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