Time for transformational change
Written by Denise Evans, Principal – Dispute Resolution
Yet again, New Zealand faces demand to repair houses affected by natural disasters and to provide a significant number of better quality and more affordable housing. The building industry is in the middle of a transformation process which invites all the players in the industry to collaborate in solving these issues. The insurance industry is a significant component of the building industry.
The current Insurance Contract Law Review is an opportunity for everyone in the housing cycle to consider the issues and collaborate on solving a major challenge for New Zealand’s housing issues. This includes town planners, financers, insurers, builders, plumbers, property developers, lawyers and all the rest of us.
We live in a country which moves and shakes, both because of our amazing talented people and also because we are an island exposed to the effects of tides and weather as well as being on the edge of active tectonic plates. Since the European arrival in New Zealand, we have built houses and seen houses as a symbol of our wealth. Maybe it’s time to rethink that and have a discussion about the relationship we are in with our houses. This discussion must include the insurance companies who many of us rely on to fix our houses when something happens to them.
In 1942, the Wairarapa suffered a significant earthquake which lead to the Government of the day taking a decision to use funds which had been accumulated to deal with the prospect of war damage to enable the repair of buildings damaged by earthquake. This event followed on from the Napier earthquake in 1931 after which the Government passed an Act allowing for loans to be granted to businesses and others to rebuild Napier. The establishment of the Earthquake and War Damage Commission in 1945 was a recognition that the Crown not only had an interest in ensuring there was cover for New Zealanders who had private home and income insurance when there was a loss suffered because of an earthquake, but also of the fact that New Zealand is vulnerable and faces real risks which means large calls will be made on the Government purse following natural disasters.
We also face the reality that there are some communities that are at significant risk because of the effects of climate change. We face the prospect that some houses will be uninsurable and therefore the owner is left with the stark reality that they will not have any insurance to fund the repair or rebuild of their house in the event of a disastrous event. The plight of homeowners in Granity has been the subject of recent media attention but this is an issue for all of New Zealand. Most of our large cities are based around ports. A change in sea level could have a massive impact on Auckland, with much of Auckland at or sometimes below sea level. Christchurch remains vulnerable to flooding as does Dunedin. Wellingtonians wait, having accepted the inevitability that Wellington will suffer a significant earthquake sometime in the near or distant future and that there will be an impact from rising sea level due to climate change.
Insurance is all about the spreading of risk. That is why the insurers spread their risk by reinsuring the risk they have accepted.
Much of the litigation arising from the Christchurch earthquake is about interpretation of insurance “policy response”. But there are bigger issues which relate to the way New Zealand has managed the development of housing over the last 200 years. For example, a response to the need to build a lot of housing in a short time frame lead to the development of a system called “cross lease”. Cross-leasing was originally created to avoid minimum rate area subdivision restrictions in the Municipal Corporations Act 1954 and under District Schemes. The cross lease creates two levels of rights. The first is that the person owns an undivided share of the land and the second is a contract between the parties to the cross lease where they enter into an agreement to grant leases to the other owners to allow the owners to have the use of the land in common with each other. There is no standard lease so the arrangements between the “owners” is dependent on each lease. This is where insurance becomes very tricky. Some leases require the owners to insure with one insurer, others specify that the owners hold a specific type of policy and in some instances the cross lease is silent on insurance requirements. The Christchurch earthquake has shown that many owners have been in breach of their obligations under the lease when it comes to insurance. It has also highlighted the need for insurers to upgrade their systems for ensuring that products sold to home owners are appropriate to the type of home ownership.
While most modern multi owner dwellings are now arranged under the Unit Titles Act, there are still a significant number of cross leases and in many parts of Auckland it is almost impossible to buy a property without some cross-lease issues even if they are limited to shared driveways.
It is therefore time for New Zealand to look at all of the factors that are involved in establishing an insurance system which meets the needs of New Zealand. Tim Grafton, Chair of the Insurance Council, was reported recently as saying that insurance will not be available for some situations because the risk to the insurance company is too high and that cover for certain situations, such as flood repairs in flood prone areas, will require higher premiums. Generally, insurance companies will be looking at the environmental factors applying to the property when deciding whether a property is insurable and whether those factors will influence the cost of the premium to be paid. A person looking to buy a house with the assistance of a loan from a financial institution will also have to factor in that the financer will require the homeowner to have insurance with the financers interest noted on any policy.
Insurance must be seen as part of the organic circle we live in when it comes to providing homes for our people. The proposed review will just rearrange the chairs on the Titanic unless we are brave enough to say what do we need to do to solve the problem of sharing the risk that there will be another natural disaster in New Zealand and we will have to face the issues of how we assist our citizens to recover from such an event.
We need to review what can be done to deal with the decisions that have already been made about where people can build. This would involve a critical analysis of the decisions taken by previous regimes about such things as allowing people to build houses close to the sea, rivers and lakes. We also need to consider what legislative changes might be needed to deal with issues such as cross leases. We should look at the responsibility that we have through our Government to ensure that the people who pay for insurance have an easy way to ensure that they can rely on the policy they have and that there is a simple and effective dispute resolution process. The added responsibility that we have is to ensure people who are not insured do not in the case of cross leased property hold up the others from getting a solution, and regardless of their lease type do not end up putting their own family into the poverty spiral.
We need to make difficult decisions NOW as it is clear we are seeing the effects of climate change evidenced by recent cyclone’s impacting southern parts of New Zealand.
For the future, we need to think about where we build, what legal structures are in place to assist people make decisions first about their insurance requirements, and how we design our homes to cope with earthquakes and floods. The reality is that as a wider society, we need to think about what materials we use, how we can make them recyclable and repairable, and also what financial arrangements are in place to assist people buy, maintain and insure their homes. Only when we address those broader issues can we ensure that insurance really provides homeowners with assurance.
About the author
Denise Evans is Principal, Dispute Resolution at FairWay. As part of this role, Denise provides Dispute Resolution leadership within FairWay and champions the use of Dispute Resolution services in New Zealand and internationally.
Denise has over 30 years’ experience as a lawyer, mediator and arbitrator, and she has vast experience in resolving building, construction and insurance matters. If you would like to get in touch with Denise, please contact her by email at firstname.lastname@example.org