay.

You can see that having just one form of cover can cause different issues. Therefore, it’s best for property owners to have both alternative accommodation and loss of rent insured, so that they have options to choose from that suit the individual circumstances of the claim, and the needs of residents and landlords alike.

It is also good practice for all parties involved to be aware of the cover in place at renewal, so should the property become uninhabitable, residents and landlords will have a more accurate expectation of how insurers can assist them.

For further information, please visist our Lockton Real Estate and Construction (opens a new window) page.

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