Owning an investment property is not without risk. Pipes can burst, gutters can overflow, and drains can get blocked. Having the proper insurance to cover these unbudgeted losses is an essential feature of a successful investment property strategy.

Here are five things you should consider when organising insurance for your rental property.

Set the Correct Sum Insured

Previously you could simply insure for the rebuild of your property based on the square metre floor area of the building. You’d tell your insurer the floor area, and they’d provide premium terms based on that.

Losses resulting from the Christchurch earthquakes changed that position when it became clear that insurers (and the re-insurers) exposure to loss was far greater than had been previously estimated. To better assess their exposure, insurers moved away from the floor area method and instead introduced a capped sum insured settlement basis. Now, the onus is on the insured to provide an appropriate amount that will be the maximum that the insurer will pay out in the event of a loss.

So, how do you go about guaranteeing that you have insured your asset for the right amount?

Several online tools, such as the Cordell calculator, can help you determine an appropriate amount. The downside with online calculators is that they don’t account for any unusual or high-value building features or any access difficulties that make the cost of demolition and a rebuild more expensive. There is also the issue of other items not associated with the floor space, such as swimming pools and retaining walls.

The safest way to ensure the amount is correct is to organise a ‘Valuation for Insurance Purposes’ through a registered valuer. Using a registered valuer will guarantee that you are not underinsuring (leaving you short in the event of a loss) or over-insuring (meaning that you are paying additional premiums unnecessarily).

Understand the Impact of Any Unique Landlord Related Warranties

When you purchase Building Insurance for your investment property, the insurer must be made aware that you intend to rent the building out; otherwise, the policy cover will be void in the event of a claim.

Before purchasing the policy, make sure you know of any associated warranties (conditions that you must comply with for the policy to be valid). The requirements can vary from one insurer to the next but may include:

• you must exercise reasonable care in the selection of your tenants, which will include obtaining references for each adult tenant
• at regular intervals, you or your managing agent must complete a property inspection and keep written and photographic records
• you must collect a total of 3 weeks rent in any combination of rent in advance and bond and register it with Tenancy Services

Buy a Policy that Includes Landlord Extension Cover

Look for a policy that includes specific cover for landlords and rental properties such as:

• Malicious damage or theft committed by the tenant(s) or persons visiting the home with your tenants’ permission
• Landlord’s furnishings
• Loss of rent due to a loss covered by the policy: If your home is uninhabitable because of loss covered by the policy, the policy will pay or reimburse you for loss of rent from the date that the house becomes vacant

Landlords need to provide insurance information with any new tenancy agreement and advise tenants of any policy changes within a reasonable time. Additionally, landlords must include a statement informing tenants that the insurance policy for the property is available on request.

Premium Payment Options

Managing cash flow is an integral part of a successful investment property strategy. Insurance brokers will typically offer a monthly payment option which you can implement for a low finance rate allowing you to spread the premium over 10 or 12 months.

Policy Excess Options

The cost of insurance has increased over the last few years. One way to reduce the premium cost is to increase your policy excess levels (the first amount of the claim you are not covered for).

As with any insurance cover, you never know when you will need to make a claim, but when that time comes, no one ever regrets having had the foresight to protect themselves or their investment against the unexpected.