Insurance – A Key Due Diligence Consideration for Purchasers

Insurance – A Key Due Diligence Consideration for Purchasers

When purchasing property, insurance is often treated as a final step before settlement.

In practice, it should be considered much earlier in the process.

Increasingly, insurance is becoming a core aspect of due diligence, rather than something to be confirmed once other investigations are complete. Failing to address this and obtain confirmation of insurability early in the process can expose purchasers to both practical and financial risk.

The shift in how insurance operates

Traditionally, purchasers could assume that if a property had existing insurance, new cover would be available on similar terms.

That assumption no longer holds true.

Insurers are now assessing risk on a much more individualised, property specific basis. Factors such as flood exposure, land stability, building condition, and environmental risk are being considered more closely than in the past.

As a result:

• Two properties in the same area can have very different insurance outcomes; and
• Some properties are becoming difficult or, in some cases, impossible to insure.

This shift is being driven in part by increased natural hazard events and a move toward insurers pricing policies based more directly on the specific level of risk associated with an individual property, rather than spreading risk more evenly across a wider area.

Why this matters for purchasers

The key issue is not simply whether insurance is available.

It is what happens if it is not.

In most cases, lenders require a property to be insured as a condition of providing finance.

If insurance cannot be obtained and conditions in the agreement for sale and purchase have been satisfied or waived, or the agreement is otherwise unconditional:

• Funding may not be available;
• It is likely that the purchaser will still be legally obliged to complete the purchase; and
• Any deposit funds already paid may be at risk.

This creates a disconnect between the legal obligation to settle and the practical ability to do so.

Even where insurance is available, it may be subject to:

• Exclusions (for example, flood or landslip risk); or
• Significantly higher premiums.

These factors can materially affect the value and usability of the property.

If a property becomes uninsurable, it can very quickly become impossible to obtain lending for and therefore very difficult to sell.

The cascade effect can be:

• Insurers withdraw or decline cover;
• Banks and lenders will not advance funds; and
• The buyer pool reduces to cash purchasers only.

This can have serious implications for the value of a property.

The growing relevance of insurability

Insurability is increasingly becoming a consideration that sits alongside checks like reviewing the title, obtaining a LIM, and arranging a building report.

However, insurance risk is not always captured as part of those traditional checks. For example:

• LIM reports identify recorded hazards, but do not confirm whether a property is insurable;
• Building reports assess physical condition, but not insurer appetite; and
• Reviewing the title to a property does not address potential future risk exposure.

This means a property can appear acceptable from a legal and structural perspective, but still present insurance issues.

In some parts of New Zealand, this is already being seen in practice.

For example, some insurers have paused issuing new policies in areas such as Westport due to flood risk and overall exposure in the region.

While these decisions are often location-specific, they do highlight a broader trend.

Timing is critical

One of the most common issues arises where insurance is only considered late in the purchase process.

If insurance is then declined or offered on unacceptable terms, options to cancel the purchase agreement or make alternative arrangements may be limited.

By contrast, investigating the insurability of a property early in the conditional period can provide greater flexibility.

In a standard conditional agreement for the purchase of property, purchasers will usually have:

• A defined period of time to carry out investigations into certain aspects of the property; and
• The ability to cancel the agreement if they discover something unsatisfactory before it becomes unconditional and before they are contractually obliged to complete settlement.

Insurance should form part of that due diligence investigation process, alongside typical checks such as reviewing a LIM, reviewing the title, and obtaining a building report.

A practical approach

From a purchaser’s perspective, a simple but effective approach is:

• Turning your mind to the requirement to obtain insurance early in the transaction;
• Engaging with an insurer or broker as soon as possible; and
• Confirming the availability and terms of insurance cover before going unconditional or entering into an unconditional agreement to purchase.

Where there is any uncertainty, a broader due diligence or solicitor’s approval condition can sometimes provide flexibility to address insurance issues alongside other matters. However, you should also consider whether a standalone insurance condition is required before entering into any purchase agreement.

The key point is not necessarily to obtain a full insurance policy immediately, but to confirm that cover is available on acceptable terms before entering into an unconditional agreement to purchase.

Risk and responsibility

In New Zealand, the principle of “caveat emptor” (buyer beware) applies.

Purchasers are generally responsible for investigating the property and identifying risks before committing to the purchase.

Obtaining insurance for the property falls within that broader responsibility.

Where insurance issues arise after a contract becomes unconditional, they are often difficult and costly to rectify. The earlier potential insurance issues are identified, the more options that will likely be available to address those issues or, if necessary, cancel the agreement.

Looking ahead

Insurance is likely to remain an evolving area.

Natural hazard exposure, regulatory developments, and insurer risk appetite will continue to influence availability and cost.

For purchasers, the key takeaway is straightforward:

Insurance is no longer a last step — it is an important due diligence consideration that should be addressed early.

A proactive approach can help avoid uncertainty later in the transaction and reduce the risk of unexpected outcomes.

If you would like to discuss any aspect of a property purchase or due diligence process, our team at DTI Lawyers is available to assist.