Coffeys - Tourism Property Brokers ltd. | LREA

30 years in business. 1984 - 2014

Insurance - How Well Do You Know Your Policy?

With the recent earthquakes still fresh in mind, it would seem timely to consider insurance matters for natural disaster cover.

Most accommodation providers running a business in a leasehold property will understand that they can and should insure their business interests, as separate to the landlord’s risk on the land and buildings. In the past, this was a difficult area with chattel insurance not being a problem, however what happens if a building is destroyed or damaged to the point where reinstatement is not practical? The lessee needs to have insurance for loss of profits (business interruption) but this is usually only for a term of one or two years.  A total pay-out of two year’s profit, combined with the on-site value of the chattels, may not equate to the market value of the business/lease. (On-site or in-situ chattel valuation is based on replacement cost less depreciation and wear-and-tear, it is usually considerably higher than second-hand market value.) We understand that Crombie Lockwood is able to place cover for the market value of the business in the case of total loss. 

Excess payable for natural disaster. It seems that many lessees are not aware that the excess payable under the business policy for a natural disaster claim is usually linked to the total site value or insured value of the entire property. The excess will vary from 2.5% to 5% of that sum depending on the property’s location and other factors. So, you may have your lease insured for say $600,000, however, the total value of the property may be $3million. Even at 2.5% of value, this suggests an excess of $75,000, so not much help for a smaller claim.  Remember that natural disaster is not only the definition for an earthquake, there could be any number of other events in that category which could occur in almost any part of New Zealand.

Excess buy-down. If the higher excess applies to your policy, it may be prudent to consider purchasing excess buy-down insurance. This effectively insures the excess so that in the event of a claim for a natural disaster, the excess would be reduced to the sum agreed. The cost of such insurance varies, depending on factors including the location, the age of the buildings and the percentage of New Building Standard (NBS) the buildings are rated at.  The premium for this additional cover can range between anything from .8% to 3.5% per thousand dollars of reduced excess.

Transfer of insurance. When buying a property and/or business it is often assumed that the purchaser will be able to obtain a “transfer” of the vendor’s insurance. Strictly speaking, this is a new policy with a new client, albeit covering the same risk. It is therefore prudent not to assume that such “transfer” will follow automatically. It was announced soon after the Kaikoura earthquake that insurance companies were reserving the right to place restrictions on writing new policies in locations from Christchurch to Wellington inclusive. Our enquiries indicate that the insurers are still looking favourably at the opportunity to write new business, even in those areas (as at December 2016).

Premium increases. It seems that insurance premiums throughout New Zealand are likely to rise as a result of the Kaikoura earthquake, however to nowhere near the same extent as they did after the much larger Christchurch losses. (Premiums in Christchurch have now been tracking downwards for the past couple of years, compared to the very high rates following the major event.)

Replacement valuation. Insurers will require from time to time that a registered valuer provide a report assessing the replacement cost of the buildings insured. In addition to replacement, cover is usually also for demolition costs and projected building cost increases for the duration of the current renewal. We understand that this valuation is often requested three yearly, however in some cases we are aware of, much longer periods than that have elapsed. With the significant increase in building costs in recent years, an updated replacement cost valuation may increase the level of cover significantly and unfortunately that will result in an increase in the premium for the buildings. Most leases provide that the lessee pays the landlord’s insurance and also the cost of such valuation. Not much you can do about this, but something to keep in mind.

So, if you are unsure of your position it may pay to consult with your insurance broker or lawyer. The intention of this article is to illustrate the writer’s understanding of insurance issues which can be complex, so it is important to seek competent professional advice on matters such as this.

Kelvyn Coffey
© 2017

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