By Andrew Hooker*
As we approach the first anniversary of the devastating February 22 earthquake, there is more than sentimental relevance to the date.
Most businesses hold insurance for loss of profits. That way, if their business is destroyed they will be reimbursed for lost profit while it is repaired.
However, the cover is for a limited time. It's called the indemnity period. This indemnity period defines how long the insurance company will pay for loss of profits.
Indemnity periods vary, depending on how much you want to pay. The most common is 12 months and so on Feb. 22, 2012, a large number of businesses will lose their lifeline and will have to find funds to meet outgoings. It seems likely that a large number of Christchurch businesses will collapse after this lifeline ends.
When arranging insurance, a broker or business person will allocate an indemnity period that reflects a best guess about how long it will take to get back to business. No one could be criticised for assuming things would be back to normal in 12 months in Christchurch but the reality is that many businesses have not even started work because the insurance company has not yet decided on whether to repair or destroy the building.
There are many possible reasons for the delay. Insurance companies blame it on many factors including the inability to rebuild while zoning is clarified, or a shortage of construction companies and engineers.
That may well be the case, but should the insurance company be able to delay for over 12 months particularly where the building used by a business is apparently irreparable?
Is the delay reasonable?
Chain dragging?
A cynic might suggest that there are other reasons that the insurance companies are less likely to publicise:
• The longer the delay between the event and payment the more money the insurance company makes. If your claim is $1,000,000 then the insurance company makes (at say 8%) over $5,000 per month, $80,000 per year by keeping your money. With losses in the billions, the overall benefit to the insurance companies, or their reinsurers is huge.
• If the insurance company is having trouble paying, the longer it delays the more money it gets in the door allowing it to meet its liabilities out of future premium income.
• Many businesses made temporary repairs and got back to business, planning to get repairs underway once the dust settled. The trouble is, the indemnity period continues to tick away and now, nearly 12 months later, they face a serious problem when they have to close down for repairs at a time when their indemnity period has expired. In that case the insurance company will directly gain from the delay in commencing reinstatement.
No quick fix
It has become reasonably well known that insurance companies are looking at some quite novel processes for repairing what was previously thought to be irreparable. One process involves injection of resin into the foundation ground beneath the building to lift the building back to level at its original height.
There are cases in which this is being considered for severely distorted and cracked concrete slabs. So perhaps the delays can be attributed to insurance companies frantically attempting to reduce their losses by trying to find ways to repair the irreparable.
Who knows the real reason for the delays but it does seem somewhat incredible that 12 months after the event, insurance companies are still trying to decide whether to repair or replace. When Feb.22 rolls around it seems that many Christchurch businesses will find their financial situation will seriously take a turn for the worse.
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*Andrew Hooker practises 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.
42 Comments
Rob, a huge natural disaster, like the Chch earthquake, does raise to the fore, and clarify, many of the issues over a free market (hence, free lives) or State planning (planned lives). It's easy to go to the 'gut feel' approach that government must intervene, but I don't believe it stands up to scrutiny.
What you're saying is, private insurers are seeing too much risk in a certain area, so government should insure that area as they have access to the huge pool of (forcibly extracted) taxation. That is, because the government can simply take the money, they don't need to consider risk (of losing that money). I have two initial responses to that:
1) I've just explained in the above paragraph why Europe and the US are seeing the destruction of their middle class (to say nothing of their freedom from a growingly coercive State) and sinking under a sea of debt. Countries going broke by governments racking up losses through throwing money into malinvestments, such as the bank bailouts, such as the welfare state. And the likely outcome of that, including civil unrest, or even war, is far worse than losses of a localised earthquake.
2) A Government able to ignore the 'cost of risk', via a pool of tax money, providing ongoing insurance so people can live and work in areas that are deemed too dangerous by private insurers, can be argued to be endangering the lives of all those people. Giving a false sense of security to live in an area that is downright dangerous to live.
Perhaps those parts of Chch that private insurers see as too risky, should not be rebuilt. That's the market signal, an unintended consequence of government intervention overriding that signal, may literally be the deaths of individuals.
I believe Rob is pointing out that private insurance companies have proven very good at privatising profit, now they’re quietly maneuvering to socialise losses and future risk. It’s really not a libertarian verse socialist issue. It’s just an example of light regulation and weak politicians allowing special interests to derail markets.
Regardless of its owner, the former State Insurance company made the NZ insurance market more efficient and NZ more competitive.
