3

Suppose a landlord has taken out landlord insurance which stipulates/limits the use of the residence, e.g. "The property may not be used for commercial purposes".

The tenant now operates a business from the house and in the course of doing so causes damage to the house or to people on the property.

Can the insurer now deny payment for the damages to the landlord? Let's assume the landlord took reasonable actions to ensure the property was not used for commercial purposes and that the commercial activity was carried out despite those precautions and without the landlords knowledge or consent.

Does the answer to this question change if the property manager was aware of the commercial activity but failed to inform the landlord?

This question is about a property in South Australia, Australia.

2
  • 3
    Quite likely the insurance can deny the claim. Their policy was violated and whether the landlord knew or didn't know is immaterial. However, most likely the landlord can (and should !) recover damages from the tenant. The tenant violated the rental contract and cause damage in doing so, i.e. they are fully liable.
    – Hilmar
    Commented Oct 22, 2023 at 13:09
  • @Hilmar, that doesn't necessarily follow. It's the person causing the damage who is liable in the first place to the landlord, assuming it is negligent or intentional damage (merely accidental damage carries no liability). Whilst it may seem logical that the tenant's breach ultimately increased the risk of such damage, it doesn't mean the tenant's breach is the cause of the damage legally.
    – Steve
    Commented Oct 22, 2023 at 19:50

1 Answer 1

6

"The property may not be used for commercial purposes"

If we rephrase the problem slightly, "can an insurer exclude damage arising in connection with commercial activity?", then the answer is that insurers can usually exclude whatever they like, and aren't obliged to offer insurance at all, let alone any particular profile of coverage.

Many people think of insurance as "peace of mind", but insurers are not in the business of selling peace of mind, but of levying an up-front charge for your expected future losses under certain kinds of contingencies. Insurance policies that cover all risks are practically never issued - and are relatively expensive if they are, probably absorbing all profit from whatever activity is being insured.

The contingency that has actually struck in this case - a loss arising from commercial activity by the tenant - does not appear to be a contingency actually covered by your insurance policy.

The tenant now operates a business from the house and in the course of doing so causes damage to the house or to people on the property.

Can the insurer now deny payment for the damages to the landlord?

If the breach of the term is directly related to the loss, then yes they can almost certainly deny payment.

Let's assume the landlord took reasonable actions to ensure the property was not used for commercial purposes and that the commercial activity was carried out despite those precautions and without the landlords knowledge or consent.

That would possibly be an argument if the alleged breach of the insurance terms was unrelated to the loss - for example, if the foundations subsided, and the insurer tried to avoid the claim because commercial activity was also occurring on the premises, but with no proposed connection between the two things.

But where an insurer has specifically excluded losses arising from commercial activity, you cannot force the insurer to cover you for commercial activity losses simply because you didn't know such activities were occurring.

Does the answer to this question change if the property manager was aware of the commercial activity but failed to inform the landlord?

It could alter certain situations, if you were trying to argue that you'd taken reasonable steps to monitor the property by having an agent in place to do so, but then argued you were ignorant because of your own agent's failure to relay information.

5
  • “Insurance policies that cover all risks are practically never issued” — I think we can be a bit more on the nose with that: insurance policies that cover all risks are never, ever, under any circumstances issued by any insurance company in the world. 90% of policy holders will, if asked what policy they have, answer along the lines of, “The one that covers everything”, and 100% of them will be wrong. Commented Oct 23, 2023 at 0:12
  • @JanusBahsJacquet, consider the Lloyd's "names" for an example of something approaching all-risk cover. I concede no insurer would ever cover every possible risk in the world, but within a broad category (like "public liability") I believe it was once a practice to issue all-risk cover.
    – Steve
    Commented Oct 23, 2023 at 0:36
  • When you say "insurers can usually exclude whatever they like" surely that statement is limited by regulation? Perhaps a different angle to this question would be "Are there any regulations that limit an insurer's ability to deny coverage where the insured person took reasonable steps to comply with the policy".
    – quant
    Commented Nov 8, 2023 at 22:20
  • 1
    @quant, there can be regulations, but none that I can imagine would apply here, and there tend to be even fewer constraints in the commercial market than on the consumer market. Also, despite saying otherwise, I don't believe he has taken reasonable steps. The landlord's agent knew of the commercial activity. And we're not talking about a peripheral exclusion either - the insurer has directly excluded the damage. It's like an insurer excluding fire, and then the house goes on fire. The landlord says "despite all reasonable efforts the house went on fire, can I force the insurer to pay"?
    – Steve
    Commented Nov 9, 2023 at 7:36
  • @Steve that makes sense, thanks.
    – quant
    Commented Nov 9, 2023 at 22:30

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .