Just what does happen to insurance money if your unit title is damaged and a claim is made on insurance? 

There is a statutory obligation on each body corporate to insure all buildings and other improvements for replacement value.  The insurance must cover demolition costs and architects fees and must relate to damage caused by:

• fire
• flood
• explosion
• weather
• aircraft
• impact
• riots
• burglars
• earthquake in excessive of indemnity value. 

The Unit Titles Act 1972 governs what must happen to funds paid out by an insurer in the event of a claim under one of these policies.  Unless the proprietors reach a unanimous resolution to do otherwise, all money paid by the insurer must be applied towards reinstatement.  When it is applied in this way, no mortgagee is entitled to demand that the insurance money be applied to their debt. 

That is why we sometimes see mortgage redemption insurance as a requirement of a mortgagee.  If mortgage redemption insurance is in place, any payment made under that policy is paid to the mortgagee.  The net result could be that on destruction of a building your mortgage is paid off by one type of insurance and the building is rebuilt by another.  Our experience has been that not a lot of owners actually put mortgage redemption insurance in place.  That might be something people reconsider in light of the Christchurch earthquake.

Debra Dorrington
Remember it is just a blog.  If you need legal advice on insurance, do speak to your lawyer.