The problem is that NZ is such a small market that some regulation is needed in certain areas, and many areas in the economy are largely duopolies. eg regulation occurred in telecommunications, just look what happened to telecom. It is also probably needed in supermarkets and pay tv/content.
I believe the private insurers should use their capital and profits to honour their contractual obligations, in good years and bad. And given some are saying the New Zealand and Australian insurers took in more last year in premiums than they paid out, perhaps last year doesn’t even qualify as a bad year.
Also, Yoda, you contradict yourself. You say the current problem is, quote, "weak politicians allowing special interests to derail market', yet, your solution sounds to be the advocacy of the wholesale derailment of the free market by those same weak politicians and their special interests.
All you're doing is advocating crony capitalism, the only solution for which is truly free markets.
There is no middle path to the enlightenment of the free-market. The free-market must be absolutely un-fettered or it is not free and can not provide its amazing prosperity. Unfortunately the last time the free market experiment was attempted Roger Douglas grew too close to a zen like status and the other politicians grew jelous of his power. The labour party decided to call tea time on the free market and it became fettered and regulated and died. Douglas later claimed that only by going further into the state of free-market zen could all of NZ have reached the enlightenment and become blessed by its eternal prosperity.
Though a true state of economic freedom has never existed in practise, economic theory points to its existance out there some where, and they are not afraid to seek it out. For it has been said that the free-market is the holy grail of economics and it was promised to economists by the lord Adam Smith the speaker of absolute truth.
Far from a base way to get the government to stop taxing and social policy, the free market describes a world where everything is priced correctly and the wealthy and knowledgeable investors can rationalise in efficient markets where they can predict the future accurately. This is what the free-marketeer seeks, not some trivial meaningless change in government policy so they pay less tax. Oh no, material things mean nothing on the path to economic enlightenment.
If it wasn't for Douglas's reforms in the agricultural sector, making our farmers the most efficient producers of food in the world, where do you think the New Zealand economy would be now? What sector outside farming and public sector are doing any good at the moment?
There is no middle path to the enlightenment of the free-market. The free-market must be absolutely un-fettered or it is not free and can not provide its amazing prosperity.
Well look at that. We agree.
Well the last thing I expected was whole hearted endorsement of my comic parody. No, Roger Douglas didn't create a large overseas appetite for aggrecultural produce. I think wealthy elites, CEOs and foreign finance conspiracies are doing pretty good at the moment.
Black and white and all this free-marketism is getting a bit last week. I think we should make a determined effort to blue the economy. Blue is pretty good right, thats un-equivocal. I mean the sky is blue, water is blue, the sea is kind of blue thats all good stuff. National and Act are shades of blue, blue doesn't come with all that green baggage, hell the NZ flag has loads of blue its like 60% or 70% blue-ness. NZ should endourse blue market policies and blue market reforms. We can all build blue market progress.
The blue market will be more efficient because everybody is on the same blue print, and so everybody will be rich beyond their wildest expectations. There will be no need for welfare, and there will be no crime, because the police wear blue and so they know who justice serves. Most importantly, blue is like the opposite of red, so everybody will be clear not to endourse evil socialism (which is always coloured red). Every body will know, this country is blue and not red and we don't ever mix the two together.
The only unfortunate thing is the Auckland Blues will need to change their name, because the country can not be seen to endourse partisanship, we were all born blue!
My head says 'Agreed tribeless. a lack of personal accountability has been one of the main factors contributing to the wests financial issues. To socialise the losses is detrimental to our collective society given the precedence it sets'
My heart says 'Damn these folks need a hand. They have been dealt a solid blow that keeps hurting and I wanna help out. There has to be compromise'
I'm completely conflicted. I think its hard to argue against either and a reason I am reticent to criticise our much maligned political class(bailing SCF out aside, tbags!) is the tricky balancing act they play in situations such as this with peoples livelihoods literally in the balance.
Given that pre quakes the idea of Chch being a siesmic risk was seen at most to be negligable or even downright improbable compared to other regions in NZ means it can happen to any of us, any time. We would all want help.
I sure dont think we should throw good money after bad. No point in rebuilding anything there until it settles down is there? Speckles provided the insight of what, 10-20 years of ongoing seismic activity in the area. Bloody hell. No wonder the insurance companies are dallying.
