Buying a property? Ensure your agreement has an insurance condition

LawNews staff

As New Zealand’s flood, erosion and landslip risks escalate, insurers and banks are driving an emerging crisis in the housing market.

Led by Tower, insurance companies are quietly updating their climate models, red-lining thousands of at-risk properties in flood or inundation zones and those at most risk of erosion. As a result, some homeowners are facing sky-high premiums, ratcheted up to match what Tower considers to be their specific risk.

But while their premium hikes might involve thousands of dollars a year, these homeowners may be the lucky ones.

Others, who own properties in locations where Tower deems the risk is too great, are now being denied insurance cover outright. If they have a mortgage, these property owners are also likely to be in breach of their loan agreement.

Equally vulnerable are prospective home buyers who have signed sale and purchase agreements, conditional only on securing satisfactory finance and an acceptable building report, with little or no thought given to whether they can get insurance.

It’s only when they apply for a mortgage that some would-be buyers are discovering that they’ve signed up for a property on an insurer’s red-lined list. Because they can’t get insurance, they can’t get a mortgage but with no insurance condition in their agreement, they still have a contractual obligation to settle on the purchase.

 

Better modelling

Tina Hwang, a director of Queen City Law and convenor of The Law Association’s Property Law Committee, says she does not believe many property lawyers have yet turned their minds to the insurance issue.

But existing homeowners are being caught by surprise. While most think climate change will hit with a storm, the real damage arrives in the mail – a letter from their insurer saying it will not renew the policy or that the premiums will double, treble or more to match the current and future risk, Hwang says.

That letter comes as a result of insurers’ improved climate modelling and/or the addition of a line in the property’s LIM report, highlighting the risks of flooding, inundation or erosion. It could be the first real financial loss many existing homeowners face due to a warming planet delivering more storms, landslides and wildfires.

With insurance cover becoming harder to get, insurance clauses are as vital as a builder’s report or LIM in standard sale and purchase agreements, Hwang says.

But in a hot market, that protection may disappear. “If it’s a vendor’s market, the purchasers often have an unconditional agreement or a very limited conditional agreement with no room to review the insurance issue.”

Conveyancers may check for flood zones only as part of the title or LIM review. “But that may need to change,” Hwang says. “Prudent lawyers will need to advise clients first on whether the property is insurable, and secondly whether the premium is acceptable.”

She says rising costs are already starting to bite. “Recently, we’ve acted for a number of first home buyers who are just scraping through, really counting every dollar in KiwiSaver. Then if they find out the insurance premium is going to double or triple, it’s going to be a big struggle.”

 

Insurance retreat

In the past, insurers priced risk on a “community ratings” basis which meant risky properties paid the same premiums as safer homes in the same suburb.

But thanks to more sophisticated data analytics, insurers can now identify these homes and assess risk right down to individual properties by inputting data from third-party flood modelling providers, such as RMS and CoreLogic, directly into their underwriting systems.

Homeowners unable to secure insurance or pay the inflated premiums could then find themselves in breach of their loan agreement even if they have never missed a mortgage payment, says Jessica Palairet, executive director of Lawyers for Climate Action.

Loan agreements require homeowners to insure the property, meaning a denial of insurance could be financially disastrous for mortgage holders, she says.

“Sometimes this issue is shrugged off as though it’s just seaside baches at risk. But in some cases, it’s entire communities. The [financial] impacts could be just devastating.”

The scale of potentially blighted homes is significant. According to a 2025 NIWA and Deep South Challenge report, about 700,000 New Zealanders and more than 411,000 buildings, valued at a total $135 billion, are exposed to river flooding during extreme weather events.

In addition, 72,000 New Zealanders and approximately 50,000 buildings worth $12.5b are exposed to present-day extreme coastal flooding.

 

Tower: the litmus test.

Driving the move to risk-based premiums is Tower Insurance.

It sent shockwaves through the insurance industry in November 2021 when it announced it was implementing the RMS data as a basis for granular risk‑based pricing for inland flood risk. It would no longer subsidise risky properties by community pooling – ie, spreading the risk across all homeowners.

