Insurance snub to short-stay risks

Insurance companies seem to have developed a distinct distaste for Airbnb and short-stays in general.

Check out the small print in your latest home insurance policy Product Disclosure Statement (PDS). Just below the charming exclusions for hazardous materials or illegal drugs, you may find another squeamish aversion: short-stays.

Your policy may well have something like this:

“No cover unless the property is leased to permanent tenants.

This policy does not provide any cover unless the property is used by tenants as their permanent residence. This means if the property is used for short-term rental, holiday letting or house sharing (including arrangements booked through an online booking platform) – this policy does not provide cover.”

If you are an owner-investor, you will be responsible for ensuring that your tenant does not use your property as part of a short-stay business. Even if you have no knowledge of the activity, you would be hard-pressed to get a payout if your apartment were trashed, or worse still, if there were a personal injury relating to a short-stay. 

The insurance industry’s unequivocal disinclination to support short-stays is bound to have knock-on effects. Specifically, we anticipate an uncomfortable tightening of restrictions in leases and, potentially, the introduction of indemnities.

We now have explicit and empirical evidence that insurance industry accords a significantly higher-risk rating where a property is used for short-stays. 

Here it gets very interesting because of the recent update to the Victorian short-stay legislation. The Owners’ Corporations and Other Acts Amendment Act 2021 was passed by both houses of the Victorian Parliament in March and will take effect from the beginning of December this year, unless an earlier date is proclaimed. 

The “benefit principle” in the new legislation will allow owners’ corporations (OCs) to charge more for an individual property based on attributable costs. The logical extension is that a higher percentage of insurance can be levied on lots that carry on short-stay business. 

The “benefit principle” clauses are very clear that other costs such as increased wear and tear and additional security can be sheeted home to those lots that obtain the benefit. Previously only “works” were captured as a cost that could be charged to a beneficiary lot. The new legislation broadens that catchment immensely.

OCs may finally realise the right to have a fair and equitable distribution of expenses beyond lot liability.

Too chummy?

An unsavoury aspect of the Owners’ Corporations and Other Acts Amendment Act 2021 is the fate of owners in large apartment complexes.

In very large buildings, it is almost impossible to reach a 75 per cent vote to take legal action against companies responsible for the use of flammable cladding.

The Greens had proposed amendments to the legislation including a reduction in the threshold to 50 per cent, the standard benchmark for a plebiscite of just about any description. Those sensible amendments were desultorily dismissed by the government and the legislation remained silent on the issue, maintaining a cloak of protection for the culpable parties in the building industry. It all sounds excessively chummy.

Cladding and your health

We promised to update our readers on the second research paper from RMIT researchers on the health impacts of the cladding issue. The paper, by RMIT researchers David Oswald, Trivess Moore and Simon Lockrey, presents a sobering illustration of the far-reaching impacts. 

The reports state that in Victoria alone, hundreds of buildings with flammable cladding have been officially classified as posing a risk to the safety of residents: 71 extreme-risk, 368 high-risk and 342 moderate-risk, plus more at the lower end of the scale.

These owners are being forced to find solutions, and it’s not easy because it is often unclear who caused the defect and who should bear the cost of rectification.

The report described the cladding issue as a major stressor, detailing reactions among participants including shock and a sense of feeling unsafe in their own homes, particularly those in the high-risk buildings. A common response was uncertainty about the future. Financial anxiety was also a recurring theme.

The participants also expressed frustration and anger, with a litany of complaints:

“… no-one is listening, unfair costs, insurers refusing to insure their buildings, builders liquidating their existing business and starting a new one if legal action was threatened, etc.”

The report also included a community swipe at short-stay operations being responsible for a growing inclination to ignore fire alarms – certainly not a good outcome for any building, especially those with cladding:

“… every short term let person doesn’t know what they’re doing, doesn’t understand that if they burn the toast, you open the window. No, they open the door to the passageway which sets off the fire alarm and the fire brigade turns up. So, every time this happens is an evacuation call, which we’ve all learned to ignore.”

Most respondents saw the cladding issue as a very long-term problem with serious effects requiring residents to adapt. Liveability and behaviour have been impacted, with some participants believing it will be at least five years before the cladding is rectified on their building.

The full report is available online – just search for “flammable cladding and the effects on homeowner wellbeing”.

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