Janine Starks looks at "lock-downs", indemnity policies and other insurance perils in earthquake-shattered Christchurch. What's your story?

By Janine Starks*

If there was ever a warning for New Zealanders to haul out their insurance policies from the back of filing cabinets and sit-down for a review with an insurance broker, the plight of Cantabs should provide the impetus.    

If I could dress up as an insurance fairy (it wouldn’t be a pretty sight) and sprinkle some magic in a couple of areas, there would be two items at the top of the wish-list.  First, I’d force every home-owner to check the square meterage of their home and ensure it’s correctly recorded on their insurance policy.  Second, I’d issue an instant ban on the sale of indemnity policies (these are the evil little beasties which depreciate the value of your home, rather than pay for full replacement). 

Recently we had a happy outcome for a State Insurance customer who had unwittingly under-insured their home, but the insurance fairy can only bang her wilting wand in frustration in other situations.  Below are a couple of examples:    

Janine, the floor size of our home is incorrect on our insurance policy. This is because the size recorded on Quotable Value is wrong and differs from the council plans.  Luckily we have no substantial damage from the earthquakes, but I’m desperate to correct the error in case there is another big one.  We are insured with AMI and despite numerous attempts to correct the problem, they refuse to on the basis that everything is ‘locked down’ and they cannot increase the floor area.  What can we do?

This would have to be one of the most frustrating situations I’ve heard of.  Sure, you are lucky, but you are living in fear of another event and are not able to protect yourself.  Other insurance companies would not behave the same way. 

We all know AMI has its own issues and will no longer write new policies.  What I didn’t realise, is they won’t even correct a genuine error on a policy held by an existing customer.  Maybe they have the legal right to do this, but I find it morally appalling.  Their inflexibility places you in a position of added risk.  Waiting for the lock-down to end is not going to be fun. 

The only practical thing I can think of is to phone the Insurance and Savings Ombudman (0800 888 202) and ask if they have jurisdiction over this sort of issue.  While you are not in dispute over an amount of money from a claim, they maybe able to make a ruling on a matter of principal.  The ombudsman’s service is free, so it’s worth asking. 

I have to admit I’m struggling over the issue of whether they have jurisdiction.  Under section 3.2 of their Terms of Reference, they have no power to consider a complaint which concerns the insurers “commercial judgment, assessment of risk, underwriting practices, methods or procedures for setting charges or premiums payable for the Services, or commercial decisions relating to its business”.

The ombudsman will need to decide whether an insurer who refuses to correct an error on a policy is simply exercising their right to make a commercial decision due to the lock-down.  If so, they won’t be able to help.  We are in unusual times and I doubt the ombudsman has ever heard such a case.  I hope clause 3.2 doesn’t stand in the way as it seems highly unfair that you can’t correct an error.    

There is also an interesting clause under Rule 25 where an insurer can prevent the ombudsman from ruling on matter by invoking a ‘Test Case’ procedure.  They can do this if the complaint has important consequences for their business or involves a novel point of law.  Given the lock-down, maybe AMI would ponder this – again it would feel unfair at the consumer level.  Interestingly, the Fair Insurance Code which AMI must abide by contains the words “you must…let your broker know if there is anything you want explained or corrected”. 

Case study #2

Janine, I have a house which I rent out, but it was hit hard in the earthquakes.  I had a policy for 20 years, but it was badly under-insured and I only received $71,000.  I need to demolish it at a cost of $12,000, leaving $59,000 to rebuild.  I’m in my 60’s with only a small income and no rent from this house.  I’m stressed and worried.  Is there anything I can do to improve my situation?

Anyone reading this, will have a lump in their throat.  It’s an awful situation.  I know some people will immediately scoff and say you chose to take this risk on a rental property, but you probably never realised the consequences.  I can only guess that you had one of two types of policy:

a)     A nominated replacement value policy: this is where you set the level of insurance in dollar terms.  Every year the amount of $71,000 would have appeared on your statement and it would have been difficult to ignore that your rental property was worth a lot more.

b)     An indemnity policy: the insurance council defines this as, “the replacement cost of the item less an allowance (depreciation) for age and use. Indemnity value may also be referred to as market value or present day value”.

If you had an indemnity policy I think you should visit your lawyer and see if they feel you received a fair payout.  They may be able to help you get a second opinion from a valuer.  I’m neither a lawyer or valuer, but it strikes me that very few houses are worth less than $100,000 (excluding land value), so a payout of $71,000 is a heck of a lot of depreciation. 

A beast called "indemnity"

The Insurance Council of New Zealand website says that an indemnity policy “puts you back in the same financial position you were in prior to the loss occurring, so that you are no better or worse off than you were immediately before the loss”.  That statement is probably giving you a ‘yeah right’ moment. 

It’s only a personal view, but indemnity policies are beastly contracts.  As I said earlier I wish they were banned. 

Most people don’t understand the massive difference in payout, let alone the extras they miss out on such as architects, engineers and building consent fees. 

Sure, there are a few financially secure people who may find them useful – for example, those planning on bowling a house, so limited cover is never going to matter.  But for the rest of the population, they have dire outcomes.  You also need to get your lawyer to check if you should be paying for demolition yourself.  Most policies will add the demolition costs to the value of your payout, or the insurer will deal with it separately.  It's worth checking as it’s another $12,000. 

Get advice

You now need to consider your options with your lawyer and bank. 

Examples include selling your land (there may be demand from red zone buyers looking for new sections) and adding this to your payout.  With this money you could invest in term deposits or bonds to create income.  Alternatively, you could look at a small flat in a city which is cheaper than Christchurch, to get rental income.  Or speak to a housing company to weigh up the costs of a small simple replacement house, with a mortgage. 

As you own the land and have a deposit, your bank may let you borrow.  The rent could pay this off, but then you’d have a number of years without income.  Take advice on the options and think about your age and whether you can stomach the idea of taking on debt, or managing a project.   

Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer.  These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product.  Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.