Since then, Tower has refined and expanded its modelling to encompass other climate-related risks, a spokesperson told LawNews. In late August it extended its risk-based pricing to homes vulnerable to slips and sea surges.

The insurer has argued that its risk-based assessments are empowering homeowners by sharing hazard ratings and helping them understand the risks their homes are facing.

This might prevent buyers from purchasing homes that will fall in value as insurance becomes more difficult or unaffordable – or non-existent. One Wellington professional and her husband found their dream home in Thorndon in June this year but were shocked when Tower refusing to cover the property, which sat in a flood plain. Initially they thought they’d simply insure with AA Insurance instead but then realised the implications should that insurer decide to adopt risk-based pricing in the future.

Tower says 90% of its customers are paying less proportionately for their insurance than they were prior to its change to risk-rating policies. It said affected homeowners would pay a median increase of $230 a year.

But that’s of no comfort to homeowners who find their property is now uninsurable.

To find out if a property is affected, homeowners and prospective buyers can enter the address into the search bar on Tower’s website. If the property is deemed uninsurable, a message may pop up: “We’re sorry. The details you’ve given mean that we’re currently unable to offer you cover.”

Many of these red-lined properties are currently on the market, being promoted to unsuspecting buyers by real estate agents who in many cases have no idea about the property’s climate and insurance risk.

 

Agents’ obligations

Real estate agents have no explicit legal duty to warn prospective buyers about insurance risks, or availability or how climate change, flooding or other hazards might affect insurability.

They do, however, have a general duty of disclosure and honesty under the Real Estate Agents Act 2008 and the Real Estate Agents Authority (REAA) Code of Professional Conduct and Client Care, which require them to:

• Be honest and truthful in all dealings
• Avoid misleading or deceptive conduct
• Disclose any material facts they know (or ought reasonably to know) that could affect the buyer’s decision

REAA chief executive Belinda Moffatt told LawNews that due diligence and disclosure requirements in relation to properties affected by natural hazards or disasters will depend on the specific property and circumstances. However, the general principles in the Professional Code of Conduct will apply.

“The first principle is that defects that are known or which a reasonably competent licensee ought to know must be disclosed. The second is that licensees must disclose information that should in fairness be provided to the parties. REAA emphasises these principles to licensed real estate professionals, via continuing professional development (CPD) topics such as one released last year called Natural Disasters and Weather Events: Disclosure, Risks, and Issues.”

Moffat added that agents should undertake appropriate due diligence around natural hazards and disasters in the area in which they are operating.

“This includes making inquiries of vendors as to any damage to the property, any Natural Hazard Commission or insurance claims that have been lodged and any remedial work undertaken and seek supporting evidence.”

Disclosure to potential buyers should take into account both the requirements around fairness to all parties and the obligation to disclose defects.

She added that agents should get information from the vendor about the vendor’s existing insurance. The REAA also recommended agents encourage buyers to take insurance advice before an offer is made, particularly if the property is in an area that has been affected by a significant weather event or natural disaster.

“Purchasers should also seek legal advice before they sign a sale and purchase agreement and consider whether an insurance condition should be included,” she said.

 

Dodging questions

Actuary Jeremy Holmes of Melville Jessup Weaver says other insurers will inevitably follow Tower and move to risk-based pricing, even if homeowners turned down by Tower managed to find cover with another provider.

Insurers call it “anti-selection”, where homeowners with the higher-risk properties migrate to another insurer which then finds itself with a greater proportion of high-risk individuals because its premiums aren’t as heavily risk-based, Holmes says.

Other insurers are believed to be refining their risk-based models, although they’re keeping quiet about it. In 2022, IAG chief executive Amanda Whiting told The NZ Herald that the company was considering more risk-based pricing to avoid customers in low-risk areas subsidising those in high-risk places.

When LawNews recently asked IAG – New Zealand’s largest general insurer – if it was now doing this, the company dodged the question multiple times. Eventually, when pressed, it replied: “How we price is commercial in confidence.”

Unlike Tower, other insurers may not be red-lining homes, but are simply hiking premiums to avoid insuring the riskiest properties.

