Andrew Hooker finds out why Christchurch residents are taking to the streets and what they can do about insurance frustrations.

By Andrew Hooker*

In what is probably another first that can be attributed to the Christchurch earthquake, the people of Christchurch have hit the streets to protest against what they see as unfair treatment by insurance companies in the wake of this disastrous event.

Previous articles have identified a number of “firsts” that have arisen out of the Christchurch earthquake from an insurance law perspective.  What is now becoming more and more common is the manner in which the insurance companies seem to be benefitting from decisions by CERA (the Canterbury Earthquake Recovery Authority), the government and local bodies relating to their handling of earthquake damaged property.

One of the most common relates to business interruption insurance.  The wrangle over the causation problem referred to in a previous article continues, with some insurance companies taking a less strict interpretation and others standing their ground.  But another issue has arisen. 

Business interruption or loss of profits policies all have what is called an “indemnity term." What that means in most cases is that the insurance company pays for loss of profits that occur as a result of an event, but the period during which that loss of profits will be paid is defined, often as a 12-month or 18-month period. 

Clock is ticking for claims

The trouble is the time starts ticking from when the event occurs. 

What that means is that for people or businesses that suffered significant damage in the February 22nd earthquake, unless they get started with their reinstatement work pronto, their indemnity period is going to run out before their building is reinstated.

You see, what normally happens, is that in the case of a fire damaged or other significantly damaged property, it is usual for reinstatement or replacement to be complete well within the 12 or 18-month period.  But given the significant delays for various reasons in Christchurch, this is unlikely to be possible.  So the insurance cover for loss of profits is unlikely to cover the business until the reinstatement is completed or they are back in business in some way or another.

But it gets worse.  In many cases, businesses carried out temporary repairs so they could get back to work as soon as possible.  As a result, there was only a very short period of maybe weeks or a month or so during which the insurance company had to pay loss of profits insurance.  The business has then continued to trade as best it can, with no or minimal loss of profits. 

Then once the “dust settles” the business will attend to reinstatement.  Of course that works in the insurance company’s favour  because whilst the business has managed to scrape together temporary repairs and worked in less than perfect conditions, it has simply been saving the insurance company the need to pay a loss of profits claim for that period.  And then by the time it gets around to doing the repairs, that indemnity period may have already expired.  Thus the insurance company is off the hook.

Where buildings are in zones that for various reasons do not allow reinstatement, the insurance company can just sit back and wait while the indemnity period expires without paying any damage.  It is beyond the power of the insured person or business to actually get the repairs under way while the indemnity period lasts.

Don't delay

It used to be relatively common in days before the earthquake for insurance companies to press the pause button on the indemnity period if it seemed justified.  But that does not appear to be the case for earthquake claims, and insurance companies are sitting back happily waiting for indemnity periods to expire knowing that they are saving millions of dollars doing so.  Whilst this may in some cases (depending on your policy wording) be in accordance with the strict letter of the law, people including businesses must ask their insurance companies whether this is what was really intended, and whether the insurance company is simply benefitting from a catastrophic situation.

There have been many other situations that have come to light where insurance companies are similarly benefitting. 

Another example relates to what is known as automatic reinstatement.  Many years ago, your sum insured for your house or contents or even your business, was simply the amount of cover you had in a given year.  So if your sum insured was $100,000 and you had a $20,000 claim, you only had $80,000 cover left for the remainder of that year.  If you wanted to increase it back to $100,000 you had to pay for the reinstatement of your sum insured.

But with market forces and competition between insurance companies, a concept known as “automatic reinstatement” crept in.  What this meant is that the insurance companies would automatically reinstate your sum insured without charging, or was like a little extra benefit. 

But different policies are worded differently.  Some policies allow for the automatic reinstatement immediately after the event, but some very cunningly say that it is not reinstated until after the repairs are completed.  In the latter case, where there is a second event before the repairs are complete, your sum insured won’t have been automatically reinstated.  So even though the repairs may have been partially or even substantially completed, you may have no insurance, if the first repair job was going to almost completely take up your sum insured.

If your policy falls within the “post repairs” automatic reinstatement class, you should be asking your insurance company why you have a less than optimal sum insured in relation to the reinstatement of your cover, and carefully look at your wording to see how your automatic reinstatement provision applies.

Reinstate refined

Finally, there is the relatively common dispute about what reinstatement means.  Insurance companies are very quick to promise that they will pay to reinstate your house regardless of the cost.  The policies invariably include clauses limiting the obligation to such things as “commonly available materials” or “modern equivalent materials”. 

But that does not mean the insurance company can force you to use pine rather than rimu, where rimu is available.  Nor can the insurance company expect you to accept aluminium joinery or something less than the quality in your house.  Before you agree to accept a cash settlement, or sign off a reinstatement offer by the insurance company, ask to see the specifications and check to see that the types of materials specified are those of a similar type of quality to that which was in your house before the event.

Even though it is more than a year since the first earthquake, it is early days from an insurance perspective. 

Insurance companies have a legal obligation to complete your repairs within a reasonable time of the event.  Just what a reasonable time is depends on the circumstances, and it’s likely that the insurance companies will be afforded some slack in the situation that exists in Christchurch. 

However, the insurance company cannot sit on its hands or blindly take advantage of regulations that prevent the reinstatement, when there are other options available.  Keep the pressure on your insurance company, because the delay in reinstating, may actually be costing you money.

*Andrew practices as a specialist insurance lawyer in Albany, on Auckland’s north shore and a director of Claims Information Specialists Ltd, running an insurance information website – www.claimshelp.co.nz.