Leaky Building Insurance in New Zealand

Overview

New Zealand's weathertightness crisis affected a large number of timber-framed buildings constructed approximately between 1988 and 2004. For body corporate committees managing multi-unit apartment buildings from this era, the insurance implications are significant and ongoing.

This guide covers what the weathertightness crisis involved, how it changed the insurance market, what exclusions typically look like, and what practical steps your committee should take. This is general information only — speak to your adviser for advice specific to your building.

The Weathertightness Crisis

New Zealand experienced a widespread weathertightness building failure problem affecting timber-framed buildings constructed approximately between 1988 and 2004. The scale of the issue was significant.

Scale of the Problem

A government-commissioned review (PwC) estimated approximately 42,000 dwellings were affected, with the range of estimates running from approximately 22,000 to 89,000. The estimated repair cost at the time of that review (2009) was approximately $11.3 billion NZD. As of that review, only approximately 3,500 leaky homes had been repaired — illustrating the scale of the unresolved problem.

Contributing Factors

• EIFS/plaster claddings — monolithic systems applied without drainage cavities meant moisture that entered had nowhere to escape
• 1995 timber treatment change — standards were relaxed to allow untreated radiata pine, which is susceptible to rot when wet
• Low-pitch roofs — designs with low-pitch roofs and internal gutters increased the risk of water ingress
• Lack of drainage cavities — many cladding systems of this era had no cavity between the cladding and the framing
• Complex junctions — architectural features that create multiple junctions are difficult to waterproof and seal correctly

How It Affects Body Corporate Insurance

The weathertightness crisis fundamentally changed how New Zealand insurers approach multi-unit buildings from this era. The insurance market has responded in several ways that directly affect body corporates.

What Has Changed in the Market

• Weathertightness exclusions are now standard — most NZ body corporate policies include some form of weathertightness exclusion, regardless of whether a specific building has known issues
• Pre-2004 buildings face higher scrutiny — insurers ask more questions about construction type, cladding, and maintenance history for buildings in the risk era
• Higher premiums for at-risk buildings — buildings with EIFS cladding or other risk factors typically attract premium loadings
• Reduced cover options — buildings with known or suspected issues may only be offered indemnity (depreciated) value rather than full replacement cover
• Some insurers decline to quote — if weathertightness issues are known and unresolved, some insurers will decline to provide cover at all

Weathertightness Exclusions Explained

Understanding the exact wording of weathertightness exclusions in your policy is critical. These exclusions can be broader than they first appear.

Typical Exclusion Language

Weathertightness exclusions in body corporate policies typically exclude claims "arising directly or indirectly out of failure to meet Building Code requirements in relation to leaks, water penetration, weatherproofing, moisture."

The phrase "directly or indirectly" is significant — it can extend the exclusion well beyond obvious weathertightness damage to include consequential damage (such as rot, mould, or structural damage) that arose from initial moisture ingress.

Indemnity vs Replacement Cover

Even when cover is available, buildings with weathertightness risk may only be offered indemnity value rather than full replacement cover. This means:

• Replacement cover — insurer pays the full cost to rebuild to current standards, regardless of depreciation
• Indemnity cover — insurer pays the depreciated (market) value of the damaged portion, which may be substantially less than rebuild cost

For a 25-year-old building, the difference between indemnity and replacement value can be very large. Committees should confirm which basis their building is insured on.

Non-Disclosure Risk

If your body corporate committee knows about weathertightness issues and fails to disclose them to your insurer, the insurer may void the policy entirely — leaving all unit owners uninsured. Disclosure of known issues is both a legal and practical obligation.

Important Case Law

New Zealand courts have considered how weathertightness exclusions apply when a building has both weathertightness defects and other defects. One important decision provides useful context for body corporates in this situation.

Local Government Mutual Funds Trustee Ltd v Napier City Council [2019] NZCA 444

In this Court of Appeal decision, the court suggested an "allocation approach": where a building has multiple defects, each defect should be assessed separately rather than treating the entire claim as excluded because some defects relate to weathertightness.

The practical implication for body corporates is that if your building has a mix of weathertightness defects and other defects — for example, structural issues unrelated to weatherproofing — you may be able to recover on the non-weathertightness portions of a claim even if the weathertightness portions are excluded.

Signs Your Building May Be Affected

Body corporate committees should be alert to the following indicators that their building may fall within the weathertightness risk profile. The presence of these factors does not confirm defects — but they are the features that insurers and building surveyors focus on.

Construction Period

Buildings constructed approximately between 1988 and 2004 fall within the primary risk window. Buildings outside this period can still have weathertightness issues, but this era saw the highest concentration of problematic construction practices.

Cladding Type

Monolithic plaster cladding (sometimes called EIFS or "stucco") applied without a drainage cavity is the most significant risk indicator. This type of cladding, when it fails at joints or junctions, allows moisture to enter and become trapped against the timber framing.

Roof Design

Flat or low-pitch roofs with internal gutters are associated with higher weathertightness risk. Internal gutters that overflow or leak can drive water into the building structure.

Architectural Complexity

Buildings with complex junctions — multiple balconies, parapets, recessed windows, internal angles, or other features that create numerous sealing points — present more opportunities for water ingress.

What Body Corporate Committees Should Do

If your building is in the risk era or has risk characteristics, there are practical steps your committee can take to manage insurance outcomes and protect unit owners.

1. Commission a weathertightness assessment — engage a qualified building surveyor to assess the building. A recent, independent report provides the factual basis for disclosure and helps insurers understand the actual risk profile of your building.
2. Disclose all known issues to your insurer — non-disclosure of known weathertightness issues can void your policy entirely. If you know there are problems, your insurer must be told. Your adviser can help you frame the disclosure appropriately.
3. Budget for remediation in the long-term maintenance plan — insurance does not cover pre-existing defects. Remediation costs must be planned for through the long-term maintenance plan and body corporate levies.
4. Review your policy's specific weathertightness exclusions — do not assume you know what is excluded. Ask your adviser to walk you through the exact exclusion wording and what it means for your building.
5. Work with a specialist broker — not all brokers have experience placing insurance for buildings with weathertightness risk. A specialist who understands this area of the market is better placed to find appropriate cover and negotiate terms.

2022 Disclosure Requirements

The Unit Titles Amendment Act 2022 (in force from May 2023) introduced important new disclosure requirements that directly affect body corporates with weathertightness issues.

Pre-Contract Disclosure

Under the amended Act, when a unit is being sold, the body corporate must disclose insurance details — including specific exclusions such as weathertightness exclusions — at the pre-contract stage. This means prospective purchasers must be told about coverage limitations before they sign a sale and purchase agreement.

Practical Steps for Compliance

• Keep a current copy of your body corporate insurance policy, including any endorsements or exclusions
• Ensure the committee chair or secretary can provide accurate insurance information quickly when a unit sale is underway
• Review insurance documentation at each AGM and confirm that the committee understands what is and is not covered
• Ask your adviser to provide a plain-language summary of key exclusions that can be shared with unit owners

Frequently Asked Questions