Couple clash with bank over quake insurance payout

Lending restrictions,
Ed and Harriet’s home was damaged in the Christchurch earthquakes, and they received a payment of $115,000 from the Earthquake Commission. The payout from their insurance company was stalled by a dispute about what it would cost to repair their home.
January 2019

Eventually, they accepted a settlement of $225,000. Among the conditions was that their bank, as mortgagee, approved the settlement (which it did), and that they used the money to repair or rebuild their home.

At a pre-signing meeting with the couple, the bank told them it would hold on to the settlement money and would release it to them on receipt of invoices for repair work. Alternatively, if they wanted to rebuild, it would require them to use some of the money to reduce their loan to 80 per cent of the property’s land value. The couple said the bank told them at the meeting it was unlikely they would meet the criteria to borrow more money.  This was because their circumstances had changed since they first obtained their home loan: Ed was unable to work and was receiving Accident Compensation Corporation payments, and Harriet was working only part-time. They told the bank their home could not be properly repaired and needed all the money released to them to rebuild. Their lawyer contacted the bank about why it would hold on to the money and was told it was both standard practice and was spelt out in the terms and conditions of the mortgage document.

Ed and Harriet did not accept the bank’s position on the settlement and looked at refinancing with another bank. Their lawyer then submitted a request to discharge their mortgage, and the bank used more than half of the insurance money to repay the couple’s loan, which stood at $145,000, and gave them the balance.

However, the couple were unable to get finance elsewhere, leaving them without sufficient money to either attempt a proper repair of their home or to start from scratch and rebuild. 

Our investigation

Ed and Harriet complained that the bank should not have held their settlement funds or required them to reduce their lending if they wanted to rebuild. They said the bank would have ended up with an equal or better security on its lending if they had been able to put the funds towards rebuilding. They said they had never defaulted on their loan repayments and believed the bank was protecting its interests but at the cost of leaving them with a home they could not properly put right.    

We noted that the mortgage document contained a specific clause entitling the bank to hold the settlement money. The bank had an interest in the property and needed to ensure its interest was protected, and that the insurance money was used as intended. We also noted that the bank was entitled to require the couple to reduce their loan to 80 per cent of the land’s value if they wanted to rebuild, and that it was under no obligation to lend them more money.


The bank agreed to discuss a new loan application and to reimburse their legal fees, an offer they accepted.

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