Does the type of lease agreement impact insurance cover?

Does the type of lease agreement impact insurance cover?

Yes, it can do!

We explain…

But first, let’s delve into the differences between the two main types of lease agreements - fixed-term and periodic (month to month).

Fixed-term tenancies:

A fixed-term tenancy has a specific start and finish date. Once the fixed-term ends, you and your tenant can agree to a further fixed-term lease. If a further fixed-term isn’t set, the lease automatically becomes a periodic (month to month) agreement, which continues until either you or your tenant gives notice.

Periodic tenancies:

A periodic (month-to-month) agreement is one where the fixed-term has expired. A periodic tenancy has no pre-determined finish date. It continues with the same terms and conditions under the original lease agreement, until either you or your tenant gives the appropriate notice to end it.

Insurance implications:

Many landlord insurance policies require a fixed-term lease to be in place at the time of a loss, so make sure you understand your coverage regarding periodic leases and lease continuations.

In some cases where cover is also in place for periodic leases, how the policy responds may be different.

This is because most policies will only respond to what has been lost in accordance with the policy limits.

So, in the event of loss of rent, the tenant must be legally liable for any rent that is being claimed.

Speaking of loss of rent claims... this is the policy area where the tenancy agreement has the most impact when it comes to making a claim.

For example, a policy may offer up to six weeks’ cover for rent default if a fixed-term agreement is in place but limit the cover to the notice period (such as two weeks) if a periodic agreement exists.

NOTE: The notice period varies from state to state.

To put it another way, if a tenant is on a periodic lease, most policies will only pay the actual rent loss and not the rent you could have charged for any further period.

The bottom line!

It always pays to read the Product Disclosure Statement and to ask your landlord insurance provider to clarify if you are unsure about cover & having a fixed term agreement in place where possible will safeguard you.

Source: EBM Insurance