One of the downsides of investing your money in an income property is that, unlike a less tangible investment, this one can literally go up in smoke. While insurance is available to protect properties against the risk of fire and other perils, there are many grounds upon which your insurer may attempt to deny coverage after a loss. Here are five of the most common grounds that landlords would do well to note.
1. Inaccuracy in Insurance Application
Your insurer may be able to void your policy after a loss if it discovers that you inaccurately described your property or your use of it on the insurance application. For example, in a 2016 Saskatchewan case, a property owner failed to indicate on his insurance application that he intended to rent out his property to boarders. After his property unexpectedly burned down, his insurer refused to pay the loss, relying on the misrepresentation in his original application, and the court upheld the refusal. The lesson to landlords is clear: conceal the existence of renters from your insurance company at your own peril.
2. Vacancy of 30+ Days
Most rental property insurance policies contain words to the effect of "We do not insure loss or damage occurring after your dwelling has, to your knowledge, been vacant for more than 30 consecutive days". The definition of "vacant" varies in each policy, but it is often defined as a situation where the occupants have moved out with no intention of returning and no new occupant has taken up residence. Landlords who fail to report such vacancies to their insurers risk losing their coverage in the event of loss – even if the vacancy had nothing to do with that loss whatsoever.
3. Failure to Notify Insurer of "Material Change"
Your policy almost certainly contains a provision stating it will be void if you fail to advise your insurer of a "material change" to the premises. This means that if your property is damaged or destroyed and the insurer comes to learn that prior to the loss you failed to report a "material change", the insurer may deny coverage – even if the loss had nothing to do with this change. If you are planning on changing the heating system, undertaking more than cosmetic renovations or implementing any other potentially "material" change, you'd better let your insurer know.
4. Carrying on Commercial Activity
Policies often exclude coverage for structures used in whole or in part for commercial purposes. In one Alberta case, the landlord began operating an automotive repair business on the property without notifying his insurer and was denied insurance coverage after the premises were damaged by fire as a result. Given the policy's clear exclusion for commercial activity, and the landlord's failure to report this "material change", the court had little hesitation in dismissing the landlord's lawsuit against the insurer.
5. Illicit Drugs
Modern rental policies also tend to limit coverage where the premises are used for the cultivation, sale, etc. of marijuana or other controlled substances. Some such provisions may purport to exclude coverage even where the drug operation did not cause the loss and even where the landlord was unaware of it. These clauses provide further evidence (as if more was needed) that grow-ops and rental properties are a terrible combination, and good reason to learn how they can be detected and dealt with.
Should your property be damaged and your insurer deny coverage for any of these or other reasons, you can take comfort in knowing that an initial denial is by no means the last word. Property owners in that position are advised to consult with an experienced insurance lawyer as soon as possible to maximize the chance of insurance recovery.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
