New Zealand: Insurance and earthquake damaged properties - buying and selling a write off

Now that more insurance claims on earthquake-damaged properties have been settled, there are a number of properties in the green zone where the owner has taken a cash settlement from their insurer and then decided to sell the property in its unrepaired state for a sum close to the land value only of the property.

Different insurers have different approaches to whether or not they will allow a house that has been cash settled to be sold in its unrepaired state. Some insurers will not settle a claim on a badly damaged but repairable house unless the owner can provide a structural engineer's report showing that the property can still be lived in - and that any recommended repairs have been completed. They may also want a structural engineer's report following the completion of those works. Those insurance companies will also require an estimate of the salvage costs, and will reduce their offer by that estimated amount.

Where insurance companies are willing to cash settle a badly damaged house so that the owner can buy a replacement property and not repair the damaged property, there are various considerations for buyer and seller.

Buyer Considerations

If you're buying a property which has been cash settled but not repaired, you will need to do a fairly detailed due diligence investigation.

These properties will generally not be insured, because most insurance companies will cancel the insurance on the property as one of the conditions of making a cash settlement. You need to consider if you are prepared to buy a property that cannot be insured. For example, generally only "cash" buyers will be able to consider purchasing an uninsured, badly damaged house, as most banks will not lend on an uninsured property.

As there will be no insurance on the property, a buyer needs to be aware that they will be personally responsible if the property causes damage to another party's property. This is called third party liability and is normally covered under a standard house insurance property. If any part of the house or property caused damage (i.e. through a fire or part of the house collapsing) to a neighbouring property or person, the owner of the uninsured property will need to pay to fix any damage themselves.

This also means that if you are looking at buying a property that is being sold without insurance, it could be be substantially damaged. This means you will need to be satisfied about the true extent of the damage, and whether it is actually safe to occupy - together with any costs required to make it safe to occupy.

You'll also need to consider whether there is any land damage. We strongly recommend that you obtain a geotechnical report to determine the likelihood of being able to rebuild a new house in the future. You will also need to consider whether there is an Earthquake Commission land claim relating to the property that you should take over.

Additionally, there will be considerations surrounding renting a damaged property to a third party, which we will discuss next week.

In the long term, a buyer will also need to think about the future of the property, whether that be selling the property in the same state as it was bought, or subsequent development of the land. In the current climate, it may still be difficult to insure a replacement house on the same site if there has not been insurance for some time, although it is becoming easier to obtain insurance as time passes.

Seller Considerations

A seller of a property which has been cash settled but not repaired will need to ensure that their insurance company is aware of their plans, and also that they approve of the seller continuing with the sale.

In a repairable house, the insurer should not retain salvage rights in terms of the parts of the house that have not been included in the scope of works. But in a house that has been deemed a total loss (and so will be rebuilt), the insurance company would normally retain the salvage rights. If you're a seller, you should get legal advice about your settlement agreement with your insurer.

A settlement agreement will normally contain provisions that mean the seller of the property indemnifies the insurer for any damage caused due to the house not being demolished. A seller should pass that indemnity on to the buyer of the property as it will be the buyer that takes on any responsibility to demolish the property.

Most cash settled properties on the market that we have encountered have been sold privately, as some real estate agents understandably have special requirements before they will list a cash settled property. This means that the seller could be marketing the property themselves, and care needs to be taken to ensure that the property is not misrepresented to any prospective buyers.

You'll need to have the agreement drawn up by your lawyers, and the agreement will need to have special clauses dealing with the state of damaged buildings. In particular, a seller of a property which has been cash settled but not repaired or demolished should seek legal advice to ensure that clauses are added to the agreement that record the state of the property, clarify responsibility for demolition, and deal with statutory liabilities for unsafe or unsanitary buildings.

You can still buy the worst property on the best street, but only with tailored advice and thinking through the issues before you commit to sell or buy.

Sidebar

What to think about when buying an uninsured, unrepaired home in Canterbury:

  • Will the insurance company allow you to sell the property with the damaged house on it?
  • Do you understand the statutory obligations around safe and sanitary houses?
  • Is the house safe to live in, and what works would be required to ensure it is safe?
  • Are you prepared to pay for any expenses if your property causes damage to a third party or their property?
  • Who is responsible for demolition?
  • Is there any land damage, or any Earthquake Commission claims relating to the land that need to be taken into account?
  • Have you had legal advice to ensure that the clauses in the agreement provide protection to you as the buyer or seller?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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