Lessons from Christchurch: Property investors come unstuck

Demolition of the earthquake damaged Cranmer Court in Christchurch. The earthquakes showed many building owners the importance of proper insurance cover. File photo / Geoff Sloan.

Over the past 2½ years, Christchurch's business environment has challenged many assumptions and contracts. In a six-part series, Christchurch legal firm Malley & Co looks at some of the lessons all businesses can learn. Here, Carolyn Foss looks at how property investors were caught out by inadequate insurance.

While working through the extensive damage to residential and commercial properties in Christchurch, property investors and their legal advisors have uncovered several due diligence issues that lay dormant before the earthquakes.

Those issues highlight how crucial it is to get the right insurance cover, and why property investors nationwide should note some of the lessons from the Christchurch earthquakes.

A significant number of property owners were under-insured at the time of the earthquakes, particularly those with two-storey investments. These owners unknowingly had not recorded an accurate property floor area on their policies, which restricted cover to the recorded, not the actual, size of the property.

This may have happened for two reasons: they may have recorded an inaccurate floor area at the time of taking out their insurance; or they may have extended the property after the original policy was in place, but had not adjusted the policy.

Those owners whose properties had to be rebuilt have suffered financial loss because of the difference between the actual replacement costs and what they were covered for. Some property investors have been unable to raise the necessary extra finance to replace their investment(s), others have reinvested in Christchurch, but with higher borrowings and others have taken the cash and invested in cheaper properties.

This issue is particularly relevant throughout the country, given the new sum insured requirement insurance companies are adopting. The worst scenario would be a property investor who has geared a property with 100 per cent finance but who has inadequate insurance cover. Not only could this place the investor at financial risk, it could also place the investor in breach of his or her banking covenants.

It is very important, therefore, that all property investors check their portfolio to ensure they have accurately calculated the correct floor area of each property, and if or when their insurer renews the insurance based on an agreed sum or agreed metreage that they have the appropriate sum insured.

This may mean getting an expert measurement, obtaining a valuation for the property that the insurer accepts as a basis for agreed value, or ensuring that the dollar per square metre cover noted in the policy is adequate.

You might also need to review the level of cover each calendar year because of increased construction costs or improvements or enhancements. If you are looking to increase your property portfolio, then it is important to include an expert measurement or insurance valuation of any prospective new property as part of the legal due diligence process, depending on the type of insurance being put in place.

Some other Christchurch property investors also suffered hardship because they had not informed their insurers they had tenants in place at the time of the earthquakes. Most competent insurance brokers will highlight the exclusions contained in a policy and point out some of the ongoing obligations of disclosure.

So, in summary, it is important to treat the insurance of any investment property very seriously. If in doubt, property investors nationwide should reflect on the hardship a number of fellow investors suffered in Christchurch, because they were not properly covered. For the sake of a few thousand dollars a year, are you prepared to take an unnecessary risk?

If you are unsure of the legal implications of an existing or proposed insurance policy then it is prudent to seek advice from a lawyer with the relevant expertise.

Carolyn Foss is a legal executive at Malley & Co, with more than 20 years' experience in property law and conveyancing.