Are you adequately insured? ...

While seeking out and paying the lowest possible premium might be an attractive option for some forms of insurance, it may not be the wisest option for property owners. Insurance broker Paul Ede says that paying the lowest premium can often result in important exclusions, poor service, or both.

"It's important that your building and contents cover includes everything you need, otherwise you may well find that when disaster comes and you need your insurance, the very thing you need has been excluded from your cover.

"It's also important that the company you deal with has a history of settling claims quickly and fairly. When you need to claim insurance, it's usually at a time when the problem has strained your financial resources anyway, so you don't want to be left waiting for an inordinate amount of time."

With property insurance, it's very much a case of 'the devil is in the detail,' so it's essential that to be aware of exactly what the policy covers. If you're uncertain on any point, ask questions.

Even asking questions may not be enough, according to property investor Geoff Doidge.

"I've had instances where I've asked one state branch a question and got an answer verbally, and then gotten a completely different answer to the same question when I've posed it to the branch in another state. In these instances, you would be well advised to get the commitment in writing rather than relying on a verbal response to your question."

Different policies will have differences in detail, but there are some basics of which every property owner needs to be aware. After an area has been inundated by heavy rain, policyholders frequently discover to their horror that their policies may not cover flood damage. Flood is usually defined as when water from a river, creek, lake, reservoir, dam or navigable canal overflows onto normally dry land.

Flood cover is seldom part of basic property insurance policies, and generally has to be added separately. The insurance company will usually review the property's location, site aspects and flood history before providing the cover. If you haven't specifically asked for flood cover on your policy, you probably don't have it.

If you're living in an area where flooding has occurred (usually your local authority can provide details from their records) then flood cover could be a wise option. If your building is high on a hill, there may little point in spending the extra money. However, the hillside dweller has other problems, usually in the form of landslide, subsidence or erosion.

In many cases, the policy will cover damage caused by these only if they occur within a specified time frame of a specific event - a storm, earthquake, explosion or the like. If the damage occurs over a longer period, you may well find the damage is not covered.

For this reason, Paul Ede advises property owners to discuss with their broker exactly what eventualities they need to cover, and be sure the policy covers them.

Similarly, policyholders need to be aware of exactly what the contents cover of your policy includes, particularly any limits on monetary value. For example, if your policy limits the payout for any one item to $20,000, and you have property that is worth more than that, you may need to list that particular item as special contents on your schedule.

It's also important to remember that you have an obligation to tell your insurance company anything that could affect the decision to insure you. As one document states: 'When we ask you specific questions, you must answer these questions truthfully and in a way that a reasonable person in the circumstances would answer them.... If you withhold relevant information or you do not answer our questions in the way we have described, we can reduce the amount we pay you for your claim, or we can cancel your policy.'

Insurance for investment properties

While these principles hold true for all forms of property insurance, those with investment properties rented out to tenants will need to consider additional protection.

Mavis Florence, national president of Property Owners Association of Australia, says that getting the right insurance for rented property is vital.

"Many people who rent out property basically own just two houses... the one they live in and the one they rent. And usually, they're fully committed financially to service those properties. Any damage through destruction of property or periods of lost rent can cripple them.

"As someone who has been involved for many years in a hotline service for our members, I've heard time and again the problems that occur when property owners have not provided for such losses by arranging the appropriate insurance cover."

Paul Ede says that most insurance companies will provide basic cover for rented properties. "This will include building insurance, contents cover - usually to around $5,000 or 5% of the value of the building - and a provision for loss of rent through damage to the property, such as fire or storm, which makes the building untenable. This will cover up to 52 weeks, providing it does not exceed 10% of the sum insured. These policies will also usually include a public risk cover."

Public liability cover is essential, according to Mavis Florence.

"I know there are some people out there who are renting properties and who don't have that cover, but they're in a precarious situation should they find themselves sued by a tenant or a visitor who injures themselves on the property. They're sitting on a legal and financial time bomb," she said.

Basic property cover also seldom covers such problems as tenants who maliciously damage property, or those who default on their lease obligations. Given the amount of time it takes to evict someone, the loss of rent can be considerable.

There are policies that will cover these possibilities, but as Paul Ede points out, these often include an excess which makes a claim uneconomic.

"For example, if you have a policy with a $400 excess on each claim for damage, you can find that the excess will not cover the damage caused."

Policyholders can also find themselves in a situation where each item of damage is assessed as having occurred at a different time, and is therefore subject to an individual excess charge.

"You can have a situation where a tenant leaves and the owner has to make several repairs before he can let the property again. In this case, if there are five separate items of damage, he can face an excess of $2,000 because each claim will be considered separately."

The problem is compounded by the fact that many tenants do not report damage as it occurs. For this reason, Paul advises periodic property inspections so that an owner can become aware of any damage on an ongoing basis.

Mortgage insurance

Another area of property insurance is that of mortgagee protection, or lenders mortgage insurance (LMI.) This can take two forms. The most common is the policy required by the lender (mortgagee) when borrowings are in excess of 80% of the property value. Many property owners are under the mistaken impression that lenders mortgage insurance protects them - it doesn't. It protects the lender in case the borrower defaults and the secured property, when sold, does not yield sufficient proceeds to pay out the loan. If this happens the company providing the mortgage insurance will pay the lender the amount of any shortfall, and will then seek to recover this amount from the original borrower.

There is also insurance that applies when you own part of a building that has been subdivided, usually into strata title units, and you have a mortgage on that part of the building. In this case you can insure against accidental damage or loss of income up to the amount you owe on your mortgage.

Like taxation and legal matters, property insurance can a complex issue, and one which even experienced investors seldom try to negotiate without professional advice. It's advisable to find a good insurance broker you can work with, and who can source policies that meet your particular requirements for the lowest premium.

Negatively geared domestic rental properties are a calculated risk, according to Tony Jackson of the St. George Underwriting Agency in Perth.

Investors factor in running expenses and an expected occupancy rate, offset this against expected rental income, and hope, over an extended period to achieve a higher rate of capital gain than the rate of after-tax loss.

"Given that most people are generally quite extended on their financial commitments, the amount by which they can afford fluctuation in the rate of net loss will depend on their uncommitted disposable income, and even among the affluent this is frequently very little," he said. In this situation, property owners with heavily-geared portfolios may be very vulnerable if the tenant stops paying rent.

"They tenants might not leave, they just refuse to pay the rent. It happens. All of a sudden, this investment starts to look very expensive. You can't find another tenant, because the existing one is still there. You can't evict them without a court order, and even then they may not go. It may take months to resolve the situation."

One option is Landlord's Protection Insurance, which provides additional protection for property investors. "The cover will pay for deliberate or intentional damage by tenants of up to $50,000 for any one tenant. Whether this occurs as one or a series of items of damage is irrelevant because there is no excess on this cover so the claimable cost is the same either way."

In addition, the policy covers default of rent by tenants up to 15 weeks rent loss, and up to $5,000 legal expenses for trying to recover defaulted rent.

"There is also provision for additions to this policy to cover building insurance, contents including fixtures and fittings, loss of rent due to property damage and public liability to $20 million.

"Most of these covers are available individually so you can tailor your policy to suit your requirements," Tony said. A written lease needs to be in place before cover can be offered under this policy.