Under the Residential Tenancies Amendment Act, tenants are now liable for careless damage caused to a rental property, costing them the lower of four weeks' rent, or the  landlord's insurance excess.

Tim Grafton, chief executive of the Insurance Council of NZ (ICNZ) confirmed that the cost applies regardless of whether a tenant has insurance and if not paid, the landlord can refer the case to the Tenancy Tribunal.   

"Although not compulsory, we recommend [that] tenants have their own contents insurance to cover them for liability for damage they may accidentally [cause] to other people’s property (not just their landlord’s), [and] damage to their own possessions in the event of a natural disaster, break-in or any number of other accidents," Grafton said.

Aaron Dickinson, head of product at AA Insurance said that the cost of damage, both to the landlord's property and other third parties can be high, and that claims experience shows there's some confusion around what contents insurance is for.

What does contents insurance cover?

Contents insurance covers the contents of a home: furniture, clothes, appliances, tools and sports items and personal liability to someone else's property, including damage to a rental property.

Different policies apply automatic limits for categories of cover, (e.g $3,000 for jewellery) and there's a choice of replacement cover (an item is replaced brand new, or the nearest equivalent) or indemnity/market value (an item's retail value immediately before it was lost or damaged, is replaced).

What is covered by the tenant's and landlord's policies?

Typically, the tenant's contents insurance policy covers the value of their personal possessions (e.g.TV, furniture, clothing, jewellery and cellphone), and their personal liability for accidental damage to fixtures and fittings of a rental property, for example benchtops, stove, dishwasher, carpets, curtains.

Dickinson said that the liability section of a contents policy usually has a fixed limit and covers a range of situations, including accidental damage to a flatmate's possessions.

"An example of where [a tenant] needs cover for legal liability [above] the landlord's excess or four weeks' rent is where careless action results in a fire, which spreads to a neighbouring property.

"The tenant in this situation would be liable for the lesser value of either the landlord's excess or four weeks' rent, and the damage caused to the neighbouring property," Dickinson explained.

How do contents policies work for multiple flatmates sharing a home?

Where there are multiple flatmates, if there's a sudden event, such as a burst water pipe or a leaking hot water cylinder, each flatmate is generally responsible for their own items, covered by their personal contents insurance policy. 

"The landlord [is] responsible for repairing any damage to the rental property, either privately or through their insurance.

"In these situations, as the damage is unlikely to have been caused by careless action of any of the tenants, flatmates [don't need to] make any payment towards the damage to the rental property," Dickinson said. 

Whose contents policy would cover a burglary to a rental property?

A recent Ministry of Justice crime and victims survey confirms that 215,000 (12 percent) of houses had been burgled in the last year and that the rate is significantly higher for rented households owned by the government.

Where there's a burglary, each tenant's contents insurance policy covers their personal items.

"The landlord [would be responsible] for repairing doors or windows [damaged by forced entry], and for any other damage caused to the home, [including stolen items provided under the rental agreement]," Dickinson explained.

The monthly cost of contents insurance for a 30-year old with cover of $30,000 is around $60, however property location, size, materials and the number of flatmates can all affect the cost.

Jennifer Sykes, Housing and Tenancy Services at the Ministry of Business, Information and Employment confirmed that tenants on income-related rents under Housing New Zealand and community housing providers who cause careless damage are liable for four weeks' market rent, which is calculated based on bond data.

Landlords should also provide insurance information to tenants within a reasonable time, and update tenants if insurance arrangements change.  

New tenancy rules put the responsibility of paying for careless damage upon the tenant.  Although not prohibitive, having to pay up to four weeks' rent - and the risk of higher costs through damage to other property - can be avoided by taking out contents insurance and reviewing your cover amount regularly.