Fire Service levy should set alarm bells ringing

Ralph Simpson, Partner | Wednesday 12 December 2001

The Fire Service maybe one of New Zealand's trusted professional bodies, but if you're a business person paying for a fire insurance policy you might be surprised to learn how it is being administered.

The Fire Service is partly funded by a levy imposed on our policies and most property owners would agree that this is reasonable.

The levy is paid by the person purchasing the fire cover, collected by the insurance company and paid to the Fire Service Commission. Late payments attract interest at 1.5% per month and a penalty surcharge of 10% imposed six monthly on a compounding basis. Taken together, the penalty surcharge and the interest accrue at more than 40%.

Most would agree this is pretty steep, but it gets worse.

The Fire Services Act is out of date, poorly drafted and not easy to apply. Because of the uncertainty it creates, property owners must base their levy payments on guidelines issued by the Fire Service Commission, and these guidelines have no legal status.

But you can always resort to a legal challenge if the amount is in dispute, right? Wrong. Unlike Income Tax legislation, there is no way to challenge a decision of the Fire Service Commission through any statutory review process. Therefore if a property owner disagrees with the Commission as to the quantum of any levy payable, the only recourse available is expensive and time consuming proceedings in the High Court. How, then, do you stop crippling penalties from accruing? There is no statutory provision allowing property owners to make a part payment while High Court litigation is pursued.

The only safe way to stop interest and penalties running is to pay the entire levy, including the interest and penalties demanded by the Commission on a "without prejudice" basis and then seek to recover it if the High Court reverses the decision of the Fire Service Commission.

So no inexpensive or expedient review process, legal uncertainty and guidelines with no legal status and penalties accruing at usurious rates. Tax law seems benign by comparison.

There are other aspects of the regime that also seem unfair.

• Property owners who do not purchase fire insurance cover pay no levies.

• Property owners engaging in activities with high fire risks pay the same levies as those who own or operate businesses with low fire risks.

• Enterprises who own and operate their own fire fighting facilities get no credit from the Fire Service Commission.

• Unlike insurance cover, those who are repeatedly responsible for call-outs by the Fire Service pay the same rate of levy as those who have never used the service and who have an exemplary fire record.

• Insurance companies and brokers are responsible for calculating and collecting the fire service levy. They receive no reward for doing so. Yet, they are subject to annual audits by the Fire Service Commission and face legal risks if they incorrectly quantify the levy payable. This is not an insignificant risk having regard to the outdated and imprecise language of the Fire Service Act.

It is hardly surprising that the Act has met with increasing industry resistance.

In the early 1990s, property owners, brokers and the insurance industry made submissions to Government regarding unsatisfactory aspects of the legislation. They sought to have the levy provisions of the Fire Service Act repealed and replaced with some alternative regime, such as funding the service from the General Account of Parliament, or from a levy added to local authority rates. The Government did not take up those suggestions.

This led owners of large portfolios of property (including local authorities, charitable trusts and corporates) to structure their insurance arrangements to minimise their liability for Fire Service levies. This is achieved by limiting the sum insured to the maximum probable less that would be incurred in any insurance period.

Take, for example, the owner of the portfolio of properties with a current market value of $500 million located in different parts of the country. The most valuable collection in any one location is, say, in Wellington, and these properties have a current market value of $100 million. If the property owner purchases $500 million of fire cover, then it is liable for a levy of $365,000. However, if the property owner purchases only $100 million of fire cover in the expectation that this is as much fire cover as it will ever need during the course of a year to cover expected claims, then the levy is only $73,000.

These minimisation arrangements are an example of community backlash to legislation perceived to be unfair and unduly burdensome.

They come at a price. As the cost of operating the Fire Service increases and as owners of large property portfolios increasingly adopt minimisation tactics, the rate of the levy has increased. Not long ago the levy was 4.5 cents for every $100 of fire cover. It is now 7.3 cents.

While individually homeowners and owners of smaller portfolios of commercial and industrial property do not have this avenue available to them, it may not be long before we see smaller businesses in common industry sectors clubbing together to take advantage of such arrangements.