A
failure by the Fire Service to break down what it considers a commercial
rip-off in both composite and “split-tier” insurance contracts came to nought
when the High Court ruled these policies are legitimate even where they have
the effect of reducing the fire levy payable.
Fire service union members are up in arms as well. They argue underpayment of fire levies reduces
funding for the service and reduces resources available for wages.
Split-tier policies
are used by large commercial operations to manage their risk at reduced cost. Insurance cover is split out into several
policies to separate out cover assessed for fire service funding. These policies are often combined with
composite policies. The commercial reality is that a business with operations
nationwide is not going to have all its plant and buildings damaged
simultaneously by fire, earthquake or flood. Composite cover for assets
nationwide is offered at an expressed indemnity value being only a fraction of
the nationwide asset replacement value.
The fire service levy is calculated on this lower indemnity value, not
the nationwide replacement value.
The Fire Service has
grizzled for years about split-tier and composite policies. The Insurance Brokers Association, concerned
that penalties might be imposed for a failure to comply with the Fire Service
Act 1975, bought matters to a head by going to court seeking a ruling that
these practices did comply with the Act.
As a test case, the
court was asked to consider insurance arrangements implemented since 2008 between
Vero and eight New Zealand ports acting together in what is called the NZ Ports
Collective.
One single policy
covered assets of the eight ports to an aggregate amount of $250 million for
fire damage alone. The fire service levy
was calculated and paid on this amount.
Separate policies provided cover totalling an extra $500 million: for
fire cover above the indemnity cover, for material damage other than fire and
for business interruption cover. No fire
service levy was paid on this extra $500 million cover.
Use of one global composite
policy benefitted NZ Ports Collective because they got the cover each wanted at
a reduced premium: the premium was apportioned between ports on the value of
their respective port assets. Each port
did bear the risk that a large prior claim in any one year by one port could
deplete the sum payable under the policy for later claims by another port. Insurance Brokers said splitting the cover
into tiers did comply with the Act and no further levy was payable. The Fire Service said it was in fact eight
separate policies with eight different ports and further levies were payable.
In the High Court
Justice Heath ruled that split-tier policies did comply with the Act because a
fire levy was payable only on the declared indemnity value. And as a composite policy the Vero cover also
complied with the Act. While the
insurance policy covered different assets owned by different ports it was
nevertheless a single policy.
Insurance
Brokers Association v. NZ Fire Service – High Court (17.12.12)
13.002