By Janine Starks
From my mailbag: My 80-year-old mother is living in a home that must be rebuilt due to the earthquakes. The land has dropped and she is in the flood management area (floor levels or the land has to be raised). I've put in an application to try to get her red-zoned, but I don't hold my breath even though we have dug her out three times with liquefaction.
She wants to make the most of her remaining years, but she is faced with sitting at her window watching her neighbourhood being demolished. Half the neighbours won’t be coming back as the other side of the road is red-zoned. It will be years before her rebuild starts so we approached SIS insurance to see what they would offer to cash settle.
She would have to walk away from her section ($185,000) and the insurer will offer her a reduced payment to cash-out. They won’t pay full replacement value unless she rebuilds. Why are insurers penalising people in this way? I understand the policy says they only have to pay indemnity value if she wants cash, but they can’t meet their obligations to rebuild in a timely manner. Why aren’t insurers forced to pay cash if they can’t deliver? If she rebuilds, the insurer will have to pay for expensive foundations, so surely they should also add this in? If she takes a cash payout on the house, will she still be entitled to any land payment from EQC if they find they have to raise the elevation? The value of foundations and land repairs could be a lot of money given the flood risks. Its just got far too complicated for her - she wants out and I’m losing sleep over it.
This is a classic example of the awful decisions and stress faced by so many elderly earthquake victims. Everyone in the Flood Management Areas around the coast and rivers in Christchurch faces a long wait, but the elderly don’t have time on their side. Insurers claim they will prioritise the vulnerable, but they don’t have a finalised process in place with EQC to solve these thorny land-issues. Yes, both sides are trying to sort things out, but I suspect there are some major legal road-blocks (about who pays for what), in the flood zones. While they bicker the elderly rot.
If you are 80 years old, you don’t even buy green bananas, let alone have years to wait for the EQC and insurance primates to agree how to raise land and foundations. Rest assured, no matter how many politicians empathise and insurance company CEOs apologise, they are not going to solve such huge problems quickly. And while no one is suing them, there is no added impetus.
Therefore, if your mother’s psychological state is affected, you and your family will be the only ones capable of creating quick and guilt-free change for her.
It doesn’t necessarily mean she has to take a financial pasting to achieve her freedom. Viewing this as a family problem will significantly lower her stress levels. It’s a difficult conversation to have, but the house was your inheritance. I don’t see it as being money-hungry or uncaring to want to protect the value of an asset your parents worked all their lives for. It is a matter of respect that you protect this inter-generational wealth. To do so, your Mum needs to decide to let you. And you need to decide if you want to and whether you can afford to. You and your siblings need to make it easy for her and consider taking on the financial responsibility and hard yards yourselves. You have time to see this through and maximise the payout (if you want to).
As she is living in her home, I assume it could be made into a rental? The income could be used to pay for a rental in another nicer part of town. Alternatively, you might be able to borrow to buy a small property and use your Mum’s rental income to pay the mortgage. With the help of a lawyer and accountant these things could be put in place in the correct way.
Short-term rentals are at a premium for those under-going repairs to their own homes. A decent income could be generated, but you need to manage tenants, deal with maintenance issues, top up any mortgage or rent shortfall, pay for movers, give the house a lick of paint and do the tax returns. It’s a lot to take on, but there is also a price in walking away at indemnity value (I have seen cases where indemnity values are only half of the replacement value of a home).
Flood zone complexity
The questions you ask are complex ones, because land levels have sunk. The remediation might involve raising the land, the foundation or a combination of both. EQC and insurers need to decide who pays for what. If your mum doesn’t rebuild, she will still be eligible for any land payout. The complication is that we don’t yet know in the flood areas, whether the EQC payment will be strictly for repairs to the dirt, or used to raise foundations if that’s the only practical way to achieve the same thing. It’s too early to tell whether any foundation costs would be paid in cash, or only paid if the rebuild occurs.
Cash at replacement value and insurance delays
The insurer will only offer your Mum the indemnity value of her home if she wants to walk away with cash. Publicly, they are likely to maintain this stance. Behind the scenes different things will start happening and patient homeowners will sit and wait until insurers become more negotiable. It might take another couple of years, but I think they will start paying cash at replacement value to put a lid on their liabilities. They are already doing it with commercial contracts. Off the record, I’ve had insurers tell me it’s likely, so I’m not making any wild predictions here. Those who fail to take legal advice will never get these offers.
