What sort of insurance should I get when buying a new-build investment property?

What sort of insurance should I get when buying a new-build investment property?

The cost of insurance in New Zealand is situation-dependent, meaning the same house in a different city or section can be thousands more. Whether your property is close to a city or shoreline, a river or fault line, is something investors must consider. Some investors find it useful to enlist the help of an insurance broker during due diligence to navigate, what can be very finicky terrain, to get the best quality policy for the best price.

In this article you’ll learn exactly what you need to know about how to work with an insurance broker during the due diligence process.

What are my options for getting insurance on my investment property?

Let’s go into the two options a property investor has when purchasing insurance:

Option one is to get a deal direct with an insurer like AA or AMI. These insurers tend to be ‘order-takers’. They’ll give you the exact insurance you ask for. The benefit is there’s no additional cost or brokerage fee.

But there’s a risk you won’t buy the right type of insurance for you. Sometimes this means when you make a claim to get an insurance pay out, you find you’re not covered and left to pay the bills yourself.

Option two is to go through an insurance broker. A broker will offer advice about which insurance to buy and not to buy; they’ll help you lodge claims when things go wrong; and review policies on an annual basis. But a broker may charge for services.

It’s important to remember not every investor needs to organise their own insurance. For instance, property investors who buy a new-build in a development of 5 or more properties.

In this case an insurance policy will be organised through a body corporate or residents’ association, but we’ll get to that a bit further down.

The key message is: Not all insurance costs the same or covers the same incidents. Our recommendation is it’s better to engage a broker during due diligence to find the right type and amount of insurance for you.

Simon Yarrell, of insurance broker Axico, says policies vary widely, and this is where speaking to a professional can help to get it right. This may come at an initial extra cost. Some brokers will charge a fee or advice, but not all. For example, Axico does not charge for advice.

How much does insurance cost?

The price of insurance varies as it’s all based on risk. For example, what is $1800 to insure in Christchurch is $1100 to insure in Auckland.

This is because all policies contain different wordings and will insure you for different risks. Therefore, all premiums are differently priced.

For example, Auckland properties are cheaper to insure than Christchurch properties. Then within Christchurch the insurance premiums you’ll pay differ between earthquake risk land-zoning e.g. TC1, 2 and 3.

Why does the cost of insurance vary?

Within complex policy wordings there are things that will trip you up if you don’t know to how look for them. If your property is seen to be at higher risk of a natural disaster, then the cost of your insurance will be higher.

For example, coastal areas like the Kapiti Coast may be more expensive or harder to insure than a property in Wellington City. This is due to coastal erosion from global warming, which could make the same insurance unobtainable in 10 years’ time.

For example, Simon found a quote for an investor in Havelock North that was $4,000. This was much higher than expected and he couldn’t figure out why.

A call to the insurance company told him the property was only 50 metres from the fault line. But, buy a property 1 kilometre in the other direction and the premium dropped from $4000 to $1500 – a $2,500 difference.

This is useful for an investor to know because if they own a property renting for $500 a week (e.g. $25,000 after vacancy), then that $2,500 difference in the cost of insurance takes up 10% of the potential rent.

Working with a broker can help understand whether an insurance quote is on the high side or normal for an area. This helps you, as the investor, make a more informed purchasing decision.

The cost of insurance and what policies cover also differs between cities. This can be due to things like a property’s height above sea level and proximity to fault lines.

For example, in Christchurch the land beneath property is graded TC1, TC2 or TC3, a measure of how well the land is likely to respond to earthquakes, which will greatly affect the cost of insurance and what they’ll pay out.

Going direct to an insurance company vs using a broker

One of the main concerns that anyone buying insurance has is: “What if the insurance company doesn’t pay me out?”

One benefit of working with a broker is they will help you when it comes to claiming. Not only do they have experience to position your claim correctly, they also bring a lot of weight to a dispute with an insurance company.

A single investor trying to argue with a massive insurance company is likely, and more often than not, going to get shut down because the insurer only stands to lose one customer in the worst-case scenario. There are plenty more where you came from.

However, if they lose favour with an insurance broker they potentially stand to lose a whole book of business.

Simon says there is a complete range of what you could need or want in an insurance policy, and this is where professional advice can help.

For example, insuring the property can be challenging.

Simon says one of the most common mistakes investors make is only insuring the house for the purchase price. It sounds like common sense, but it’s inaccurate.

Whereas insurance companies would once insure a house as the original price, cover must now be the total cost to rebuild, which may include land value.

The cost to rebuild could be much higher than the original purchase price.

There are online calculators, such as Corelogic’s Cordell, which will tell you what your property will cost to rebuild - and that’s the figure you need to insure.

The flipside to using an insurance broker, it’s true, is that investors who work with one usually end up spending more money on policies.

That’s not because brokers generally add a fee on top of the insurance, but because you better understand what the insurance company will and won’t cover. That often means investors buy a higher-quality policy.

What documents will I need to send to the insurance broker?

In order to give an accurate quote, a broker will need to have certain information about the property.

Happily, with new-builds, all this information is usually supplied in the property pack.

A broker needs to know:

• The address of the property
• If the buyer is getting a mortgage
• How the property is owned (Own name, joint name, trust or LTC)
• Is the home stand-alone or attached
• If the house is attached, how many properties there are in total

Every single one of these components will affect the cost of your premiums.

