Two insurers with different coverage and farmers without protection creates a messy problem

By John Grant

When the post World War 2 government decided to follow mother England and introduce a War Damage insurance scheme, and extend it to cover earthquake damage, the situation that now presents itself in Christchurch must have been top of mind.

The principle was to make sure that if a disaster of this magnitude was to happen then there would be enough money in the kitty to reimburse those effected by the disaster, or at least go a long way towards it.

It was decided that insurers should collect the levy and the first version of earthquake insurance under the then Earthquake and War Damage Commission provided private and commercial properties with indemnity value earthquake insurance. As it was collected by levies via the fire insurer, the cover was aligned to the indemnity value on the fire insurance cover.

In 1993, a Government review modelled the potential overall exposure for a major earthquake, and based on this, decided to overhaul the coverage. The following changes were then made:

1. Cover was limited to residential properties only
2. Cover was limited to $100,000 plus GST on buildings and $20,000 plus GST on contents
3. Land cover was introduced for residential properties
4. War damage cover was dropped.

Other changes were made but the main impact of this was to cap-and-limit the potential exposures of the Commission.

The changes morphed it into the Earthquake Commission (EQC) and a new fund was established - the Natural Disaster Fund - to collect levies for any claim payments.

The Government gave $1.5 billion to start the new fund, but it is not clear how much was sitting in the consolidated accounts from the old Earthquake and War Damage Commission. However much it was, it was more than that initial contribution to the EQC.

The new scheme also transfered of much of the liability from the public sector to the private insurer. Private insurers needed to provide earthquake insurance cover for those areas no longer provided by the government scheme.

It put in place a dual insurance arrangement on properties, with different policy wordings and settlement processes. It has not been until the Christchurch quake that this has been so clearly tested.

The challenges now facing the public, is how these two organisations will work together to harmonise the process for those impacted people.

The Government has seen the issue and is busy seeking an agreed approach by both parties.

The EQC is under pressure to progress the more than 100,000 claims as quickly as it can. It normally settles these claims on a cash basis with the majority of funds going to the insured or to their lender.

This leaves the private insurer with a policy obligation to reinstate the building (or contents) after deducting the amount paid by EQC.

The Government is keen to see Christchurch rebuilt. It wants houses put back on the land where they were damaged.

Insurers are naturally cautious about this.

However it is the insurer who is left with the challenge of having to reinstate a property and find builders and materials to do the job.

This will be challenging and having a shortfall of the amount paid by the EQC has the likelihood of making this even more challenging.

There are meetings taking place to find a resolution.

Whatever happens it will highlight many anomalies. Some of these are surfacing already.

1. Where will the Earthquake Commission settlements be paid to and how will insurers access this to enable them to reinstate the properties?
2. Who pays the cost to get the land back into a stable enough condition to rebuild on?
3. What happens to those who did not have insurance cover, like the farmers?
4. What happens to properties that do not have adequate insurance amounts for rebuilding?

And, there are the bigger questions of the scheme itself - is the current level of cover (limits unchanged since 1993) and way it is structured the best way for earthquake insurance to be provided?