Would EQC and the insurers do better, if a Canterbury quakes-sized natural disaster happened tomorrow?

Thursday, 4 March 2021

These images from Tonkin + Taylor engineers, geologists and land damage assessors highlight the catastrophic damage to residential homes and infrastructure following the Canterbury earthquakes.

People traumatised by the Canterbury earthquakes were further traumatised by the organisations meant to help them rebuild their homes and lives, Treasury officials told Prime Minister Jacinda Ardern.

The “horror” many families suffered in their dealings with EQC and insurers must not be repeated should another massive natural disaster strike, Treasury told Ardern in a September cabinet paper.

But it also flagged concerns over whether the “sum-insured” cash-settlements-for-everyone model of post-disaster claims management introduced after the Christchurch earthquakes would work well for homeowners after a mega disaster.

When Christchurch shook, homeowners had “total replacement” insurance policies, which paid whatever it took to rebuild, but now homes are usually covered by sum insured policies, where homeowners select the maximum amount their insurer would have to pay to rebuild their homes.

If a natural disaster on the scale of the Canterbury earthquakes happened again, would EQC, insurers, and the government make a better job of handling homeowners’ claims?

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Tony Guthrie was injured in the Kaikōura earthquake, and flown to Christchurch, but flew back to see family. His house was a write-off.

Sum-insured policies facilitate quick cash payouts of claims, and EQC and insurers see cash payments, rather than managed repairs, as the model for handling claims after a natural disaster.

But next month, EQC will begin a study of how cash settlements worked for homeowners hit by the November 2016 Kaikōura/Hurunui earthquake, with a view to understanding how it might work in another Canterbury-scale natural disaster.

Recipe for instant ‘slums’

The sum-insured policies look like a step forward to South Brighton homeowner Seamus O’Cromtha.

He has finally settled with his insurer over damage to his home from the 2011 earthquakes, but is still living in a “wrecked house”.

O’Cromtha says many Cantabrian homeowners would much rather have had cash payments than experience EQC’s “managed repair” programme, which resulted in botched repairs, and traumatic experiences for homeowners, an inquiry by Dame Silvia Cartwright found.

“If I had had a cash payment for my wrecked house, it would have allowed me to buy in another area. It would have saved me 10 years of trauma,” says O’Cromtha.

But mass cash payouts in Canterbury might have had a darker side, he says.

Even more rapid house price inflation in nearby safe areas might have happened, had people scrambled to use cheques as down payments on new homes.

It may also have left a high number of homes going unfixed, becoming earthquake-prone renters for lower-income families.

“It would end up with homes being rented out to lower-income people, and if another earthquake struck, there could be loss of life,” O’Cromtha said.

Cash payments risked the instant overnight creation of a legacy of slum housing, says housing risk analyst Melissa Heath, who worked for IAG during the aftermath of the Canterbury earthquakes.

Tim Grafton, chief executive of the Insurance Council of New Zealand believes the majority of cash payments made to owners of damaged Kaikōura homes were spent on repairs.

In her inquiry report, released in April last year, Cartwright acknowledged the risk, saying: “A cash settlement approach potentially leads to a continuing legacy of unrepaired homes.”

Her report spoke of “grave concerns” about the quality of the housing stock in Canterbury, and also in Kaikōura/Hurunui.

“These concerns are partially because of indications that some cash settlements in Kaikōura/Hurunui may not, as yet, have been spent on the assessed damage repair,” Treasury told cabinet.

Cartwright recorded one Cantabrian telling her that cash payments to homeowners from EQC for land damage hadn’t brought Canterbury’s housing stock up to scratch, but: “There are some new BMWs, Range Rovers and Mercedes Benzes in town though.”

Tim Grafton, chief executive of the Insurance Council, a political lobby group for insurers, thinks those concerns are overblown.

“In the vast majority of cases, people would not have pocketed the money and lived in places without a roof,” he says.