You also point out that insurers have failed to carry out the rebuilds in a timely manner. I agree. There’s an argument they’ve broken the terms of their contracts and the fallback should be cash at replacement value. It costs them no more. It seems wrong to promise a benefit that can’t be delivered for many years. No one purchasing the contract would have anticipated or agreed to such a drawback. Despite this, no one is taking them on. A class-action lawsuit might sort it out, but Cantabrians won’t part with any money. If these issues existed north of the Bombay Hills, the insurers would have been tested in court long ago.
Foundation payouts
Insurers are currently claiming they will only payout on ‘above ground costs’ if you want to move elsewhere. If the expensive foundation cost isn’t incurred, they are saying they won’t pay. Again, it should only be a matter of time before they budge, so it’s a waiting game. The backstop for insurers is their customer can force them to incur the foundation cost by rebuilding. If that customer offers them a small discount in return for cashing up the foundations, they would be doing their reinsurers a dis-service if they didn’t contemplate the cheapest option. Even without a discount they would be wise to settle in order to eliminate inflation risk from delays and cost over-run risk. On the flipside, the more desperate and psychologically damaged their clients become from the delays, the more likely they’ll accept payouts at indemnity value and give up on negotiating replacement or foundation values.
Land values
It seems logical that land values could depreciate by the cost of the technical foundations required on liquefied land (if the land is saleable at all). On one hand maybe EQC should be adding the foundation cost to land payouts, because without liquefaction, this added expense wouldn’t be needed. Maybe the insurers should be paying, because it’s part of the house and their contracts cover full rebuilds that comply with whatever regulations are in force. So far it appears that insurers are wearing the bill for foundations. But they’re a wily lot and nothing would stop them backtracking if they felt they had a case against EQC.
On a final note – please seek legal advice for your Mum. However you decide to proceed, you should all be independently advised.
Email questions to starkadvice@gmail.com, subject line: Financial Agony Aunt. Anonymity is guaranteed.
*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.
3 Comments
Why not transfer the asset to a family trust - and then have the trust secure a mortgage over the property in order to buy/build Mum a new home. Apply to one of the banks for a red-zone special interest rate (even though Mum isn't technically 'yet' red-zoned the lending folks likely have some descretionary powers in that regard). Speak to a number of banks first and get pre-approval, perhaps even before encurring the cost of setting up the trust.
At a 3% red-zone special interest rate it is possible that Mum's pension alone might be able to support a mortgage on a 1 bedroom dwelling, regardless of whether the damaged property is rented or not. With our aging population - 1 bedroom dwellings are in my opinion going to be highly sought after going forward (same goes for properties with 'granny flats').
An interest-only flexible-type mortgage product would be ideal - as large amounts can be paid off (deposited to the mortgage 'overdraft' account) as insurance matters are settled.
Trust documents can set out all the estate related matters as well.
Thanks Janine for some sensible suggestions for these people in a difficult situation not of their own making.I do wonder though, will EQC regard the dropping of the land (which leads to increased flood risk) as land damage, and if so, how will they address it. Remember, regardless of what the local building regs are (including Plan Change 48), EQC are only required to remedy the land to its pre-EQ condition, or pay a cash settlement that in theory should cover the cost of doing this. The problem is, though (especially for those of senior years) that they take years to do even this, and in the meantime the private insurer can do nothing, with some justification.
Living in the red zone, I know many people in similar awful situations and the biggest stumbling block to progress is EQC. In my opinion, their systems are poor, their disaster planning has been well and truly shown up, and their existence on the insurance landscape, while unique, is based on a flawed funding model. Very serious consideration needs to be given by the Government as to whether EQC should even exist going forward, what liabilities it should take on, and how these risks are funded. I have seen no sign that the Key regime has either the stomach or the brains to bite this bullet. They prefer to smile, pretend that progress is being made, and that (apart from a few whingers) all is well. As you well know, all is not well in Christchurch - far from it.
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