Coastal properties are some of the most expensive in New Zealand, yet the most at risk of extreme weather events and other natural hazards. Obtaining comprehensive insurance is essential, especially when seeking mortgage finance. This raises the question, as awareness of risk increases: what happens to insurance cover? Will it become too expensive, or not available at all? Commentary suggests coastal and other vulnerable properties may lose their ability to be insured in as little as 15 years. We recommend that prospective purchasers approach coastal and low lying properties with caution and consider the increasing awareness of natural hazards as part of their due diligence.
Why the risk to home insurance cover?
A recent Government funded report asserts sea levels are expected to rise 10 cm by 2040, which could cause a full insurance retreat of over 10,000 homes across Auckland, Wellington, Christchurch and Dunedin by 2050.
“Insurance retreat” is when a private or public insurer declines an application for, or renewal of, insurance cover because of the high likelihood of damage occurring. Prior to full retreat, insurers may introduce exclusions (such as excluding flooding as an insured event) to transfer a significant portion of a property’s risk back to the policyholder. Otherwise, insurance premiums and excesses will increase to reflect the real or perceived increase in the likelihood of an insured event occurring.
Increasing premiums, partial retreat, and total loss of insurance is problematic for several reasons. These include:
- Loss of the ability to obtain mortgage finance/being in default of one’s mortgage
Mortgage finance requires comprehensive insurance cover on a no-exclusions basis. This insurance is to be maintained at all times and typically, the only exception is when the property is bare land. If insurance companies were to refuse to insure coastal or other vulnerable properties, then existing homeowners may be in default of their mortgage and prospective purchasers may not be able to obtain mortgage finance at all.
Even if insurance companies were to partially retreat (e.g., refuse cover for flood damage) banks could still refuse to provide mortgage funding if they consider the risk of loss is too great. Projections show that a partial retreat of insurance may occur as early as 2030.
- Increased costs to homeowners
Extreme weather events can leave homeowners of coastal and other vulnerable property open to significant costs in repairs and maintenance with no safeguard of insurance compensation. Homeowners may also incur the costs of temporary engineering responses to mitigate the effects of extreme events, if these are not Government funded.
- Value loss and unsellable homes
Alongside an increase in insurance premiums, coastal and other vulnerable properties are likely to suffer a loss in value. In a worst-case scenario, vulnerable properties may become unsellable.
What can you do?
If you are looking to buy, it is important to ascertain if the property is at risk of the effects of extreme weather events and natural hazards. Some “at risk” properties will be obvious from a physical inspection. However, what is less obvious is the quality of the ground a dwelling is built on, overland flow paths that have been dry for many years, exposure to high winds, and risks caused by alterations to upstream catchment areas.
Obtain a LIM and Record of Title
A Land Information Memorandum (LIM) provides key information held by the territorial authority (TA) about a property. LIMs often include geotechnical information about the section a dwelling is built on, and the risks that the land is prone to such as floods, liquefaction, and earthquakes. Often these risks are hidden and you should ensure your purchase is conditional upon your approval of a LIM. There is a LIM condition in the standard form REINZ/ADLSi Agreement for Sale and Purchase of Real Estate, but the clause can be tailored on a case-by-case basis to suit any purchase. Some TAs provide natural hazard databases online, but this can vary depending on where in New Zealand the property is located.
The Building Act requires a TA to refuse to grant consent if you are building or making alterations to a property on land subject to natural hazard(s), unless special approval is gained. This will typically result in a consent notice, an encumbrance or a notification under section 73 of the Building Act on the Record of Title outlining the hazard(s) that put the property at risk.
Obtaining insurance advice
Although insurance may be available now, it may be worth obtaining professional advice as to the long-term insurability of a property. Property is one of the main investments that New Zealanders make for the long-term. Ensuring that your investment will remain protected through insurance and maintain value when you sell is essential. It is also important to check you will be able to obtain insurance cover for your intended use for the property. For example, insurance is not required for bare land, but it is important to ensure that when you do build you will be able to obtain suitable insurance protection.
Making your purchase conditional upon your obtaining satisfactory insurance enables you to enquire about the present and future insurability, and the cost of that insurance. With the correctly drafted condition, if the insurance advice you receive is unsatisfactory, you can cancel the agreement.
The insurability of any property should be carefully considered as part of due diligence on all property acquisitions. Exposure to natural hazards and exposure to extreme weather events will impact the cost and ability to obtain insurance. Adequately protecting yourself when putting in an offer will be crucial going forward.
If you are considering buying or selling property, we can assist you in the process. We have extensive experience acting in property transactions and on matters concerning insurance. Please get in touch with our Property team or your usual contact at Hesketh Henry.
Postscript: Since we started writing this article, Auckland, Northland and the Coromandel have been severely hit by flooding. Many properties that were thought safe from flooding were impacted. Overland flow paths that had been dismissed as not being a risk had sudden, significant water flows resulting in catastrophic flooding. The extent of damage means all prospective property purchasers should be alert to the issues addressed in this article.