IAG and Tower are accusing the Earthquake Commission (EQC) of short-changing 2010/11 Canterbury quake claimants, whose properties have suffered land damage.
They have filed separate cases in the High Court, which if successful, could cost EQC tens if not hundreds of millions of dollars.
However, at the heart of the dispute is the fact that claimants who have had certain types of land damage settled directly by EQC, have essentially been paid out less than those who have had this damage dealt to by their private insurers on behalf of EQC.
The only reason these double standards are being brought to light in court, is because they are leaving private insurers out of pocket.
The issue is: EQC covers land damage. But in order to get things in Canterbury moving, private insurers have been dealing to land damage on behalf of EQC, as they’ve cash settled, repaired or rebuilt their clients’ properties.
Yet EQC and private insurers have been using different methods to calculate the cost of land damage, with EQC's approach being much cheaper.
IAG and Tower therefore want the courts to make a call on the matter, in the hope of getting reimbursed the larger amount they believe they're entitled to.
Interest.co.nz believes the amount of money in dispute is in the order of tens, and possibly hundreds of millions of dollars, as there are hundreds of claims in dispute between IAG and Tower.
What’s more, if successful, the case will give other insurers in the same position as IAG and Tower a leg to stand on, when they ask EQC to reimburse them more for the land damage they’ve paid for. A Vero spokesperson says: "Vero is in discussion with EQC regarding this issue. We have not joined any legal action at this time."
It’s particularly crucial for Tower to receive this money, as it doesn’t have a robust parent company to fall back on, so plans to ring-fence its embattled quake-related business from the rest of its business.
It flagged the importance of recouping these funds in its annual results, when it said EQC still owed it $57.6 million. For legal reasons, Tower can't confirm how much of this figure is attributable to this land damage issue.
How have EQC and private insurers treated land damage claims differently?
The type of land damage we are talking about here is land that is more vulnerable to liquefaction in future earthquakes.
EQC has settled 6,540 such ‘increased liquefaction vulnerability’, or ILV claims, and has 1,750 claims to settle.
EQC settles its ILV land damage claims by cash.
It assesses its customers’ losses by calculating the extent to which the ILV decreases the market value of the land. It refers to this deprecation-type method as ‘Diminution of Value’, or DoV.
In some cases it also considers the cost of repairing the ILV land under and immediately around the house.
Private insurers on the other hand, haven’t used DoV. Rather they have been calculating losses by assessing the actual cost of repairing the land so it can be built on.
IAG’s head of corporate affairs, Craig Dowling, says the idea behind this is to ensure “long term habitability”.
EQC’s DoV settlement doesn’t mean the land will necessarily be repaired, as it doesn’t oblige claimants to use the cash they’re given to mitigate the effects of any future liquefaction. Rather they can use the money for whatever they like.
EQC’s interim chief executive, Bryan Dunne, has told interest.co.nz the Courts have okayed the DoV approach.
“EQC proactively [in 2014] sought confirmation from the Courts through a declaratory judgement that confirmed ILV was damage covered by the EQC Act and confirmed the Diminution of Value (DoV) was an appropriate settlement method in certain circumstances,” he says.
Nonetheless, the disagreement between the public and private insurers remains.
IAG’s Dowling, says: “A legal ruling will confirm EQC’s liabilities and private insurer’s recoverable costs in this situation, and help all parties avoid such confusion in future.”
What do the court cases mean for claimants?
IAG and Tower have told interest.co.nz they won’t come knocking at their customers’ doors, asking them to pay back parts of their settlements.
“Customers can also be confident that this court action in no way prejudices or impacts their Tower settlement. We are simply seeking to have EQC fairly reimburse Tower for costs incurred responding to ILV in settlements already reached,” Tower CEO Richard Harding says.
Dowling goes further to say: “All customers that IAG has settled by cash or reinstatement for enhanced foundations in an ILV area are part of these proceedings and we have written to them to inform them of this.
“We believe this action is in their interests as they may ultimately receive higher payouts for land around their homes (land 8m beyond a home’s footprint that EQC is also responsible for) if this legal action is successful.”
As for those claimants who have been paid directly by EQC, so have possibly received less than those who have been paid via their private insurers, EQC’s Dunne maintains nothing will change.
“While EQC is reviewing its response to the litigation, I can reassure our customers in Canterbury who have already received an EQC settlement for ILV land damage that your settlement will stand.”
As for those Cantabs who haven’t yet had their claims settled, Dunne says EQC will keep evaluating their losses “in accordance with our current ILV settlement policy”.
Tower says Harding has “reiterated that customer settlements would not be affected by the court action”.
However interest.co.nz believes the cases may cause delays for claimants still waiting for their ILV land damage to be dealt to by IAG and Tower.
Here is a document IAG has sent out to its clients, and here is a statement from Tower.
9 Comments
The article implies that IAG and Tower are surprised to learn that EQC has been applying a higher threshold to determine liability for land damage - 'it turns out EQC and insurers have been using different methods'.
This is incorrect. The 'gap' has been fully understood for years. This day was always going to come.
Tower and IAG would have estimated the likelihood of recovering this money from EQC and factored this into their event reserves. It is possible the temptation to be optimistic about recovery prospects would have been present at a time when shareholders were regularly being delivered bad news on multiple fronts, from Christchurch. Hopefully resisted.
