Insurance company fail re Christchurch bodes ill for ACC privatisation

Last week David Hayward blogged about his own experience dealing with his insurance company over the fate of his Christchurch home:

Tower Insurance maintain that the house is not a write-off.  They maintain that they are only obliged to repair the house — not to honour our insurance policy for total replacement.  They say that just because we won’t be allowed to live on the land, and that the house will be bulldozed, doesn’t mean that the house is an insurance write-off.  Sorry, they say, but what the government mandates with regard to land is nothing to do with them.

I had hoped my fellow blogger David’s problems were a one-off, and someone at Tower Insurance had made a mistake.  But that is clearly not the case.  Tonight’s Campbell Live reveals this is a widespread approach by the insurance industry – if a house can be repaired, but the Government has deemed the land to be unsuitable for housing, insurance companies will pay only the repair costs, rather than the replacement costs, even though the house will have to be demolished anyway.

Some Christchurch homeowners are even hoping for another big quake – to cause more damage to their homes and finally convince their insurers that the homes cannot be repaird.  

This is a disgraceful approach from the insurance industry – trawling the fine print, and without seeng the policies I would suggest with dubious interpretation,  to minimise their financial liability and maximise that of landowners.

And, hey, it is these same insurance corporates that the Government wants to run the ACC work account – no doubt crapping on injured workers in the same way as they are currently crapping on property owners in Christchurch.

18 Comments Posted

  1. Insider, You make an important point. Annectdotal evidence suggests the LINZ negotiators appointed under the PWA aim to get the market value “as though no public work had been proposed” except where only part of a property is being taken and the remaining land will increase in value due to irrigation or improved access, etc. But CERA definitely seems to require valuation at the date CERA makes its decision rather than prior to the eathquake.

    “Who would buy those places now?” AS the government is going to “land bank” the land for future residential development presumbaly any other property developer with deep pockets and an appreciation of the future value of riverside land in a medium density peak oil city would be in like Flynn.

  2. Note the words “current market value” Kevyn. It’s not GV or RV but market value. Who would buy those places now? Under the PWA you pretend the work was never planned but it is targeted at a few specific properties – we are talking about more general areas. Will they pretend the earthquake never happened? Sounds like the 2007 GV is a good option. I know mine has dropped this year.

    PS I loved this Freudian slip “to negatiate a fair value”

  3. BJ – “but if the government has RE-defined the land as unbuildable” Therein lies the crux of the matter. The government hasn’t legally redefined the land as unbuildable it has merely offered compensation for land within the red zone that is greater than available under the EQC Act. In practical terms land owners in the red zone can be paid the value of their current section whilst those in the green zone can be paid the value of a 400sqm section in a new subdivision. The only real advantage with these new options is that those who thought they had comprehensive cover are no longer going to be completely shafted by their insurance companies insisting that the cover is only for repairs.

    It is absolutely essential for home owners in David’s position that they contact the law society for advice as in today’s Star the president of the Canterbury-Westland branch makes the claim that if CERA resorts to compulsory evictions from the red zone in nine months then CERA will have to pay compensation under the Public Works Act. That means LINZ provides a negotiator to negatiate a fair value.

    However Subpart 5 of the Canterbury Earthquake Recovery Act 2011 specifies that compensation “means compensation for actual loss” (s61) but further says that “the Minister must determine compensation having regard to its current market value as determined by a valuation carried out by a registered valuer” (s64) which suggests that the Public Works Act will serve as legal precednet rather than actually being applicable. Subpart 5 only applies when s54 “Notice of intention to take land” has been invoked.

    Your comments about homeowners being the architects of their own misfortune is correct for land outside the red zone where their loss of property value is due solely to liquifaction or lateral spreading but the in the red zone it is largely due to deformation of the bedrock during the Feb 22 quake and that faultline was only vaguely suspected prior to Feb 22 so wouldn’t have been mentioned on the LIM reports.

  4. I thought one of the reasons for the government’s delay in making a decision was so that they could investigate and sort out all the complexities of the issues with the multiple insurance and reinsurance companies involved. Clearly they did not as this ploy of the insurance companies was not included in last Thursday’s announcements, but has taken a few days to come to light. Indeed I recall that, when asked about the government alternative options on the Thursday, Brownlee explained those with replacement cover would probably take the government offer of 2007 GV/RV for their land and use their insurance policy for their home whereas those with lesser cover would probably take the government offer of 2007 GV/RV for both their land and home rather than use their insurance policy.

  5. Kevyn

    Details aren’t that important as long as the end result is that the land under a house has been defined as unusable for housing by the government.

    If the land is usable with some sane amount of remediation and there is a potential that the community could be rebuilt that is one thing… but if the government has RE-defined the land as unbuildable then the insurance companies and government have to take a fair hit. If the community is broken as a result, the remaining households in it have to get some compensation for that.

    At the same time, the notion that an owner who built/bought on that land in good faith based on the previous government designation of the property as buildable is, by the magic of ignorance and lack of proper property inspection, to be held completely without responsibility for some share of the pain, is something I don’t accept. That pain has to largely fall on the insurers and the government but not all of it.