This is why the process of investigating insurance is important during due diligence because if your insurance premiums are sky-high, you want to know that before the contract goes unconditional.

What type of insurance do I need?

Here at Opes Partners we usually recommended that property investors get the following insurances (but they’re not all necessary all of the time):

• House insurance
• Landlords insurance
• Contents insurance

House insurance covers you if your house burns down, is struck by an earthquake, or another natural disaster.

Landlord protection covers and includes:

• The chattels of the house if they get damaged (heat pump, oven, carpet, drapes)
• Loss of rent if there’s a flood or fire and your tenant has to move out
• Meth contamination
• Rent if you have to evict your tenant or they leave without notice
• Tenancy tribunal issues
• If your tenant maliciously damages your property

Finally, there is contents insurance. This is used to cover the damage of any extras you put into the house. Whether you need contents insurance or not depends on a few things.

If an investor is renting out their property unfurnished to long-term tenants, then landlord insurance will likely cover house chattels. So contents insurance wouldn’t be needed.

But if they fully furnish the home with beds, couches and TVs, then contents insurance will be needed as furnishings are deemed extras.

This becomes more complicated if the investor chooses to use the property as an Airbnb because this requires commercial insurance as, essentially, it is turning the property into a motel.

Commercial insurance is a lot more complex and expensive, so we won’t cover it too much in this article.

Does every investor really need all of these types of insurance?

Well, “yes” and “no”.

Some are mandatory, such as house insurance if you’re getting a mortgage. The bank won’t give you the money if you don’t insure it. But landlords insurance, while recommended, is optional.

However, should you choose to forgo this, you are essentially “self-insuring”, which means if something goes wrong you have to pay the cost yourself. In the worst case, this could cost you tens of thousands of dollars.

Many property investors choose to buy landlords insurance for peace of mind. While others who are more risk-seeking are willing to go without and pay the cost if things turn out poorly.

What happens when insurance is organised through a residents’ association or a body corporate?

Properties in a development of 5 or more will have one insurance policy assigned to the group as a whole and there is no wiggle room to change it. That means that both you and your neighbour will use the same insurance company.

Simon says there is a reasonable amount of confusion about this, with investors thinking because they are buying a unit title they can choose the insurer, when in reality they can’t.

But this one-for-all policy is for a good reason.

Say for instance there are 50 properties, sharing a lot of the same services, and each had its own insurance with different policy wordings. Then let’s say there was damage caused to a shared driveway. With too many insurance companies involved, claim time is going to be too problematic ... catastrophic even.

So, when there are 5 properties or less it’s manageable for each to have its own insurance. After that, it’s just one insurer for the lot.

This insurance will be run through a body corporate or residents’ association by divvying up the premiums and invoicing all home-owners in the development to pay their share, as per property size.

In this instance, how the policy is structured and who is going to administer that is a very important discussion to bring up with an insurance broker during due diligence.

Body corporates do have their upsides. For instance, the insurance will often be cheaper when organised through the body corporate as you’re able to get it at a discounted rate.

However, it is good advice for investors to revisit, or question, whether the body corporate premiums are too high, which is something an insurance broker can inform you on.

This way you can double-check policies are being reviewed correctly, and if you feel there are discrepancies you can raise this at the annual general meeting (AGM).

Do insurance companies really pay out?

Some investors are sceptical of insurance companies, thinking: “Isn’t there an incentive for the insurance company not to pay me out?”

Whether the insurance company pays your claim or not depends on your policy wording and quality of the policy.

Simon says it is very much a “get what you pay for” scenario, so don’t scrimp and save on the premiums.

For example, some budget policies don’t have meth cover and claims are rejected, leaving the investor to find $50,000 to cover the cost.

Some cheaper policies exclude malicious damage; some only have $10,000 cover for chattels, while others have $20,000.

Gradual damage is often a hot topic. For example, if there is a leak in the wall and the shower has to be removed some policies will cover up to $5000 in costs where others will only cover $2,500.

When you see an investor on Fair Go complaining the insurance company hasn’t paid out, generally the issue is that the investor thought they were covered under their policy but they weren’t.

So working with an insurance broker can help investors understand exactly what their policy does and doesn’t cover. That allows you to make an informed decision about how much risk you are willing to accept and how much insurance you really need.

How do investors tell the difference between policies of high and low quality?

Don’t assume because a policy is more expensive, it is of higher quality. The nuances can be assessed by online comparison tools and reference guides, which are utilised by brokers.

However, an experienced broker will know the track records of claim history and will have a unique insight into which insurance companies are usually better or worse than others when it comes to paying out.

Simon says he’s been through so many policy wordings he can tell the difference between good and bad quality. So, sometimes it is a case of getting someone who has “been there and done that”.

Even the biggest direct insurance company could have a good policy wording but still stuff it up and under-insure you.

Looking for more information about due diligence?

If you're looking to learn more about due diligence, check out these articles about: how to work with a solicitor during due diligence, how to work with an accountant during due diligence, how to get finance during due diligence, what to do on a site visit, and everything you need to know about signing a sales and purchase agreement in NZ.