After a tenant's dog used a Foxton house as a toilet despite a no-pets clause, and the clean-up cost fell on the landlord, the Government is looking at a law change.
Housing Minister Nick Smith on Saturday flagged amendments to the Residential Tenancy Act.
In August, the Tenancy Tribunal ruled Amanda Stewart was not liable for the damage caused by her dog to her Foxton rental, despite there being a no-pets clause.
That was because under the Act she was immune as the damage wasn't intentional or criminal and the landlord could recover it through insurance.
The landlord, David Russ, is intending to appeal the decision, Fairfax has reported.
Dr Smith says the decision is creating uncertainty for landlords and tenants across the country, where there are 450,000 tenanted properties.
"The latest court rulings mean landlords cannot recover the costs of this damage where they have insurance, including for their costs such as the excess," he said.
"The problem with this approach is that it reduces the incentive for tenants to take good care of the property they rent. It also reduces the landlord's incentive to have insurance as it lessens tenants' responsibilities."
It could also add to the overall costs of the residential sector, driving up insurance costs and rents, Dr Smith said.
"However, we do not wish to return to the situation where tenants may be sued by their landlord's insurance company for hundreds of thousands of dollars, such as with an accidental house fire."
Dr Smith said he was looking at a model where tenants would be liable for damage caused by carelessness or negligence up to the value of their landlord's insurance excess but not exceeding four weeks' rent - the equivalent of the bond.
Tenants would remain fully liable for intentional or criminal damage.
The Ministry of Business, Innovation and Employment will start consultation with tenant and landlord organisations, and the insurance sector, on possible amendments.