Stories are emerging of body corporates watering down or completely scrapping their earthquake insurance cover in response to sky-rocketing premiums.
Insurance Council of New Zealand (ICNZ) CEO, Tim Grafton, raised the issue at a briefing he arranged with journalists earlier this month.
While he didn't know how widespread the issue was, business consultant and former lawyer and chair of a stakeholder group that helped the National Party with a body corp review it did when in government, Charles Levin, said he was aware of “more than one or two” of these cases involving apartment buildings in Wellington.
Keegan Alexander partner and insurance law specialist, Crossley Gates, hadn’t heard of body corps reducing their insurance cover, but agreed that as insurers make aggressive moves towards risk-based pricing, it would be more tempting to do so and problems could arise.
IAG, the insurer that underwrites about half of the country’s general insurance, in April announced it was following Tower in applying risk-based pricing across all its brands. In other words, it’s charging higher risk customers more, and lower risk customer less (supposedly).
This means more policyholders can expect premium jumps as their policies come up for renewal in the next year.
Seismic strengthening is another cost weighing on body corps. And as risk-adverse insurers become more selective over who they insure, a failure to have adequate strengthening could mean cash-strapped body corps have little choice but to be under-insured.
Worse case scenario very bad
Body corps reducing or doing away with earthquake cover is problematic on a number of fronts.
Existing unitholders could be left in breach of their mortgage conditions, prompting their banks to reclaim their mortgages; prospective unitholders risk making dud investments; and well-meaning but incompetent body corp members could be left personally liable in the event of their building being under-insured.
There is an added complication. The Earthquake Commission (EQC) only covers an entire building if more than half of it is residential.
So, if a building that’s mostly used for commercial purposes is damaged in an earthquake, EQC will only cover damage to a residential unitholder’s unit. Any damage outside of this (foundations, lifts, carparks, etc) would fall to the private insurer. If there isn’t one, the liability rests with unitholders.
In another twist, the calculation EQC uses to determine whether a building is mostly residential or commercial has proven problematic in the past
In the case of Wellington’s Marion Square apartments for example, EQC in 2013 deemed it mostly residential, then in 2016 didn't - excluding all common areas used by residents in its calculation, leaving them to cover the $2.3 million excess of their private insurance bill.
While residents claimed EQC changed its formula, EQC said it simply made a mistake in its initial assessment of the building.
The bigger picture here is that the Government's policies to increase the supply of affordable housing and densify housing around arterial transport routes rely on apartments being attractive to both developers and buyers.
Grafton, Levin, Gates and the Body Corporate Chairs’ Group president, Lyn Gillingham, agree issues around body corps’ insurance obligations stem from a badly written Unit Titles Act 2010.
They noted ambiguity caused by Section 135.1 of the Act saying, “The body corporate must insure and keep insured all buildings and other improvements on the base land to their full insurable value,” but not specifying what perils ought to be covered.
Gillingham said some body corps were therefore pushing the envelope to see if they could reduce their cover while still technically complying with the Act.
However Gates pointed out that most residential insurance policies in New Zealand cover all perils, but some commercial policies treat earthquake cover as an optional add-on.
Levin raised the point the Act doesn’t deal with the situation where a body corp can’t actually get insurance.
“The Act is written on the basis that A. Insurance is attainable and B. It will be taken out. So there is a problem with the Act in that it is not meeting current practice in Wellington,” he said.
He acknowledged there was no easy fix, but suggested the legislation include clauses to deal with quake-prone buildings and draw some lines in the sand around strengthening standards.
Being clearer around what body corps need to disclose to existing and prospective unitholders, and when, was another fix he advocated for.
Still ‘not a priority’
Levin’s suggestions fed into a Bill, the Unit Titles (Strengthening Body Corporate Governance and Other Matters) Amendment Bill, which National MPs Judith Collins and Nikki Kaye recently unsuccessfully pitched to Housing and Urban Development Minister Phil Twyford.
While it doesn't deal with insurance specifically, it proposes ways to strengthen body corps’ governance arrangements, increase professionalism, and ensure planning and funding of long-term maintenance projects are adequate and proportionate to the size of the complex concerned.
The Bill stemmed from a public campaign Kaye and Collins launched in 2016, before the Ministry of Business Innovation and Employment began working on the issue.
While he said he would address the issue “in due course when priorities and resources permit,” he declined interest.co.nz’s invitation to comment on body corps in light of concerns around insurance.