How many “1 in a 100 year” floods have we had in the last few years? In an era of escalating extreme weather events, more people and properties are being exposed to costly and devastating damage. As a result, obtaining adequate insurance is a vital requirement when purchasing a home.

Buyers are generally well-versed in ticking off other conditions in the standard sale and purchase agreement. However, as highlighted in a recent article published by The Law Association / LawNews, “Buying a property? Ensure your agreement has an insurance condition,” an increasing number of buyers are discovering too late that the property they have agreed to purchase is either uninsurable or only insurable at such a high premium that the purchase is no longer viable.

Insurance is not an express standard condition under the standard ADLS/REINZ Agreement for Sale and Purchase of Real Estate. Unlike finance, LIM or a builder’s report, there is no default box requiring a buyer to confirm that the property can in fact be insured. There is therefore no trigger for a new buyer to understand this important requirement and preparation until they get legal advice and by then, it could be too late.
 

That omission matters

Often, purchasers will assume insurance goes “hand in hand” with finance, but insurers often operate on a different risk model, particularly considering climate-related risks such as flooding, erosion, landslips and coastal inundation. As a result, buyers will confidently go “unconditional” without ever checking whether an insurer will offer cover.

In some cases, it is only shortly before settlement or even on settlement day that a buyer discovers their insurer will either decline cover altogether or only offer cover on exorbitant fees or heavily restricted terms.

This leaves purchasers with a serious problem, as no lenders will advance loan funds without insurance. In many cases, if the buyer cannot obtain acceptable insurance, the lender may refuse to release loan funds, while the buyer remains contractually obliged to settle.

Across New Zealand, insurance companies are increasingly refining their climate and hazard modelling, leaving entire categories of properties particularly in flood plains, erosion-prone areas or coastal zones without insurance (or only offering limited, expensive insurance) due to perceived risk or drastically increased premiums. Buyers are not aware.

Critically, some of these risks may only appear briefly as notations in a LIM report or as zoning overlays on council maps details the lay purchaser may not fully appreciate without specific insurance advice. Auckland Council has a geomap function where you buyers can easily identify the flood zones, but only to those that know.

This can leave buyers facing a loss of their deposit, exposure to default interest and penalty costs, and potential further action. All of this can occur where the buyer has acted reasonably but failed to include a specific insurance condition.

However, the real cautionary lesson is that a LIM or building report may identify legal, structural or council-related issues, but neither guarantees that an insurer will accept the risk on ordinary terms.

As the LawNews article emphasises, insurance clauses are now just as vital as traditional due diligence conditions, particularly in areas exposed to climate or natural hazard risk. Yet, many buyers and even some professionals still treat insurance as an administrative step to be dealt with after the contract becomes unconditional.

Before going unconditional, buyers should:

1. Get legal advice from experts who understand such issues.

2. Speak to an insurance broker early.

3. Disclose the property address, construction, location, and LIM details.

4. Confirm not just whether insurance is available, but on what terms and at what cost.

5. Ensure the agreement includes a specific insurance condition, where appropriate OR ensure you can get insurance on terms acceptable to you before you commit.

Buyers who should be especially cautious include those purchasing:

• Coastal properties
• Homes near rivers, streams, or flood-prone catchments
• Hillside or landslip-prone sites
• Older homes
• Homes with a history of weather or water damage
• Homes in areas with known natural hazard overlays

A well-drafted insurance condition, or lawyers who can assist with the process can give buyers a contractual “out” if acceptable cover cannot be obtained. Importantly, the clause should address not only whether insurance is available, but whether it is available on reasonable and commercially workable terms, and it should clearly state the timeframe for confirmation.

In today’s market, insurance should no longer be an afterthought. It should be treated as a critical part of due diligence and deserves the same attention as finance and building reports.

Please contact the experts at Queen City Law for assistance. For more information about this article, you can contact the authors of this blog Tina Hwang and Carissa Smith.

Disclaimer:

This article is general information only and does not constitute legal advice. Every dispute is different and professional advice should be obtained before taking action.