Homeowners, banks and insurers had an interest in homes being repaired to ensure they were liveable, and continued to be insurable, Grafton says.

Neither IAG (State, AMI and NZI), or Suncorp (Vero and AA Insurance) had any data on how cash payments were used.

Insurance and financial services ombudsman Karen Stevens says the process of claims-handling after the Kaikōura earthquake showed some lessons from the Canterbury earthquakes had been learned.

Faster, easier settlements

O’Cromtha thinks sum-insured policies, and cash payments, reduced legal conflicts between homeowners, EQC and insurers, and the figures from Kaikōura appear to bear that out.

EQC chief executive Sid Miller says: “In Kaikōura, 95 per cent of claims were resolved within 16 months, and less than 5 per cent of claims have been re-opened.”

“This is a major improvement from Canterbury, although Canterbury was on a much larger scale, approximately 460,000 claims vesus approximately 38,000 claims, and it’s difficult to compare.”

Kaikōura-based claims assessor Julie Gapper, who worked the Canterbury quakes, says: “I think if Christchurch had been sum-insured, it would have been done and dusted by now.”

Insurance Ombudsman Karen Stevens says the flood of complaints to her office after the Christchurch quakes was not repeated after the Kaikōura/Hurunui event.

“Out of Christchurch we had so many complaints about scope of works, and that the money fell short,” Stevens says.

Stevens attributes that to the absence of a botched managed repairs programme, as well as homeowners not having to deal with EQC.

After the Christchurch quakes, assessors from both EQC and private insurers descended on people’s homes, creating an inefficient and maddening process, made worse, Cartwright was told, by sometimes bullying, arrogant and incompetent EQC assessors.

But after the Kaikōura/Hurunui earthquake, EQC struck a deal with private insurers, which resulted in the claims being assessed only by the insurers, reducing cost, and complexity, Stevens says.

Paula Halliday (fourth from left) says the courts allow themselves to be used by insurers to “delay” settling cases.

This was a genuine example of having learnt from the failures in Canterbury, she says.

Miller says the deal, which continues to be refined, meant the insurance industry could now manage around 100,000 joint EQC/insurer claims a year.

Justice still tilted to the powerful

Sum-insured policies do not mean an end to disputes between insurers, EQC and homeowners over the scope of damage to their homes.

“An independent project management and repair scoping company in Kaikōura, working for homeowners to assess the scope of repair work independently of EQC or the private insurer, has warned that in its experience, ‘the scopes… are consistently light, missing huge areas and/or grossly underestimating costs’,” Cartwright reported.

“A major local building firm has made similar comment, reporting that ‘scopes are short by $20,000 up to $200,000’,” she said. “If these views prove reliable then there are serious issues to be addressed to ensure the security and quality of the settlements from the Kaikōura/Hurunui event.”

For O’Cromtha, and Christchurch apartment-owner Paula Halliday, the ability of homeowners to get swift, affordable justice in disputes with insurers is the most glaring lesson that has not been learned.

Dame Silvia Cartwright’s report called on government to put in place mechanisms to ensure homeowners in future natural disasters do not have to suffer as many Cantabrian homeowners did.

Halliday owns an apartment in a block where owners are still battling Vero, but says the insurer has been using delay tactics, approved by the High Court.

“Each time we go to court, Vero always asks for an extension, and each time the court gives it to them,” Halliday says.

O’Cromtha believes if New Zealand had learned from the aftermath of the Canterbury quakes, it would have created a permanent, impartial insurance court with an inquisitorial model of justice, as the adversarial model is not fair to financially weak homeowners fighting powerful, wealthy insurers with the best lawyers in town.

The Canterbury Earthquakes Insurance Tribunal, created in 2019, came too late, Treasury told cabinet.

Treasury asked for the creation of a permanent “more people-centred claims system”, and funding for homeowners who needed lawyers.

Managed repairs gap

EQC launched its botched managed repairs programme in Canterbury because it was instructed to by ministers.

