Flip through CoverNote Magazine online

Opinion

Business Extreme Weather Financial Advice Financial Law Insurance Natural Disaster

The Natural Hazards Insurance Bill repeals the Earthquake Commission Act 1993 (EQC Act) and replaces it with the Natural Hazards Insurance Act 2022.

The intended commencement date of the new Act is the later of:

• 1 December 2023, and

• 12 months after it receives the Royal assent (becomes law).

Although the natural hazards covered by the Bill do not fundamentally change, the name change is to better reflect the fact that the Bill covers more than earthquakes.

The Bill calls the cover it provides ‘natural hazard cover’. The Bill expressly refers to the cover as insurance. The cover is for ‘natural hazard damage’ as described in the Bill.

The nature of the cover remains similar to the EQC Act in many respects, but with a number of changes we will highlight below. The Bill greatly expands the terms on which the cover is provided, as well as the entitlements it provides. For the first time, it directly addresses a number of building and land ownership issues that may arise under the cover and at claim time, such as shared, common, or joint property. It appears the Commission has learnt many lessons from the Canterbury earthquake claims.

The Bill has an extensive section on claims and claims handling. It expressly states in 10 sections the grounds on which the Commission can decline a claim. It makes it clear that those grounds cannot be prejudiced by any action taken by the Commission in assessing, deciding, or settling the claim. In other words, the common law relating to estoppel and election by the insurer does not apply.

Consistent with the current trend towards consumer friendliness, and perhaps in response to the criticism the Commission received from some about its handling of the Canterbury earthquake claims, the Bill requires the Commission to create, and adhere to, a Code of Insured Persons’ Rights and to have a complaint management procedure. It must also belong to an approved dispute resolution scheme

Natural hazard cover

The Bill covers the same natural perils covered under the EQC Act, but each one is now expressly defined in the Interpretation section.

The natural hazard cover insures against ‘natural hazard damage’, defined to mean physical loss or damage to a residential building or residential land:

• that occurs as a direct result of a natural hazard or measures taken to mitigate its consequences, or

• that in the Commission’s opinion is imminent as a direct result of a natural hazard.

In the same way as under the EQC Act, the natural hazard cover commences for a dwelling when the insurance cover over that dwelling for the peril of fire commences. It continues so long as the insurance cover continues.

The cover for a residential building pays the replacement cost of the building. This is defined in a similar way to how replacement cover is defined in a Material Damage Policy.

The cover for residential land is on an indemnity basis as set out in the Bill.

Building cover

Section 28 is, what is effectively, the insuring clause of the Bill; it provides insurance for ‘dwellings in an eligible building and certain other related property’. It divides the cover into building cover and land cover

In relation to the building cover, a ‘dwelling’ is defined as a building or part of a building that is:

• self-contained with facilities for day to day living on an indefinite basis (including somewhere to cook, sleep, live, wash and use a toilet), and

• one or more of the following applies:

- One or more persons use it to live in as a home, or

- One or more persons use it as a holiday home, or

- It is capable of being used and is intended by the owner to be used for one of the two uses immediately above.

A ‘dwelling’ also includes:

• a building used to provide long-term care for the elderly, and

• a vehicle, trailer, boat or aircraft that is immovable.

An ‘eligible building’ is defined as:

• a building that contains one or more dwellings and the whole building is insured under a single fire insurance contract, or

• a part of a building that contains one or more dwellings and is insured under a single fire insurance contract, or

• an immovable vehicle.

A ‘residential building’ is defined as:

• the whole of the eligible building, other than the property excluded as stated in Schedule 2, and

• any other appurtenant structures and service infrastructure (as defined) for the dwellings in the eligible building.

The number of dwellings in a residential building is:

• the number that was disclosed to the fire insurer when the fire insurance for the dwellings was entered into, or

• if no number was disclosed, one.

The maximum amount of cover available for residential buildings under the Bill is $300,000 plus GST for each dwelling in the residential building.

While this is not new, insurance brokers arranging fire insurance over buildings that contain dwellings will need to be careful to disclose, on behalf of the client, the correct number of dwellings, as this determines the maximum amount of cover provided for the residential building. If no disclosure is made, the Commission will be legally entitled to assume it is just one.

Land cover

In relation to the land cover, the ‘residential land’ in relation to a residential building is defined as:

• any part of the land that is one or more of the following:

- land on which the residential building sits,

- land that is within 8 metres horizontally of the residential building,

- land that is part of, or supports, land that is part of the main access way and is within 60 metres horizontally of the residential building, and

• any retaining walls for the residential building, and

• any bridges or culverts for the residential building.

The maximum cover available for residential land is the lesser of:

• the actual cost suffered as calculated by way of calculating the reinstatement cost or diminution in value, or a combination of both, and

• the maximum land cover amount based on the assessed market value using the stated criteria.

Claims

The Bill says claims must be made in the way stated in regulations not available yet.

The Bill sets out a formula that determines when natural disaster damage that occurs in succession is one claim or more than one claim. If defines the ‘damage period’ as the period starting when the damage first occurs and ending:

• 48 hours later for earthquake, flood, hydrothermal activity, landslide, storm, or a tsunami, and

• 7 days later for volcanic activity or a natural hazard fire.

The time limits for making a claim are:

• Standard Claim Date: 3 months after the date when the earliest damage occurred.

• Extended Claim Date: 2 years after the date when the earliest damage occurred.

• After the Extended Claim Date: Beyond 2 years if certain discoverability issues apply.

A claim made after the Standard Claim Date and within the Extended Claim Date may be declined by the Commission if the delay beyond the Standard Claim Date materially prejudices the Commission’s ability to assess the claim.

The Bill sets out a number of ways the Commission can settle the claim.

As stated above, the Commission can only decline claims under one of 10 sections of the Bill providing different grounds.

Levy

The levy payment arrangements are similar to those in the EQC Act.

The fire insurer must collect the levy from the insured and pay it to the Commission within 2 months of the end of the month in which the fire insurance commenced.

As a disincentive to levy evasion, the Bill creates a new offence of intentionally failing to meet the levy payment arrangement. If convicted, an individual may be sentenced to 2 months’ imprisonment or a fine of up to $25,000, or both, and a company may be sentenced to a fine of up to $50,000.

The Bill has been referred to a Select Committee to receive submissions.

Please feel free to contact us if you require any further information.