Savings
on fire levies through use of composite insurance contracts have been lost
after the Supreme Court ruled a composite policy is a bundle of multiple
individual contracts. Full fire service
levies are payable on each individual contract within a composite policy, a
boon to the fire service which receives 97 per cent of its funding from the
levy.
The fire service levy is a tax funding the Fire
Service. It is calculated on the
indemnity value of properties insured against damage by fire and is collected
by insurance companies when annual insurance premiums are paid. The Fire Service operates as a public good,
turning out for all fires even where a property owner is getting a “free ride”
by being uninsured (no levy is paid) or under-insured (a reduced levy was
paid).
Concerned that penalties might be imposed under
the Fires Services Act for not properly calculating levies, the Insurance
Brokers Association used a test case to interprete the rules: a 2008 composite
insurance policy between Vero Insurance and eight New Zealand ports.
Evidence was given that the composite policy
covered assets of the eight ports to an aggregate amount of $250 million for
fire damage. A fire levy was paid on
this figure as the indemnity value. A
figure of $250 million grossly understates the correct indemnity value of all
assets owned separately by the eight ports.
Another section of the composite policy provides cover in excess of $250
million. No fire levy was calculated on
this excess. The commercial
justification for a composite policy is that those insured get a premium
reduction given the low risk that all eight ports simultaneously will suffer
damage by fire, earthquake or flood.
The Supreme Court ruled the composite policy was
not a single policy. Wording within the
composite policy meant it consisted of eight separate policies with each port
insured on the same terms. This ruling requires
payment of eight levies not one.
The Supreme Court also ruled that insurance
policies providing excess cover beyond a stated indemnity value also attract a
fire service levy to the extent the excess provides cover up to the true
indemnity value of the assets insured.
This, said the Court, ensures the levy payable better reflects the fire
cover provided and minimises free rider problems.
Fire
Service v. Insurance Brokers – Supreme Court (13.05.15)
15.044