Although the Act will not apply to the damage wreaked by Cyclone Gabrielle, both insurers and insureds will need to prepare for the change in legislation.
Core settings
The Act keeps many of the core settings for cover as currently provided for under the existing legislation. In summary, the new legislation:
- Continues to apply to residential buildings and land only. It does not cover commercial, farming or other buildings and land.
- Also continues to provide cover only to people who insure their residential building with a private insurer. If a person does not have private insurance for their building, then they do not have any cover under the legislation. They also do not have cover for their land. They are fully uninsured for both building and land.
- Generally continues to provide the same substantive cover for residential buildings in respect of specific risks. It covers earthquakes, landslips, volcanoes, tsunamis and hydrothermal activity, but it does not cover other risks, such as floods and storms. Although the cover is generally the same, insurers should be aware that language has changed: for example, “natural disasters” are now “natural hazards”, and “natural landslips” are now “landslides”.
- Continues to cover all of the same risks for land as for residential buildings. However, unlike residential buildings, the new legislation also continues to cover land for flood and storm damage.
- Provides first loss cover, funded by a levy that private insurers collect on behalf of EQC, and guaranteed by the government.
Residential buildings
The existing legislation provides up to $100,000 of cover per event for each dwelling in a residential building (in most cases), although this was increased by regulation late last year to provide for $300,000 of cover.
The new legislation carries forward this increased level of cover. This means that all New Zealanders will pay the same amount for the first $300,000 of their cover, whether or not they are at high risk or low risk of a natural hazard. This is a deliberate policy choice by the government, which it says is to support insurance availability and affordability.
The new legislation provides for cover on a “replacement cost basis”. This is similar to the existing legislation, which provides for “replacement value” cover. However, the new legislation also contains a number of changes to the way in which the cover is described. It remains to be seen whether these changes are understood as clarifications rather than substantive changes, and the extent to which the cover provided under the legislation could be seen as different in scope to that provided for by private insurers.
The Act also makes changes to the cover provided for buildings with both residential and commercial uses, and in particular the extent to which common areas are taken into account in assessing the extent to which the building is residential.
Land
As with the existing legislation, the new legislation only covers land that is within eight metres of a residential building (as well as the main access way, retaining walls, bridges and culverts).
The Act says that cover for residential land is provided “on an indemnity basis”. However, the specific provisions of the legislation go beyond indemnity cover.
In respect of land itself, cover is provided for the “actual loss suffered”, which is said to be either “reinstatement cost” or “diminution in value”. The method that must be used is said to “depend on the circumstances”, with a list of factors taken from EQC’s policy that was considered by the High Court in its earlier declaratory judgment in relation to land damage arising in respect of the Christchurch earthquakes.1 The statutory factors allow consideration of whether reinstatement would be “disproportionately expensive”. However, if reinstatement is avoided on this basis, then it would seem that the risk of future damage from unrepaired land will increase.
Any land claim is capped at the market value of the land.
The position is different again in respect of retaining walls, bridges and culverts. Under the current legislation, only indemnity value was payable. Under the new legislation, “undepreciated value” is payable. This is a new term not previously used, and it may well give rise to disputes. Further, the new legislation excludes all costs other than actual construction (for example, demolition costs). These excluded costs may need to be covered by private insurance policies, with implications for sums insured and pricing.
Any retaining wall claim is capped at $50,000, and any bridge or culvert claim is capped at $25,000.
There are also some changes to cover for bridges and culverts beyond the landholding boundary but within the main access way.
Claims
The Act adds a new requirement that claims must be settled in a timely and fair way. It also provides for a code of claimants’ rights, together with the ability for claimants to take any dispute to a dispute resolution scheme.
Excess
Currently, there is a wide variety in the different excess amounts that may apply, which range between $200 and $3,450 for residential buildings per event, and between $500 and $5,000 for land per event.
The Act introduces a new regime: an excess is payable for residential building and land claims at $500 per dwelling.
New name
EQC will be renamed the Natural Hazards Commission – that is, EQC will become NHC. On the one hand, this makes sense because EQC covers a number of natural hazards other than earthquakes. On the other hand, the new title is broader than the new entity’s role, as it does not cover all natural hazards – for example, it does not cover residential buildings for flooding or storm damage.
The NHC will have extensive new powers, including the power requiring any person to produce any document or information that the NHC reasonably needs for the purpose of performing its functions.
If you have any questions about the matters raised in this article, or for more details about the new legislation, please get in touch with the contacts listed or your usual Bell Gully adviser.
1 Earthquake Commission v Insurance Council of New Zealand Incorporated [2014] NZHC 3138 at [119]-[123].