NZ reforms natural hazards insurance

by Crossley Gates and Frank Rose, Partners, Keegan Alexander

New Zealand’s Natural Hazards Insurance Bill repeals the Earthquake Commission Act 1993 (EQC Act) and replaces it with the Natural Hazards Insurance Act 2022.

The intended start date of the new Act is the later of:

1 December 2023 and
12 months after it receives royal assent (becomes law).

Although the natural hazards covered by the Bill do not fundamentally change, the name change is to better reflect that the Bill covers more than earthquakes.

The Bill calls the cover it provides ‘natural hazard cover’ and expressly refers to the cover as insurance for ‘natural hazard damage’.

The nature of the cover remains similar to the EQC Act in many respects, but with several changes. The Bill greatly expands the terms on which the cover is provided and the entitlements it provides.

For the first time it directly addresses building and land ownership issues that may arise under the cover and at claim time, such as shared, common or joint property. It appears the EQC has learnt many lessons from the Canterbury earthquake claims.

The Bill has an extensive section on claims and claims handling. It expressly states in 10 sections the grounds on which the EQC can decline a claim. It makes it clear those grounds cannot be prejudiced by any action taken by the EQC in assessing, deciding or settling the claim. In other words, the common law on estoppel and election by the insurer does not apply.

Consistent with the current trend towards consumer friendliness, and perhaps in response to criticism the EQC received from some about its handling of the Canterbury earthquake claims, the Bill requires the EQC to create, and adhere to, a Code of Insured Persons’ Rights and to have a complaint management procedure. It must also belong to an approved dispute resolution scheme.

Natural perils defined

The Bill covers the same natural perils covered under the EQC Act, but each one is now expressly defined in the interpretation section.

The cover insures against ‘natural hazard damage’, defined to mean physical loss or damage to a residential building or residential land:

that occurs as a direct result of a natural hazard or measures taken to mitigate its consequences, or
that in the EQC’s opinion is imminent as a direct result of a natural hazard.

Like the EQC Act, the natural hazard cover starts for a dwelling when the insurance cover over that dwelling for the peril of fire starts. It continues as long as the insurance cover continues.

The cover for a residential building pays the building’s replacement cost. That is defined in a similar way to replacement cover in a material damage policy.

The cover for residential land is on an indemnity basis.

Building, land cover separated

S28 is, effectively, the insuring clause of the Bill. It provides insurance for ‘dwellings in an eligible building and certain other related property’. It divides the cover into building cover and land cover.

For building cover, a ‘dwelling’ is defined as a building or part of a building that is:

self-contained with facilities for day-to-day living on an indefinite basis and one or more of the following applies:
- one or more persons use it to live in as a home, or
- one or more persons use it as a holiday home, or
- it is capable of being used and is intended by the owner to be used for one of those two uses.

A ‘dwelling’ also includes:

a building used to provide long-term care for the elderly, and
a vehicle, trailer, boat or aircraft that is immovable.

An ‘eligible building’ is defined as:

a building that contains one or more dwellings and the whole building is insured under a single fire insurance contract, or
a part of a building that contains one or more dwellings and is insured under a single fire insurance contract, or
an immovable vehicle.

A ‘residential building’ is defined as:

the whole of the eligible building, other than the property excluded in Schedule 2, and
any other appurtenant structures and service infrastructure for the dwellings in the eligible building.

The number of dwellings in a residential building is:

the number that was disclosed to the fire insurer when the fire insurance for the dwellings was entered into, or
if no number was disclosed, one.

The maximum amount of cover available for residential buildings under the Bill is $300,000 + GST for each dwelling in the residential building.

Insurance brokers arranging fire insurance over buildings that contain dwellings need to be careful to disclose, on a client’s behalf, the correct number of dwellings, as this determines the maximum amount of cover provided for the residential building. If no disclosure is made, the EQC will be legally entitled to assume it is just one.

Residential land defined

For land cover, the ‘residential land’ of a residential building is defined as:

any part of the land that is one or more of the following:
- land on which the residential building sits,
- land within 8m horizontally of the residential building,
- land that is part of, or supports, land that is part of the main access way and is within 60m horizontally of the residential building, and
any retaining walls for the residential building, and
any bridges or culverts for the residential building.

The maximum cover available for residential land is the lesser of:

the actual cost suffered as calculated by calculating the reinstatement cost or diminution in value, or a combination of both, and
the maximum land cover amount based on the assessed market value using stated criteria.

Claims formula

The Bill says claims must be made in the way stated in regulations that are not yet available.

The Bill sets out a formula that determines when natural disaster damage that occurs in succession is one claim or more than one claim. If defines the ‘damage period’ as the period starting when the damage first occurs and ending:

48 hours later for earthquake, flood, hydrothermal activity, landslide, storm or a tsunami, and
seven days later for volcanic activity or a natural hazard fire.

The time limits for making a claim are:

Standard claim date: three months after the date when the earliest damage occurred.
Extended claim date: two years after the date when the earliest damage occurred.
After the extended claim date: Beyond two years if certain discoverability issues apply.

The EQC may decline a claim made after the standard claim date and within the extended claim date if the delay beyond the standard claim date materially prejudices the EQC’s ability to assess the claim.

The Bill sets out several ways the EQC can settle a claim. It can only decline claims under one of 10 sections of the Bill providing different grounds.

Levy evasion offence

Levy payment arrangements are similar to those in the EQC Act.

The fire insurer must collect the levy from the insured and pay it to the EQC within two months of the end of the month in which the fire insurance started.

As a disincentive to levy evasion, the Bill creates a new offence of intentionally failing to meet the levy payment arrangement. If convicted, an individual may be sentenced to two months’ imprisonment or a fine of up to $NZ25,000, or both, and a company may be sentenced to a fine of up to $NZ50,000.

The Bill has been referred to a select committee to receive submissions.