    This a place where the practice (which I regard as careless in the extreme) of having council take responsibility for everything to do with building houses and inspecting them, really takes a big ugly bite out of the body politic. Real Estate agents don’t like the detailed inspections because they show up every flaw. It knocks down the over-inflated valuations quite a bit, and cuts into their commissions. Tough nuts.

    Do it right and this shit does not happen so badly. Owners KNOW they are building/buying on what is potentially quicksand. Bankers KNOW they are lending for construction on what is potentially a disaster area. Insurers KNOW that they have to charge a higher risk premium for those properties… and that pricing structure pushes people to build and buy elsewhere.


  6. The situation is more complex than either frog or bj have described it. The Feb 22 quake distorted th bedrock under the city causing uplift under most of the Heathcote riverside suburbs and subsidence under most of the Avonside suburbs. Consequently the land subsidence alongside the Heathcote has been offset so that house floors in this part of the city are still above the RL but causing house floors in the areas alongside the Avon to be severl hundred mm below the flood level and therefore requiring the houses to be raised by that amount to comply with both the building code and the city plan and thus be reinsurable. The boundary of the red zone is this flood level which is why many home owners are mystified by why there neighbours equally munted land has been zoned differently. Add to this the fact that the LCPP has been broke since April making local and central government entirely responsible for the costs of fixing munted pipes, roads and pumping stations and you can understand why the government has decided to cut the losses for itself as well as the insurers and give home owners nine-months to decide to accept GV or stay in their suburb with no services and homes that are repaired but uninsurable.
    You can read the section 2 of the City Plan online

  7. If I have insurance for “full value” I am paying a higher premium for greater protection. This isn’t what most people would do in any case but there are now 3 parties to the situation. If the house was built on land that is now condemned as unstable and unsuitable that is a condition that the goddammed insurance company should have known about ahead of the event by their own inspection reports.

    What? They didn’t DO any inspection? In the real world this is called “due diligence” and it isn’t left out. Still, the situation is what it is now and the fine print is there to say that this is an “act of god” even if it is actually an act of government.

    I would suggest that after the government bulldozes the house, the house will in fact be a “total loss”.

    The government has some responsibility to do rather more than simply telling the company to cough up its last cent. It is the government after all, that regarded the land as safe to build on in spite of liquefaction risks (which I understand were known ahead of the event?). The insurance companies took this as gospel for reasons of financial expediency. Owners took this as gospel for similar reasons.

    There are no completely innocent parties (except possibly renters) here IMHO, and there need to be some haircuts taken all around.

    That’s reality. Sending the Insurance Companies to the wall because of this is not any smarter than sending the owners to the wall. It is a big bill. It is a collective response that is required and it is government that has to work it out, as nobody else can. The unwillingness of this government to do better at both working it out and explaining how it is working it out, has ideological roots.

    Tough nuts. Nobody else can, so it is their job now.


  8. @ frog

    you said under a post titled “Insurance company fails…”

    “This is a disgraceful approach from the insurance industry – trawling the fine print…” and accuse them of crapping on Chch home owners.

    You admit you haven’t seen the contracts so have no idea if it is indeed ‘fine print’ (something I believe not allowed under disclosure rules), but just lash out at insurance companies anyway and claim it is an issue of trust.

    You could have said ‘the Govt’s offer has exposed a loophole for some, what are they going to do about it?’ but you chose to use it as a platform for a meritless attack about imaginary fine print (and bizarrely brought in the ACC). If you are not challenging the integrity of contracts, what exactly are you challenging?

    Note that total replacement is of the previous building. If building standards have changed since it was built, affected friends have told me that that is not covered – eg a 1920s cottage will be rebuilt to its previous standard but not to the modern requirements to double glaze or insulate, piling standards, bracing etc. If true, then many people may have hefty bills ahead.

  9. The Insurance Companies are opting out leaving the Govt offer the only one to take – Govt should reimburse itself from said companies (at least in part).
    I’m not allowed to let my Bills slide through specious and convoluted logic. Why are these Companies permitted – and lets not mince words here – a pragmatically unfair fraud?

  10. frog says “and the government has a responsibility to address it one way or another.”

    So what do you call offering to pay out full 2007 valuations?

    (regardless of whether the house is a write off or not)

  11. Oh great, now the Greens are against the laws of contract, and want to pick and choose the bits they want enforced after the event. Great way to instill confidence guys.

    Tower has done nothing wrong. The government is changing the rules so they should wear the cost.

    [frog: I didn’t suggest that – a commenter did. But the issue is of serious concern, and the government has a responsibility to address it one way or another.]

  12. @dbuckley 11:00 PM

    I wouldn’t want to see the government do it under the CERA emergency powers. It should be through legislation, including a select committee hearing submissions, to make sure they get it right.

  13. The problem is, this isn’t a loophole, it was all conventional wisdom until very recently.

    The government (under its wide reaching emergency powers) could pass legislation that makes it clear that where land is deemed unusuable then then any and all buildings on said lands are to be considered written off.

    Then there would be a judicial review to waste some time.

    But now that the govenment has underwritten the odd insurance company, I’m not sure how keen they would be to increase their (actually – “our”) own exposure.

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