Head/heart conflicts are rarely easy, but I don't think there is as much of a conflict as you suggest between wanting to help on the one hand and opposing Government intervention on the other. For the fact is that Government intervention to deliver an outcome that markets won't - and so blocking out a message that people do need to hear - is often not helpful, quite the opposite. In this case,Government providing insurance that insurers don't want to provide would encourage and enable people to carry on living and working somewhere dangerous, at the expense of other taxpayers. It's a grown up version of not giving a child the expensive toys and unhealthy diet that it wants but will regret later as it surveys its corpulent frame, unlovely teeth and impoverished parents.
The potential difference between a Private Insurer model and a Public Insurer model is one of "reserves". Private Insurers have the twin imperatives of making a profit and paying dividends. The distribution of dividends is made out of reserves. It would seem that a "public" insurer is better placed to accumulate and hold adequate reserves over the long haul whereas the "private" insurer doesn't and won't and can't. It would further seem that the Private model doesnt cope too well with the 1 in 100 year event.
While it's true that a public insurer would not have the requirement to pay dividends, that does not necessarily mean that a public insurer would be any more likely to build up a large reserve. Ministers under pressure to find ways of paying for all of the things the public wants and votes for might well feel that standing ready for something that might happen once in 100 years is not the best use for a large amount of liquid assets (and staff resource, equipment and expertise), compared to what could be achieved by devoting those assets to problems that happen every day.
Just a little query of journalistic interest, Bernard. On your front page you've picked gonz's above post as the 'editor's pick' of posts. Yet, not only does is say little, it belittles one of your staff written articles, which is to belittle your own site?
Why would you do that? Are you trying to redistribute your income inequality with sites that are struggling, by going broke :)
Good lord. So you think it 'fair' to belittle your own endeavour, on a principle? I understand that's the basis the West is operating on now, but, always wanting to know the enemy, perhaps you could enlighten me on why it's good to belittle yourself? What will become of that do you think?
And what do you think is the actual import of gonz's post, that this impartiality and fairness has been applied to?
Wellington Philanthropist Gareth Morgan is going to pay for the funeral of Blanket Man.
Ben Hana died in Wellington Hospital on Sunday afternoon, after spending years living on the street in Courtenay Place.
He left no money for funeral costs and his family has said they'll struggle to pay for one.
Mr Morgan, who recently came to the aid of the struggling Wellington Phoenix, has now offered to pay.
He says while he didn't know Blanket Man well, he was a Wellingtonian and deserves a send off like everyone else.
Very magnaminous of the guy , who's poked his snout into the KS funds management trough ..... a nice little earner set up by Cullen , to gouge massive fees & performance bonuses from tax-payers' monies .........
....... sweet of Gareth to chip some of his profits back into the community , where he sees fit ....... kind of like being a Lord over the Serfs , isn't it !
you get what you pay for. some businessess have longer than 12 mth IP, and they will reap the rewards if they are still in that unfortunate situation.
most businesses especially if they had additional increased costs insurance cover have relocated, largely at the Insurers expense and found a way forward within 12 mths.
Just had a very helpful discussion with a CEO of the insurance industry.
He explained that in fact it may not be in the interests of insurers to delay claims in the case of earthquakes, because until they pay, the reinsurers don't have to pay. Good point. I probably should have pointed out that in many cases it is the reinsurers that benefit. A good claim is a closed claim is the mantra, apparently. I agree.
He also pointed out that reinstatement has been delayed due to no fault of the insurers because of the aftershocks. I agree. The issue is with buildings that can't be repaired. There can be no reason that these claims can't be settled without delay.
I think it is important to say that I am not suggesting in any way that there is evidence that any insurers deliberately delay claims for this purpose. But it certainly does not harm the reinsurers or whomever is ultimately responsible for paying. The the effect on insured people of the delay can be serious and in the case of buildings that can't be repaired, there is no justification for it.
The dialogue is helpful to all.
so you are now admitting that your story is inaccurate - may be a retraction is in place.
I suggest that any business affected in Christchurch by damage has had 11 months at least to rearrange their business. They should not just expect to sit on their laurels doing nothing to get the business up and running but collecting Business Interruption payments whilst doing so, they have had this time to plan a way forward for the business.
Despite what self-professed "insurance expert" Mr Hooker suggests, it actually costs more for an insurance company to settle a claim later than sooner.
............if insured for indemnity value sure but if insured for replacement value don't most policies still say the claim is not payable until the replacement value costs have actually been incurred, that is the rebuild has been done; you cannot just take the sum insured money and run?