“In some sense, the insurer is saying, ‘look, we can’t really cover this. We can offer you this price and if you’re willing to pay that, then sure. But actually, we know that most people can’t afford this’,” Holmes says.

“Access at any price is not access.”

The same thing happens in Australia, where homeowners are facing premiums in the tens of thousands of dollars to get flood cover.

Holmes says the two big wake-up calls for insurers in recent years have been the Christchurch earthquakes of the early 2010s and the floods and cyclone of 2023. Insurers and reinsurers have recalibrated premiums to reflect these and other emerging risks.

Some insurers may choose not to fully price in the risk, for fear of public backlash, Dr Eric Crampton, chief executive of The New Zealand Initiative, wrote in a Newsroom article. A November 2024 report Premiums Under Pressure by Kali Mercier for the Helen Clark Foundation found that with risk-based pricing, a $500,000 flood-prone property paid $4,500 more in annual premiums than a similar property located nearby that was not at risk.

Increased premiums, however, are not just a result of natural hazards. Increased building costs and regulatory compliance costs also played a role, Holmes says.

 

The Lim trap

Climate retreat in various guises is a trap few see coming.

One common impact is the quiet additions to LIMs that can affect the ability to sell a home or the price that can be achieved. Councils are obliged under the Local Government Official Information and Meetings Act 1987 to disclose known hazards, and updated flood maps or erosion studies are increasingly reflected in LIMs, which in turn affects insurance.

But “there’s no warning label on the LIM report that says, ‘you might lose your insurance in five years’,” Palairet says.

In July, Stuff reported that more than 1,100 properties in Hastings had landslide risk added to their LIMs, but the council did not inform owners. The only way to find out, Stuff wrote, was to spend $400 purchasing the report.  

 

No insurance no mortgage

For thousands of Kiwi homeowners, the link between climate change, insurance and ultimately the value of their homes could be their financial undoing.

Like insurers, banks’ data models are becoming increasingly detailed and sophisticated and buyers seeking a mortgage can face serious challenges, Palairet says. Banks can refuse to lend on homes facing climate risk.

The risk for banks, writes researcher Belinda Storey, is that in worst-case scenarios entire neighbourhoods could become unmortgageable.

“If a major flood or hazard event hits an area with a concentration of high-risk homes, many homeowners could default at once, particularly if they lack insurance and cannot afford repairs. That puts both banks and borrowers in peril.”

Existing homeowners who lose cover or cannot afford to pay face having their mortgages called up. The catch is that insurance is a one-year contract, while home loan contracts typically run for 25 to 30 years.

If the loan terms require homeowners to keep the property insured, but they cannot obtain cover or afford the high premiums, banks are left exposed. The insurer will usually seek payment from the bank and the cost is added to the mortgage.

But insurers have no legal obligation to alert banks or regulators if a homeowner cancels their cover.

Storey and colleagues warn in their paper Insurance Retreat in Residential Properties from Future Sea Level Rise that banks are not monitoring insurance cover once the loan is issued.

“That means lenders, and the financial system more broadly, have no visibility over where these risks are building up.”

 

Borrowers’ obligations

Massey University Associate Professor Claire Matthews analysed mortgage contracts from ANZ, BNZ, Westpac and ASB for LawNews. The home loan documents don’t require borrowers to have insurance. The security documents do.

“Fundamentally, what the security documents all say, minus the legalese, [is that] ‘you must have insurance, you must keep the property insured, you must not cancel it and if your policy is cancelled or a new insurance company is appointed you need to tell us. We can choose to pay premiums for you. If you get into arrears, we’ll pay it and then that will be added to your loan’,” she says.

“In practical terms, the bank may not immediately notice a lapse in insurance if the borrower continues paying the mortgage and doesn’t request additional funds. However, the obligation to notify still stands and borrowers could be caught out later with serious consequences.”

Matthews said if homeowners discontinued insurance but kept paying their loan, the bank may not ask questions until the borrower wanted a top-up. That might trigger a review.

