Earthquake Insurance: EQC v. Insurance Council

Losses following the Canterbury earthquakes have been shifted from the private sector to the Earthquake Commission following a High Court ruling. The Commission is liable for multiples of $100,000 for each earthquake during the currency of an insurance contract. Over 110,000 properties have multiple claims.

New Zealand is very unusual in having statutory insurance cover for earthquake damage. Private insurance cover is the norm in most of the world. In places such as California and Japan, the cost of private cover is so high that many go uninsured.

The Earthquake Commission Act 1993 in New Zealand creates a government-underwritten insurance scheme for all private dwellings having fire insurance cover. The statutory scheme does not apply to commercial buildings. For residential dwellings, a levy charged on top of the fire insurance premium is paid to the Commission as insurance against “natural disasters”, which includes earthquakes. This statutory levy amounts to fifty cents for every one thousand dollars cover.

This earthquake cover provides the first layer of insurance: $100,000 for loss of land and buildings; $20,000 for contents. Fire insurance policies typically provide private cover for the excess.

Since 2010, Canterbury has suffered an unprecedented series of earthquakes with over a dozen quakes registering magnitude five on the Richter scale, triggering Earthquake Commission (EQC) liability.

EQC together with the major fire insurers sought a High Court ruling on the application of statutory earthquake insurance cover to losses in Canterbury. Since fire insurers cover the “excess”, it was necessary to first establish the extent of EQC liability.

EQC argued that its full liability on each residential dwelling was $100,000 for each year of an annual fire insurance contract; the fire insurer was responsible for any further losses be it from one claim or multiple claims in that year.

The High Court did not agree. Wording of the 1993 Act together with provisions enabling EQC to charge a further premium for the period between an earthquake and the conclusion of an annual fire insurance policy meant that EQC was liable to multiples of up to $100,000 for buildings (and $20,000 for contents) for every claim during the one year currency of a fire insurance policy.

As a result, private insurers will have no liability for damage to many Canterbury homes suffering damage from successive quakes.

Earthquake Commission v. Insurance Council – High Court (2.09.11)

09.11.004

Nathans Finance: R. v. Moses, Doolan & Young

Two directors of Nathans Finance have been jailed for their part in the company’s failure; two others received home detention. Just over one million dollars in reparations is held by the High Court to be divided among investors. While imposing jail sentences, the judge emphasised that the directors had neither acted dishonestly nor intentionally misled investors but were being punished for inept performance, failing to do their job properly.

Penalties followed convictions for breaches of the Securities Act 1978 after Nathans issued a misleading prospectus and investment statement when seeking funds from the public. Investors were owed some $174 million when Nathans went into receivership in 2007. On current estimates, losses of about $168 million are expected.

Statements in Nathans’ prospectus about related party lending and the extent of bad debts were misleading. Investors could not make an informed decision before investing. Nathans received about $66 million by way of new investment or reinvestment after issuing the misleading prospectus.

Justice Heath said penalties imposed must reflect three consequences of the directors’ behaviour:

· their inept management discourages investors in future from lending to finance companies

· this will reduce venture capital investment, and

· might reduce overseas investment in New Zealand ventures because of doubts about the integrity and competence of New Zealand management.

He also said offers by a director to pay reparations should be taken into account as evidence of remorse for wrongful behaviour.

Kenneth Roger Moses was sentenced to two years and two months imprisonment and ordered to pay $425,000 reparations. He had expressed concerns about the high level of intercompany lending but while on the board and as chairman did little to correct the position. “Actions speak louder than words”, Justice Heath said.

Mervyn Ian Doolan was sentenced to two years and four months imprisonment and ordered to pay $150,000 reparation. He is a qualified chartered accountant and along with Moses was described as having a full understanding of Nathans finances.

Donald Menzies Young was sentenced to nine months home detention, 300 hours community service and ordered to pay reparation of $310,000. He joined Nathans’ board two years before receivership. He was described as the least culpable of the company’s directors, being reliant on information from his co-directors. The court indicated that Young was not given as complete a picture of the company’s position by his fellow directors as could be expected.

At an earlier High Court hearing, John Lawrence Hotchin, another Nathans director, was sentenced to eleven months home detention, 200 hours community work and ordered to pay $200,000 reparation. He was sentenced early, after pleading guilty to the charges and agreeing to give evidence at the trial of his fellow directors.

Reparations ordered against the four directors totals $1.085 million. Justice Heath directed that the money be paid into the High Court and distributed pro rata by the receivers among those investors who had invested in the company. A further court hearing will determine who is eligible for payment.

R. v. Moses, Doolan & Young – High Court (2.09.11) & R. v. Hotchin – High Court (4.03.11)

09.11.003