• Banks usually won’t lend until you can insure the property.
• Insurance covers catastrophic events—fires, floods, earthquakes.
• If you can’t insure, you can’t settle. You could lose your deposit.
Imagine signing and going unconditional. Then paying a big deposit, only to discover you can’t get insurance cover. Your lender freezes funds. You’ve already committed, but now there’s no mortgage, no insurance. Legally, you must settle. Commercially, you’re stuck.
In New Zealand, this scenario is more than possible. Councils rezone land. A building once classified “residential” might shift to “lifestyle” or “coastal erosion risk.” Insurers take note. They may exclude insurance cover if they see or perceive a heightened risk. And often, they don’t tell you in writing until you’ve applied for the cover. This may be after you go unconditional. At this stage, you have committed to purchasing the property.
The Pauanui Example: A Cautionary Tale
Source: https://www.waikatotimes.co.nz/nz-news/360568305/coromandel-house-prices-drop-squeeze-goes-second-home-buyers
In April 2025, a story was shared in the Waikato Times about a family in Pauanui who bought a coastal section on a clean title. They got their LIM (Land Information Memorandum) and building consent checks done. All seemed well.
They went unconditional. They transferred the deposit.
When they applied for insurance, the insurer declined.
Why? The council had rezoned the land for a future coastal hazard zone. Flood risks increased. The insurer flagged it as “high risk.” No cover meant no mortgage. The bank pulled the loan. The buyers faced losing their 10% deposit and paying penalties. They had to scramble to find out if another alternative existed for insurance or walk away and forfeit all their money.
This could happen to you. It happened because there was no clause protecting them if insurance fell through, and they did not do this check before going unconditional.
What Is a Pre-Purchase Insurance Clause?
A pre-purchase insurance clause is a condition in your sale and purchase agreement. It reads something like this (wording may vary):
“This agreement is conditional upon the Buyer obtaining, to the Buyer’s satisfaction, a written offer of insurance from an insurer covering the property, on terms acceptable to the Buyer, by [insert date]. If such insurance is not obtained, the Buyer may cancel this agreement, and the deposit will be returned in full.”
Key points:
• It must be in writing in the Sale and Purchase agreement.
• It sets a deadline for this condition to be met. This may often be the same as or just before the finance clause.
• It gives you an “out” if insurers refuse cover or impose unacceptable exclusions or premiums.
Without this clause, you rely on the general rule that you must proceed unconditionally once the financing condition lifts. That means you can’t walk away just because an insurer says “no.”
Risks of Skipping this Insurance Clause
1. Deposit Forfeiture
If you can’t insure, the bank won’t lend. You’re technically in breach. The seller can keep your entire deposit.
2. Financial Liability
You might still owe penalties under the agreement. This could include daily penalties for late settlement, for example.
3. Limited Options
By going unconditional without insurance, you can’t renegotiate the price or terms of the property you want to purchase. It is too late.
4. Unforeseen Risks
Rezoning, natural hazards, or even structural issues can trigger an insurer’s red flag. You only find out after you apply and you cannot rely solely on a LIM.
If you’re dealing with coastal or rural land, or an older building, the risk is higher. Insurers might refuse cover, or charge a premium so high it makes the purchase uneconomic.
How to Draft an Effective Clause
1. Keep It Clear and Time-Bound
• State that the agreement is conditional upon obtaining insurance.
• Specify the date by which you need a written offer. If your finance condition expires on 31 May, set the insurance date to 28 May.
• Define “insurance” clearly: cover for loss or damage by fire, flood, earthquake, storm, landslip and other standard perils.
2. Allow for “Terms Acceptable to Buyer”
You want a way out if:
• Insurer covers some perils but excludes others you deem critical.
• Premium is double what you expected.
• Excess is so high it’s impractical.
By saying “terms acceptable to Buyer,” you retain flexibility. Always use plain English: insurers sometimes offer partial cover that simply doesn’t work for you. You need an escape.
3. Link to Other Conditions
Often, this clause sits alongside finance, LIM, and building inspection conditions. Your agreement might read:
“This Agreement is conditional upon the Buyer:
(a) Obtaining finance;
(b) Obtaining insurance cover;
(c) Obtaining satisfactory LIM report;
(d) Satisfactory building inspection report.”
If any of those fail, you can cancel.