Both Matthews and Hwang say it’s unlikely banks would want to subject swathes of clients to mortgagee sales, which would threaten the financial system. Some may simply turn a blind eye if the customer continues to pay the mortgage.

Hwang adds: “Even if the bank did move to [mortgagee] sale if the property was uninsurable, it would be very difficult to get a good price to cover the loan.”

 

Government moves

In mid-October, Climate Change Minister Simon Watts released the country’s first National Adaption Framework which he said would ensure New Zealanders had access to better information about the risk they faced, especially from flooding.

This information will include comprehensive flood maps, with the first iteration due in 2027. New legislation will clarify the responsibility of local government to provide adaption plans for the highest priority areas.

In that absence of any current legislative moves, some commentators have argued that insurers and banks are effectively doing the government’s job around managed retreat. But as Palairet points out, “It’s insurance and banking retreat, but I wouldn’t call it managed retreat.”

She adds: “We don’t have a clear sense of how central and local government are going to respond. Our view is that’s absolutely not an approach New Zealand can or should take.”

 

Unbundled policies?

The future for house insurance in New Zealand may be more dire than it appears. Risk-based pricing takes into account climate change only for the current year, Holmes says. Should climate-related risks increase, premiums will rise accordingly.

Along with hiking premiums for risky properties, many insurers in Australia have unbundled flood cover from their insurance offering. So, the house might still be insured for fire, earthquake and other hazards, but flooding is excluded. The catch is that banks are unlikely to lend where the insurance policy is unbundled, shrinking the potential buyer pool to cash buyers who know they’ve got the upper hand and will expect steep discounts.

In New Zealand, unbundling flood cover would be complicated. It would challenge the traditional all-perils insurance model, which generally bundles together cover for all accidental damage unless specifically excluded.

As Storey puts it: “This would have significant implications for the entire insurance market, because once you’ve unbundled flood insurance, you’d be very tempted to unbundle earthquake insurance.”

Overseas, some governments have stepped in where private insurers have retreated from certain risks. This includes the US National Flood Insurance Program (NFIP), the UK’s Flood Re scheme and Australia’s Cyclone Reinsurance Pool.

New Zealand could in theory set up a flood-specific insurer or expand the role of the Natural Hazards Commission (NHC), which provides limited cover up to $300,000 for climate-related risks in specific circumstances. But this is not full flood or inundation insurance.

 

Buyouts to the rescue?

There is a public perception that if homes are damaged by climate events, owners will get a buy-out from the government, as happened with many homeowners following the Christchurch earthquakes and 2023’s cyclone and floods.

But an independent panel advised the government in July that buyouts should not be the default position. The panel’s report recommended a 20-year transition period to give homeowners time to assess their risk and make informed decisions, after which they should “bear the costs of their decision” and not expect market-price-based buyouts. It did recommend hardship assistance based on relocation but no compensation for lost equity.

The report’s authors made it clear that they believed the government should not view itself as responsible for protecting residential property wealth. The report noted, however, that homeowners would need better hazard information and communication than is available currently.

Palairet said the report took a moral hazard approach to the way people need to adjust to a changing climate. “Some people may choose to stay in risky locations, [but] they should be responsible for bearing the costs of that decision.”

She added that more work needed to be done around preventing properties from being built in high-risk areas, and the government should take a greater role in actively managing retreat. “We don’t want to just wait for disaster to strike. We need the government to step in beforehand.”

 

What can homeowners do?

On a practical level, Palairet says prospective purchasers need to be aware of the importance of checking properties on hazard maps to identify risks, as well as checking the LIM, although changes can always occur after they’ve bought.

Purchasers should ask real estate agents direct questions, preferably in writing, in relation to any known hazards. They should also ask about the amount of the current insurance premium and the name of the insurer.

Buyers can use third-party fire and general insurance brokers who can warn them of potential insurance risks related to the property.

The NHC also operates a Natural Hazards Portal at, which has links to relevant council and other GIS viewers and hazard maps for the entire country.

It also has a claims map for settled Natural Hazards claims dating back to 1997. Previous claims can indicate prior exposure to natural hazards. Home buyers can inquire how the insurance money was used and if the damage was repaired.