With natural disasters on the rise in New Zealand, the need to have sufficient insurance is more important than ever to protect you and your assets. Many people will not be aware that there is a trap for unwary homeowners if they under insure their home.

As an example if the home is insured for $1 million, but recent inflation means that it is actually going to cost $2 million to replace if it is destroyed, then the insurer could regard you as only insuring half of the value of the house. If it is totally destroyed you would get only the $1 million cover you paid for. You have to cover the other $1 million yourself depending on the policy wording. 

However if the house is only half destroyed and will cost $1 million to fix, you are regarded as self-insuring for half the house. The insurer then may pay only $500,000 and you have to pay the other $500,000 despite having insurance for $1m.

A Bank requirement for mortgages

If you are a homeowner, or are in the process of purchasing a home, and you have a mortgage, or you are about to sign up to a mortgage then you should know you are obligated to have house insurance.

Importantly, you will not be able to draw a loan from a bank without having insurance that is to a level acceptable to your bank.

The specific terms of your insurance obligations will be found in your Loan Agreement with your bank. You will need to keep the building insured against loss or damage by fire or by natural disaster. It is important to get the “sum insured” (the maximum amount of money you will get from your insurer) correct. If the sum-insured is too low, you might not have enough money to rebuild your home if it was damaged by a natural disaster. Banks will also look at this value before drawing down your loan, to see if it is adequate from their perspective.

Failing to have house insurance will be a breach of your obligations to the bank, and the bank may exercise their power of mortgagee sale for such breach.

Updating your sum insured

It is also important to periodically update your insurance to ensure the sum-insured is still enough to completely rebuild your home. You should take into account material and labour costs, and inflation. Extra features such as pools and retaining walls should also be included in your policy. Therefore, re-adjusting your sum-insured annually is recommended as prices change, and you want to have the peace of mind that you will be completely protected if an unexpected event occurs.

Contents insurance

Another thing to think about is home contents insurance. Natural disasters can greatly damage your personal property, and the cost of starting from scratch can be exponential. Home contents insurance will cover the cost of replacing things like your furniture and appliances, and your other personal belongings.  Contents insurance is not a requirement of your bank, but is of course recommended for the reasons above.

It pays to speak to a legal professional if you are unsure about your insurance obligations to avoid being caught out if an unexpected event occurs.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.


Andie Donnelly and Hanifa Kodirova

Lawyer and Law Clerk