Cyclones, floods and insurance
A natural disaster can tear through in hours but leave long-term devastation. Amy Hamilton Chadwick talks with Vero’s executive manager of business claims about what property investors need to know about insurance in the aftermath of a flood or cyclone.
31 March 2023
When an event like Cyclone Gabrielle occurs, there’s a surge in claims that leads to delays. Insurers must prioritise the most urgent cases, so try to stay patient, says Derek Cherry. When you do make a claim, the more information and images you can provide to your insurer, the better.
“The easiest claims for insurers are where the property owner has proactively recorded the damage and may even have started to minimise more damage occurring,” says Cherry. “Some will have itemised quotes for repair. We can often work with the information provided by customers to either work out how to get the repairs done or to cash settle the agreed cost of repairs.”
Information is also helpful if you don’t agree with the insurance assessor. For instance, if the assessor believes the carpet just needs drying out, but you think it needs complete replacement.
“There will be times where the parties do not agree,” Cherry says. “However, in our experience if the property owner has provided good quality information for our consideration, a solution can be negotiated. In extreme cases, the property owner may look to utilise a dispute resolution process like the Insurance and Savings Ombudsman.”
Typical property insurance policies cover the cost of demolishing insured property that is damaged beyond repair. For example, ripping up flood-damaged carpet, removing bowed GIB from the walls, or even knocking down and removing the entire building if it’s irreparable. Insurance also covers the cost of removing the damaged property.
As a commercial investor it’s important to know which policy covers which fixtures, adds Cherry: “The landlord’s insurance will cover their own building fixtures and fittings but will not extend to the tenant’s fit-out. The tenant can insure their fit-out under their own insurance policy.”
Other types of damage may not be covered; private insurers do not insure land. The recent cyclones and flooding caused landslips, land damage, and deposited debris that needed to be cleared away. Toka Tu Ake EQC provides limited cover for land; as an insurance partner in the National Disaster Response Agreement model, Vero has already handled around 1,120 of these claims.
‘Loss of rent can be covered by your insurance policy’
The Residential Tenancies Act provides tenants with a rent abatement if the house they occupy is damaged, and most commercial leases have a similar clause.
For residential investment property, loss of rent can be covered by your insurance policy. Landlord-specific insurance products often include this, and you can also add this option (at an extra cost) to other types of home policies. They usually cover 12 months in lost rent payments at the sum insured.
For commercial investment properties, loss of rent is an option on a business interruption policy.
“You select the sum insured and how long you want the cover to last for (aka the indemnity period),” Cherry says. “Your tenant may also have business interruption insurance which takes into account things like increases and decreases in business costs. So, if they have a business interruption claim, reduced costs like not having to pay rent is treated as savings and will be deducted from their claim.”
In late 2022, the Reserve Bank issued a report with a warning for homeowners: climate change is raising our flood risk, which will likely mean higher insurance costs. Eventually, as buyers start to understand the risks and extra costs, owners of properties in flood zones may see falling values.
As an investor, this means risks and opportunities in the future. You may decide to rule out riskier properties or even whole areas from your search. Alternatively, you may be able to pick up a bargain if owner-occupiers are scared off by the identified hazards.
“When it comes to insurance, broadly speaking more risk equals higher cost and/or less cover,” Cherry says, “and some types of risk will reach the level where insurance may not be available. If a property investor is fully informed on what they are purchasing and the potential consequences as it relates to insurance cover, then they can at least make a fully informed decision on whether to proceed with purchasing the property.”
LEFT A fallen tree blocks an Auckland road during Cyclone Gabrielle.
ABOVE and BELOW Eskdale in Hawke’s Bay suffered some of the worst damage from Cyclone Gabrielle with vineyards and orchards being heavily impacted.
You should always check the LIM, which includes any identified natural hazards (including flood). Cherry recommends asking for a history of any claims for the property, adding, “It wouldn’t hurt to also ask for a copy of the current insurance policy for the property to check whether insurance has previously been available and on what terms.”
ACCURACY THE KEY
As a final reminder, Cherry says that under-insurance is common for residential and commercial landlords – and homeowners, especially when inflation is high. Use a sum insured calculator (such as Cordell) to update your insurance value at least once a year to prevent under-insurance.