Insurer Not Required To Cover Recommended Flood Upgrade

The Insurance & Financial Services Ombudsman Scheme (IFSO Scheme) has found that an insurer was not required to pay for additional costs to raise the floor level of a rebuilt home.

The decision followed a complaint from the Chan* family after their home was badly damaged in severe flooding and needed to be rebuilt. The insurer accepted the claim and agreed to cover the cost of rebuilding the home. However, a dispute arose about whether the rebuild should include the cost of a raising the floor level, as the house was in a flood prone area.

The insurer said it only needed to raise the floor level to the minimum required to obtain building consent and that there was no clear evidence from the council that a higher level was mandatory.

The Chans wanted the home rebuilt with the higher finished floor level, to reduce the risk of future flooding. They said that if the floor level was not raised enough, the council could place a notice on the property title indicating that the land was subject to natural hazard risk, which could affect future insurance or their ability to get a mortgage.

In considering the complaint, the IFSO Scheme looked at the terms of the house insurance policy, whether a higher floor level was required to obtain building consent, and expert reports and council information provided by both parties.

The policy stated that the insurer was only required to pay for costs that were reasonably required to rebuild the home and meet legal or council requirements.

The insurer offered to apply for building consent at the lower floor level and said that if the council refused consent without the higher floor level, they would then include it in the rebuild. The Chans declined this offer, saying the higher floor level should be included regardless, based on other expert evidence.

However, because there was no firm council decision showing the higher floor level was mandatory, the IFSO Scheme found the insurer was not required to pay for the additional cost.

Karen Stevens, Insurance & Financial Services Ombudsman, says the case highlights the limits of what insurance can cover as more homeowners face flood risk.

“Many people want to futureproof their homes against flooding, especially as severe weather events become more frequent,” says Stevens.

“However, our role is to look at whether an insurer has correctly applied the terms of the policy. Insurers aren’t required to fund upgrades or improvements that go beyond what is required under the policy,” she says.

“While we understand that having a higher floor level would be preferable to reduce future flood risk, and having a notice on the property title warning about flood risk would have significant financial implications for the Chans, the IFSO Scheme has no power to require an insurer to make payments outside the terms of the policy, on a goodwill basis,” says Stevens.

Stevens says uncertainty about climate adaptation and who should pay for it is becoming an increasingly common issue for homeowners, insurers and councils.

“This issue is not going away, especially with the number of storms we’re seeing now. There are urgent decisions to be made about how adaptation will be managed and funded,” she says.

The IFSO Scheme resolves complaints about insurance and financial services, and is independent, fair, and free for consumers. People can make a complaint to the IFSO Scheme at www.ifso.nz or by calling 0800 888 202.

*Names have been changed

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