How EQC has avoided being stung by rising land values; Cameron Preston has the back story to the legal action IAG and Tower have launched against EQC

By Cameron Preston*

In 1956 EQC introduced ‘landslip damage’ as a form of statutory insurance cover provided to all insured New Zealanders.

A massive landslip in Abbotsford Dunedin in 1979 lead Parliament to broaden this cover to ‘land damage’ in 1984.

Basically the cover provides for EQC to pay for land repairs on insured land up to its statutory ‘land cap’. It’s similar to EQC’s more commonly known ‘building cap’, however instead of being fixed at $100k + GST, the ‘land cap’ is the market value of a minimum allowable land plot under your local district plan.

Land prices have gone crazy in the decades since 1984 and by 2008 EQC had alerted its Minister that there was a significant problem developing with its land cover.

In fact by 2008 the Earthquake Commission should have been rightly named the “Land Commission”, from 1993 until 2008 it had paid out a total of $124mln in land damage claims, as opposed to just $73mln for earthquakes claims.

Complicating things further the ‘land cap’ was based on market value, therefore there was perceived inequality in the amount EQC would pay to fix land, dependent on where you lived.

Predictably the politicians put EQC’s concerns to the bottom of the priority pile, but this came back to haunt them when the first Canterbury Earthquake struck in late 2010.

EQC’s first response to land damage was to follow its legislation. This resulted in expensive but lawful $560k payments to landowners in affluent areas with land damage.

But after the February 22nd aftershock the problem became bigger and more expensive, so the statutory EQC response went out the window.

EQC statutory land caps turned out to be higher than the rateable land values in most areas of Eastern Christchurch and Kaiapoi, so the Crown took matters into its own hands and immediately Red Zoned them instead.

This had the effect of simultaneously: cauterising the land damage costs for EQC; allowing the Crown to acquire the land titles for possible future use; and letting most property owners move with their lives quickly.

This was not the first time the Crown had worked around EQC’s legislation, and while Red Zoning  was, legally questionable, it was a quick, fiscally prudent move by the Crown, and private insurers (and their reinsurers) piggy backed on the move.

In the ensuing years EQC has used an army of highly paid geotech engineers, university professors and lawyers to whittle down the remaining 28,000 non-Red Zoned land plots to just over 10,000 plots that now ‘qualify’ as damaged.

This drawn-out qualification process has become so ridiculous that EQC experts have ended up calculating that some red zone landowners actually do not have any land damage after all, and were only entitled to tiny $1,000 payments.

Then, once the pool of qualifying landowners was sufficiently small enough to push around even further, EQC went to the High Court in late 2014 to argue that instead of its statutory response of paying to repair the damaged land or paying the land cap, it wanted to invent a new cheaper settlement method, named ‘diminution of value’ (DoV) or put more simply - loss of land value - instead of paying actual land repair costs.

However this week the land issue bubbled into full public view, if you excuse the pun.

EQC had miscalculated that private insurers had been settling their building claims with their claimants on the basis of building and land repair costs, with the expectation that EQC would reimburse the insurer directly for the full land repair components.

But when EQC began processing the land claims in June last year insurers received two surprises: 1) EQC had whittled down their qualifying properties down to next to none; and 2) they were using the invented DoV to settle the few that did qualify.

Private Insurers decided that what is good for the gander is not good for the goose, with the first public cracks appeared in November 2016 when Tower Insurance announced that it was in solvency woes with the Reserve Bank, not only due to a dispute with its reinsurer, but also due to a dispute with EQC for the reimbursement of $50mln.

Then this week Tower and IAG announced they were separately taking EQC to the High Court to gain ‘clarity’ on these two land issues.

So while this conflict will undoubtedly cause delays in the EQC Act review, aimed at solving this very issue, it is a dangerous fight for EQC to take on, given their less than impressive efforts in trying to interpret its own legislation to date.

The expenditure from the Crown in the Red Zone was $1.5bln alone for only 7,000 properties, so it is not hard to imagine that this dispute could blow up in EQC’s face and cost many hundreds of millions.

Whether the private insurers or EQC will win this latest round is unknown. But what is certain is that any pretence of the insurance industry working together or working with claimants in ‘good faith’ is a fair weather ideal.

I predict that an old fashioned game of brinkmanship is underway over land claims right now, with the stakes so high, that it is unlikely to reach any public declaration.

However if it does, it will have ramifications for anyone with land that has, or could, suffer land damage by earthquake or flooding.

*Cameron Preston is a Christchurch accountant with an unsettled claim for ILV land damage.