By Andrew Hooker
The insurance law was amended a number of years ago and things have not panned out quite as intended.
In 1993 the Government changed the law relating to damage for earthquake and other natural disasters so that:
- Earthquake Commission cover for commercial property was gradually phased out under the and taken up totally by private insurers;
- Earthquake Commission cover for damage to domestic property such as houses and domestic contents:
a. is capped at $100,000.00 plus GST for houses and $20,000.00 plus GST for contents;
b. excludes certain items such as swimming pools and jewellery.
At the same time, the private insurance industry stepped in to provide what was widely in those days referred to as “top up” cover.
The insurance companies were supposed to pick up where EQC left off so that losses that were not covered by EQC would be picked up under the private policy.
At the time this was intended to be a seamless “dovetailing” of cover between the Earthquake Commission statutory cover and the cover provided by the private insurers. But the reality is that is not necessarily the case.
The catastrophic earthquake in Christchurch is undoubtedly the largest natural disaster to have occurred since the new laws. But in the intervening 17 years, there have been many claims for smaller earthquakes and other types of natural disaster such as landslips.
What has been apparent in the last 17 years is that there is often a mismatch between the cover provided by EQC and the cover provided by private insurers so that certain losses and expenses fall through the cracks (excuse the pun).
Getting a claim accepted
A quick survey of the policy wordings of major domestic insurers certainly confirms that the extent of cover provided by insurers for earthquake varies greatly, albeit with somewhat subtle differences in the wording. For example:
Some policies say that if the Earthquake Commission agrees to cover your loss but the value of your loss is higher than the Commission’s payment then the insurer will pay the difference between what the Earthquake Commission pays or would have covered and your maximum entitlement under this policy.
This can be compared with other policies that state that they will pay a certain amount of money if a “natural disaster” occurs.
The difference may be subtle in wording but quite dramatic in consequences.
Under the first wording, the insurance company is clearly agreeing to follow whatever decision EQC makes in relation to the cause of the damage. But under the second wording, it is open to the insurance company to dispute EQC’s finding as to the cause of the damage and you may find yourself having to prove all over again that your property suffered earthquake damage.
This mismatch is a consequence of different insurance companies providing slightly different cover. There have been cases in which EQC has accepted that a house or other property was damaged as a result of an earthquake or some other event covered under the Act, and paid in full. Then the insurance company has disputed the Earthquake Commission’s assessment of the cause of the damage, and the home owner has been left fighting with the insurance company to prove what EQC had already established.
The Earthquake Commission Act has a special provision in which cover can be provided where a property is in imminent peril of suffering damage or destruction. In many cases where a house is at imminent peril of damage, but is not actually damaged, the Earthquake Commission will either pay the cost of averting the risk (like a retaining wall or other earthworks) or settle on a total loss of $100,000.00 plus GST.
Insurance policies do not expressly say that they cover imminent peril, and different insurance companies approach this from a different perspective. Some insurance companies have accepted that they have an obligation to prevent an imminent peril (sometimes called prevention costs) and some insurance companies refuse to do so. This is yet another “crack” between the EQC cover and the cover provided by the insurance company.
After claim acceptance
Once your claim is accepted, there are some other areas in which you need to be careful. Primarily, these relate to the means of settlement.
If your house is damaged seriously, and will clearly either be demolished or cost more than $100,000.00 to repair, the Earthquake Commission will almost certainly write you out a cheque for $112,500.00 and then close its file. That is the extent of its liability.
You will then need to deal with your private insurance company for the rest. The insurance company will send an assessor out to assess the house, and may even obtain an estimate or quotation for the repairs.
Particularly in times when building resources are scarce, the insurance company may very well offer you a cash settlement under your policy so that you can then have the house repaired at your leisure.
But there are a few things that you need to be very careful about:
In return for a cash settlement, the insurance company will almost certainly want you to sign a discharge agreeing that its payment is in full and final settlement of all claims.
If you sign a discharge like this, it is possible (depending on the exact wording of the discharge) that you may be prevented from making further claims should one of the following occur:
• the actual cost of repairs exceeds the estimate obtained by the insurance company (how many building contracts come in on budget?)
• after the work is started, further undetected damage is uncovered;
• due to market demand or other reasons, the cost of building increases.
You need to be sure that you have claimed for everything you are entitled to.
Many insurance policies these days can contain all sorts of bells and whistles and you may be able to claim for all sorts of things like accommodation for pets, stress benefit etc. If you sign a discharge for a fixed amount, and you have not included these extra bells and whistles, you may be doing yourself out of the full benefit of the policy. You will be well advised to have the policy checked before signing any full and final discharge.
Then there is the question of mortgages. If an insurance company cash settles, and you have a mortgagee registered on the policy that mortgagee may take the money and may not be too keen to release it to you, particularly if you have been struggling with your mortgage payments.
If, however, the insurance company elects to actually carry out the building work, that is less likely (although still possible). So when you sign a discharge to settle your claim on a cash basis, be sure that you know whether you are going to get the money or whether it is going to end up in the hands of your mortgagee.
If your mortgagee wants the money, see if they will agree (before the payment is made) that the funds can be re-released to you as you re-build.
Overall, it is very important that you think carefully and obtain proper advice before actually accepting a full and final cash payment.
There are certainly advantages to having the money up front, and that gives you all kinds of freedom in respect of how the money is spent. But don’t rush into that decision, and make sure that you aren’t signing away your rights and entitlements under the policy.
In times of stress, a large cash payment may seem attractive. But down the track, you may regret taking the quick option.