The industry ombudsman has backed an insurer that declined a claim by landlords whose tenants ran a marijuana-growing operation.

Police alerted the owners’ property manager to the illegal activity in May last year, before raiding the building and removing plants and equipment.

An assessor found the tenants modified bedrooms, a bathroom and laundry to cultivate marijuana, leaving damage to electrical wiring and lighting, ducted heating and other areas of the property.

There was also consequential damage to hallways, a lounge room, toilet and garage.

“The property damages are consistent with and a result of an illegal drug lab set-up,” the insurer’s assessor reported.

The owners claimed for damage under their landlord insurance, but AAI would not pay out because the insureds had not taken out additional “tenant protection”.

Related article: Homeowner loses dispute over 100% premium rise

The Australian Financial Complaints Authority finds the owners were offered the optional cover when buying the policy but declined it.

The policy they had covered malicious acts and vandalism by third parties but excluded damage caused by tenants.

AFCA also finds the policy’s general exclusion for loss or damage connected with illegal drugs would have applied even if the landlords established a valid claim.

The landlords argued some damage was caused by police when raiding the Victorian property.

But AFCA finds damage caused while executing a lawful search warrant cannot be characterised as malicious.

“Although the police may have intentionally damaged parts of the property when executing the warrant, that does not mean the damage was malicious.”

The owners also sought a payout for lost rent while the unrepaired property was untenanted, but AFCA says that cover depended on there first being a valid property damage claim.

See the ruling here.