Thanks for the feedback Middleman. I didn't intend to imply IAG and Tower are surprised they have been taking a different approach to EQC. Rather I used that wording to try to make the situation easier for readers to understand. I have just changed it now. I trust it more clearly reflects the scenario.
Hopefully, the court will also look at the engineering approach taken for the calculation of DoV for liquefaction. This was a "world first" approach featuring an "index-based LSN" (liquefaction severity number) that ignored aspects such as crust thinning and elevated ground water, thereby dramatically reducing what the EQC argued it had to pay out. The substantial savings are confirmed in an EQC briefing: "Revised central estimates (provided by Tonkin & Taylor) indicate an overall reduction in land liability of $710m". With the new methodology, for example, EQC identified only three or so properties in the Brighton peninsula - the worst-hit eastern suburbs in Christchurch - that qualified for ILV.
Insurers have no reason to challenge the DoV approach used by EQC for increased flooding vulnerability as it suited both parties. But in exactly the same way, it is has left homeowners with modest payments without addressing the underlying risk. Both EQC and private insurers have saved significant amounts by not raising either land or, in the majority of cases, floor levels. Unfortunately, in the context of climate change, the risks from flooding are likely to manifest themselves much sooner the risks from liquefaction.
Not sure how you arrive at the conclusion DOV for increased flooding vulnerability suits insurers, given they would have recovered far more had EQC actually been required to fund elevation of finished floor levels.
From recollection the court did agree that DOV was an appropriate approach to determine EQC's liability under the Act for ILV, where physical remediation was said to be not practically possible. Possibly one of the reasons EQC dropped investigation into more expensive insitu remediation techniques such as horizontal ground beams.
Bryan Dunne's statement also seems to suggest the court endorsed LSN as the model to be used for ILV when I don't think that is right. As I recall it, the court specifically refrained from giving guidance on whether or not this Tonkin and Taylor developed LSN model correctly determined DOV.
There is a significant mismatch between the number of sites eligible for DOV against those where insurers have been forced to pay for expensive land treatment which , as I understand it, is the basis for the current court action. Can cost upwards of $30K a pop.
EQC argues most of the sites where they declined to pay for ILV were poor quality before and remain so now i.e. they don't meet the 'increased propensity' test under the act. But to successfully maintain that position they will need to demonstrate the validity of the LSN model.
They'll probably succeed with LSN, in concept, especially given the rigorous peer testing they have done, but might struggle on some of the high threshold triggers built into the model.
If the court agrees with that a lot more people will will get additional cheques, Tower shareholders will sweat a little less and Bill English's budget surplus will be slightly less rosy.
The reserving position the Govt claims settling entity, Southern Response, has taken on this issue, would be enlightening.
EQC has no responsibility for floor levels - that depends on the consenting process from local authority (although EQC has avoided restoring any IFV land to its pre-earthquake height as provided for in the EQC Act, by inventing the DoV approach). The High Court declaratory judgement stated that this was justifiable "in appropriate circumstances". Christchurch City Council has neutralised the floor level problem problem by allowing insurers existing use rights for many flood-prone properties instead of using the Resource Management Act (which would require much higher floor levels). At the same time, it has introduced Coastal Erosion Zones and Coastal Inundation Zones, hoping to blame erosion and flooding on climate change, rather than earthquake damage (subsidence). The city's Replacement District Plan is currently in the final stages, but Minister Brownlee has instructed Council to leave High Flood Hazard Management Areas until the end of the process. Christchurch rates will be fixed from 1 February until 2020, but in April people will find that they are in HFHMAs subject to erosion (which will not be covered by insurance). It's all very Machiavellian, but the battle lines seem to be central and local government, EQC and insurers on one side, and the general public on the other.
IAG required me to sign over the land claim on claims settled from around 2014, but not on the ones settled earlier before 2012. As an example on one of my claims the enhanced foundations cost was about $55k and this was for a small 90m2 house.
Say 24,000 overcap claims,ignore the red zone claims where this wasn't paid out, down to 16,000 say. Then say half required enhanced foundations (hill and many tc1&2 won't), and if the insurers got half of those handed over (assuming they missed out on the early claims). Then optimistically, they've got 4,000 claims at $75k, ie $300m but that would include other insurers as well.
But in reality if they win then there are thousands of other claimants who can make the same claim, particularly, Southern Response claimants who cash settled and weren't paid out for enhanced foundations, those that settled early with IAG and weren't paid out for enhanced foundations and potentially those that didn't go over cap but have the same land issues.
Suggest half is on the high side and $75K av at the top end given partial foundation replacements were common but your overall number may not be too far away. Quantifying the potentially under paid ILV DOV claims where the claim was undercap, is harder as only EQC will have that data.
More issues to come. EQCs 'at the site vs effects away from site' policy on increased flooding vulnerability might yet be challenged by the insurers, as might their 'physical repair not feasible so DOV applies' determinations.
Then there is the thorny issue of event allocation - not just how much gets chucked into each event and the fresh caps this could trigger but also where costs turned out higher than EQC had initially estimated and agreed with insurers. They may be looking to extract more out of EQC for some of those. EQC will likely dispute many given different repair standards available to them under the EQC vs insurer policy entitlements - although possibly more difficult for them now they have declared they always applied' new for old' so effectively no difference in repair methodology. People in CHCH will have their own views on that !
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