Drug labs: landlords exposed if tenants undertaking criminal activity

Drug labs: landlords exposed if tenants undertaking criminal activity
Larry SchlesingerDecember 7, 2020

Landlords could find themselves bearing heavy losses if their properties are rented by tenants who  undertake criminal activities if they don’t take out extra insurance to cover this sort of behaviour.

However, investigations by Property Observer indicate that obtaining the extra insurance needed may be hard to come by, with many insurers not readily covering this kind of activity.

It especially highlights the importance that property managers properly vet prospective tenants before signing lease agreements.

The issue has come to light following the reporting of two drug labs uncovered in rental properties in Melbourne and on the Gold Coast in the last few months.

In September, the Herald Sun reported that property investor Nicholas Milan Wyman would sue his property manager after suffering extensive damage his rental property in St Leonards, Sydney, which was used as a drug lab and where a corpse was dismembered.

Last week, the Gold Coast Bulletin reported that a police drug raid uncovered a drug lab in a rental property on the prestigious Isle of Capri.

Property Observer recently contacted the major landlord insurance providers, but only one – Terri Scheer Insurance – provided a definite response to the question of landlord recompense cover for criminal activity.

Another insurance provider, Perth-based EBM Insurance Brokers, has subsequently contacted Property Observer to say that its RentCover landlord insurance does cover drug lab clean-up costs and recently paid out a $50,000 claim to clean up a property used as a drug lab in Hoxton Park, NSW.

According to RentCover general manager, Sharon Fox-Slater, police discovered the laboratory by chance when investigating a child abuse allegation; the home was occupied by a family with four children aged under 10.

Fox-Slater says in this case the alleged crooks were careful with gardens well-kept and the four-bedroom home "immaculate during property inspections, with the laboratory dismantled".

“We treated the claim as tenant damage because the ongoing liability is massive if the property is not cleaned correctly,” she said.

A spokesperson for Allianz Australia said the company could not provide any comments in relation to the example of the St Leonards drug lab story.

“We have looked into it, but there are some many potential complexities and unknowns in the scenario provided below that it is not possible to provide a simple response as to whether our landlords policy could respond in full or part to such an event,” said the spokesperson.

A spokesperson for CGU said the insurer had no comment.

Aon said it could not comment, though it does provide a professional indemnity policy for property managers with a “mismanagement extension”.



This extension provides protection from allegations of negligence arising from any claim arising as a result of an actual or alleged breach of the agent’s professional duty as a property manager, including malicious damage to a rental property or loss of income or value to a rental property as a result of illegal activity by tenants (including drug labs).

Terri Scheer Insurance manager Carolyn Majda said criminal activity by a tenant that results in damage to the rental property “may be covered by insurance – provided there is a tailored landlord insurance policy in place”.

Terri Scheer Insurance offers tailored insurance policies to cover landlords for many risks including malicious and accidental damage, loss of rental income and legal liability.

“Landlord insurance policies that cover these specific risks can assist landlords to safeguard their investment and ensure they continue to receive a steady flow of rental income,” Majda says.

“A good landlord insurance policy that covers malicious damage – for example holes punched in walls, doors that have been kicked in and intentional damage to carpets and floors - will class illegal activity within this category.

“Loss of rental income resulting from criminal activity may also be covered by landlord insurance, for example, if the landlord is unable to lease the property while it is repaired or cleaned, or if the tenant absconds before their lease is up for renewal.

“This is why every landlord should have a tailored landlord insurance policy,” she says.

“Landlord insurance policies that cover these specific risks can assist landlords to safeguard their investment and ensure they continue to receive a steady flow of rental income.

Majda says the policy should also provide cover if a court orders a tenant’s eviction or terminates the rental agreement due to tenant hardship.

“A standard building and contents insurance policy generally won’t cover landlords for many of these risks,” she says.

From January 1 next year, all real estate licensees in NSW will be required to have mandatory professional indemnity insurance with cover of at least $1 million for any one claim and not less than $3 million in the aggregate for all claims made during the period of insurance.

Photo by West Midlands Police courtesy of Flickr.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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