The above are only suggestions, and you should consult your lawyer and legal representative to craft the best clause for you and your circumstances. This news item does not constitute legal advice.
Practical Steps to Check Before You Sign
1. Talk to an Insurance Broker Early
Before bidding at auction or agreeing to sale, call an insurance broker. Tell them:
– Property address.
– Intended use (residential, holiday home, rental).
– Age of building, construction type, any known hazards.
They can give you a “letter of intent” or “pre-approval” status. That helps you decide if adding the clause makes sense.
2. Review Council Records
Check if the property has had any recent rezoning, coastal hazard zoning, flood overlay. Many councils publish hazard maps online.
If you see red zones or flooding risk, insurers will spot that too.
3. Obtain LIM Early
Your Land Information Memorandum flags building consents, resource consents, hazards.
4. Calculate Premium Estimates
Even if an insurer will cover, the premium might be so high it kills your cash flow. Ask for a quote. If it’s 50% higher than similar homes in the area, you need an insurance clause to renegotiate or walk away.
5. Check Bank Requirements
Some banks demand “full replacement cover” even for asbestos removal. Others accept “agreed value.” Clarify with your lender. The clause should mirror the bank’s minimum requirements.
How to Deal When Insurers Refuse Cover
If you already have the clause and the insurer says “no”:
• Inform the vendor in writing, citing the clause.
• Arrange to meet the insurance deadline—show the vendor you’re acting in good faith.
• Ask your lawyer to cancel formally, so the deposit comes back to you.
If you didn’t have the clause, you’re in trouble. You might have to:
• Seek alternative lenders who accept “named perils” cover. That insurance limits cover specific risks. Sometimes banks accept that.
• Pay higher premiums to get “wraparound” cover from a niche insurer.
• Negotiate with the vendor for a price drop. This is unlikely if you’re already unconditional.
Real-World Example: Coastal Sections vs Inland Suburbs
Scenario A: Coastal Section
Jane and Tom want to buy a sectional title near the beach. The council has rezoned part of the shoreline for future erosion control. They check with an insurer early: “We’ll cover you, but only if you raise the foundation by one metre. Premium doubles.” They add a pre-purchase insurance clause. Insurer refuses “standard cover,” but offers “named perils” only. Prime lender won’t accept. They walk away. They only lose time, not a hefty deposit.
Scenario B: Inland Suburb Home
Sarah buys in a safe zone. No coastal hazards. Council plan change shows no new overlays. Broker quotes a normal premium. She does not include an insurance clause as she feels confident. Settlement day arrives and she produces her insurance policy. Done. Everything is smooth.
The difference? Jane and Tom didn’t know the hazard risk until late. Sarah did her homework. But if Jane and Tom had skipped the clause, they’d have lost tens of thousands.
Tips for Sellers and Real Estate Agents
If you’re selling, expect buyers to ask for this clause. Resist pushing buyers to go unconditional quickly. Instead:
• Provide LIM, building reports, and any hazard assessments upfront. Transparency cuts delays.
• Encourage buyers to talk to insurers early, so they know the risks.
Conclusion: Protect Yourself with a Simple Clause
You can’t predict every rezoning, every flood overlay, or insurer’s appetite. But you can control your risk.
A pre-purchase insurance clause gives you:
• Time to verify you can actually insure the property.
• An “escape hatch” if insurers refuse or demand unaffordable premiums.
• Peace of mind to focus on finance and inspections first, without losing your deposit.
If you’re buying anywhere near a river, coastline, or a known hazard, treat insurance as seriously as finance. Insurers have their own risk appetite. They won’t bend just because you signed unconditionally.
Talk to your lawyer or conveyancer. Insist on clear, time-bound wording. Ask them to explain every word. Don’t let anyone slip in ambiguous legalese.
Protect your deposit. Protect your dreams. A simple insurance clause could be the difference between a smooth settlement and a financial disaster.
Why chat to Quay Law Conveyancers when buying a property? This is what some of our clients have shared about our conveyancing and property law services.
1. Positive reviews highlighting Ian Mellett and the Quay Law team’s professionalism, knowledge, and excellent communication throughout the property purchase process.
2. Consistent praise for Ian Mellett’s friendly, supportive, and client-centred approach, as well as his ability to guide clients through complex legal matters.
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