You could take the money & run as you say, even if your building is insured for replacement and a total loss but dont expect to get the full sum insured, expect the indemnity value + what ever you have negotiated. If you are insured for replacement and have a total loss and it is your intention to rebuild, the insurer could/should pay you the indemnity value at least in the meantime before the property is rebuilt.
Surprised Mr Hooker didnt say this, and I thought he was an expert....not.
Andrew, we have 8 residential properties (several are substantial) which the insurer has agreed are write offs. This includes 2 which CERA issued demolition orders on.
All were clearly write offs on Feb 22 and some were clear on Sept 4. Of these one in Avonside which was a write off after Sept 4 wasn't inspected fully by NZI until July 2011, the others were only assessed as being written off at least 6 months after Feb.
The QS reports give the full replacement at about $5m. Valuations put indemnity at about $1.5m. Most loss of rent is now expired.
A few months ago the insurer promised us that they would allow us to purchase replacement property up to the replacement value. However now they are starting to discount large amounts such as groundworks, consents, builders' margins etc etc from the QS reports. Even after having the reports for 2 months they have not made an offer of settlement. The suggestion has been that they will discount the $5m replacement figure about 20% but we have nothing in writing yet.
We now feel that we have been led down the garden path and that the insurer is mucking us around. If we had known 5 months ago when they first offered the replacement option that it wouldn't actually be full replacement, we would have proceeded with plans to build on alternate sites.
From conversations with the insurer and loss adjustor it's pretty clear that they have been asking questions to find out our financial stability so that they can try and squeeze us into a cash indemnity settlement or low replacement offer.
It's clear what our policy covered. It's a full rebuild as an exact replica (we selected this option) and there are several benefits added on. All we want is what we are insured for, yet all we have got is the run around.
Clearly our insurer (NZI/IAG) is trying to limit its payout. They have been difficult from the outset and after Sept 4 (in Jan 2011) they advised that they would "not renew" some of our policies after the expiry of that year (in April 2011). Fortunately for us, all the properties they were concerned about were written off on Feb 22.
How do we proceed? Do we just get plans underway for building on alternate sites (they won't allow us to rebuild on ours), in order to force a higher offer? Can we sue for the time wasted by them misleading us into what they meant by "replacement cost" when they proposed the alternative (to buy existing property)?
Why hasn't the Government cracked down on them for doing this sort of nonsense? Why aren't insurance contracts required to have penalties for not meeting the obligations in a reasonable timeframe?
EQC unfortunately are even worse. We have at least 3 more (perhaps 6) that will ultimately be uneconomic to repair, yet they are still sitting at EQC in limbo without a decision made as to whether they are overcap. It leaves an impossible situation with some of these uninhabitable, a private insurer unwilling to act before EQC does and EQC giving the same answer every time that it's being processed or it's in the queue to be reviewed (whatever that means).
When will it end? I am thinking that we will never see a payout for some of these because the Govt will run out of money, reassess things and say its all preexisting (btw some assessors have been to our properties where there is liquefaction to the floor boards and the rooms are like roller coasters, yet they believe there is no damage? Yet similarly damaged houses in nearby streets are already demolished).
Chris we worked out quite a while ago that the way to extract the full value of a replacement policy was to rebuild (in our case, being in the Red Zone, on another site). Your insurer allowing you to buy an existing property (not in our policy, nor, I think, in yours) looks like a concession on their part to allow people to move on quickly with their lives, but could merely be a device to save themselves money.
If you choose that path you have the challenge of fronting up with dosh to acquire land, What is the insurer's reason for refusing to rebuild on the same site? Is it "waiting for EQs to go away" or "EQC must fix land 1st" or "waiting for DBH foundation guidelines"?
We have almost finished dealings with EQC and are most grateful for that! After February EQ they changed from erring on the generous side to a cost minimisation exercise, including "exporting" damage from one event to another to reduce their liability. Even the insurers seem powerless to stop them doing whatever will limit the Crown's liability to underwrite their payouts.The only ways I see to hold them accountable are complaining to the Ombudsman (which will take months/years to get anywhere), or Court action (but effectively you would be suing the Crown, a brave move and probably an expensive one).
We were noisy, lawyered up, did our homework, and persistent. This bore results with IAG in the long run, but I am not confident that approach works as well with EQC. My guess is their political masters have put the hard word on them to save the Government money. Others I have spoken to have encountered similar intransigence on the part of AMI. Coincidence? The Crown now covers their EQ liabilities once the reinsurance funds are exhausted (and as you know, they will be).
All I can say is good luck and hang in there!
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