The Napier floods revealed some people who felt initially they could manage repairs to their own homes, later found it was beyond them.

But its manifest failings have not convinced Cartwright, Treasury, EQC, insurers, or the government, that leaving homeowners to go it alone after a massive natural disaster is a realistic option.

“There is every prospect that following a future major event or series of events, it will again be necessary to coordinate repair of land and residential buildings and a similar managed repair process will be adopted,” Cartwright said.

Resources like building materials, engineers, and builders, would be in high demand, she said.

A managed repair programme could provide adequate housing for a traumatised population, and ensure the inevitable costs and rationing of resources could be managed fairly and efficiently, she said.

Not all homeowners can manage repairs themselves, says Stevens.

In one recent ombudsman case, an insurer wanted to make a cash settlement to a woman who felt entirely incapable of managing the repair herself.

“In our case manager’s opinion she was vulnerable, and she could be shoe-horned into a full and final settlement,” Stevens says.

The insurer consented to manage the repair, Stevens says.

In a Canterbury-sized event, one unnamed Canterbury community advocacy group told Cartwright: “Wealth and powerful organisations are on one side, individuals on the other. The scale of vulnerability after a disaster everyone is vulnerable.”

After the Napier floods in November, the need for managed repairs for some homeowners, even those who thought they could go it alone, emerged.

Earlier this month, EQC chair Mary-Jane Daly, told MPs: “People who wanted a cash settlement … then come back and asked for help with repair because access to builders has been challenging.”

But while homeowners could manage a repair, or rebuild, themselves in ordinary times, Cartwright and Treasury have questioned homeowners’ ability to do it in after massive natural disaster.

Inexperienced owners of damaged homes could be preyed on by cowboys, says Stevens.

“There were a hell of a lot of cowboy builders that set up, and have gone bust after doing a very poor job,” she says.

Treasury told the government decisions were needed on which government agencies, if any, should lead a managed repair programme in the event of another Canterbury-scale event. The National Emergency Management Agency will make a recommendation by the end of the year.

Spectre of underinsurance

Concerns remain that some homeowners are under-insured.

When buying a sum-insured policy, homeowners must decide how much to insure their homes for, often only with the help of online sum-insured calculators, which contain legal disclaimers so homeowners can't sue, if the calculations prove inaccurate.

The sum insured nominated by homeowners is the maximum amount their insurers have to pay in a cash settlement, even if it was not enough to rebuild their homes.

In 2016, Treasury estimated that up to 85 per cent of homes could be under-insured by an average of 28 per cent, and the spectre of underinsurance has been raised in the aftermath of the Kaikōura earthquake.

“There was a little bit of anecdotal stuff that said some people had selected a sum insured equivalent to the market value of their homes in small, remote towns,” Grafton says.

Grafton says insurers do challenge homeowners, if they think people have selected sums that are manifestly too low.

Underinsurance is not an issue, if damage to a home is modest, but if a home is destroyed, and there’s not enough money to rebuild, people have to opt to build smaller homes, says Heath, or take on debt.

Neither IAG and Suncorp have data on the proportion of homeowners that would be under-insured, if their homes had to be rebuilt.

EQC does not have that data either, though the Kaikōura study could shed some light on the issue.

Gapper says underinsurance was an issue in Kaikōura, but homeowners weren’t talking about it, because they knew they had no-one to blame but themselves.

“They know why they were underinsured. They were trying to save money,” she says.

“There’s a huge gap in knowledge of most consumers about what their house should be insured for because they don't take into account demolition fees, expert reports, or retaining walls,” says Stevens.

Heath says other things homeowners often failed to take into account were the cost of repairing or replacing homes that were on sloping, hard-to-access, or remote sites.

Sometimes they had no idea of the extra costs of removing asbestos from their damaged homes.

While Vero releases figures on how many owners of small and medium business have confidence in their cover in the event of a natural disaster, it says it does not have data on confidence among homeowners.