The devil's in the 'technical' details in EQC revamp plan
The consultation report on the natural disaster compensation scheme has revealed some wide-ranging changes, writes Rob Stock.
Technical issues flagged in the consultation report on the future of the Earthquake Commission (EQC) natural disaster scheme, could have big implications for homeowners.
While coverage focused on the proposed removal of land and contents cover from the EQC scheme (see box), no attention was paid to a list of "technical issues" which must be addressed when writing the proposed changes into law.
But these could result in changes that would allow the EQC to make payouts to banks which hold mortgages over homes, instead of homeowners.
They could also result in homeowners paying multiple excesses of $2000 plus GST in some circumstances, and even give EQC powers to decline claims for non-disclosure.
There are plenty of people suspicious about proposals to change the EQC scheme, but that wariness has not yet been directed towards the possible implications of technical issues flagged in brief towards the end of the lengthy consultation document.
One of those twelve technical issues says there would be a review of when the EQC could pay claims to people with "insurable interests" instead of the insured person.
The main group of people with insurable interests, Treasury says, are the banks.
They have mortgages on homes, and sometimes they are owed much more than half the equity in the property.
This will be contentious, as banks asking EQC for the money after a natural disaster, changes our concept of who the EQC is there to protect.
Already many ordinary policies allow that to happen. This is from Westpac's home insurance policy - "Where the claim is settled by a cash payment and a financial interest has been noted on the Policy, we may make payment direct to the interested party."
Another on the technical issues list is that the EQC scheme needs "more closely aligning with industry practice EQC's ability to deny or cancel insurance cover, deny claims, and recover payments improperly paid out."
Treasury says that doesn't mean EQC will start deciding there are some places that people just shouldn't build because of the risk, and decline them cover if they do.
It considered giving EQC that power, but decided that was the job of local government.
It didn't want people who are looking to build having to apply to EQC to see if they could get natural disaster cover.
Instead, it refers to private insurers rights under law to decline claims and avoid policies.
Insurers are legally able to decline a claim and "avoid" a policy if the policyholder has lied to it, or even failed accidentally to disclose something material like a criminal conviction the insurer's underwriter would have wanted to know.
Claims can also be denied in cases where people have breached the terms of their policy, such as renting out their home without telling the insurer.
EQC can't do these things yet, but aligning it with private insurers would allow it to.
As private insurers will be handling claims, if they were to find material non-disclosure when a homeowner claimed, and avoid a person's policy, it appears EQC cover could be avoided too, if this proposal goes ahead.
The third of the technical issues that needs to be resolved in whether the $2000 plus GST excess that homeowners would have to pay on every claim- a sum designed to discourage small claims- would have to be paid multiple times if there are multiple events. There were multiple tremors in Christchurch, and multiple excesses could soon add up. That must be addressed, says Treasury.
THE MAIN PROPOSALS
These are the proposals which would see the EQC scheme move from being a house, land and contents scheme, to just covering the house, with only as much land as is needed to rebuild on, plus the main accessway. Private insurers will only pick up some of the risks the EQC wants to shed.
CONTENTS COVER: Treasury argues the EQC is there to make sure people get a roof back over their heads rather than replacing their stuff. EQC would not longer provide $20,000 of contents cover, which means it would pass over to private insurers.
LAND COVER: Damage to land will not be covered, except to the extent necessary to repair or rebuild the home.
The main accessway to a property is also covered, though that cover is for the land, not the surfacing like concrete or tarseal. Land will only be covered to the extent that is necessary to rebuild homes. This will include rental properties, holiday homes and retirement villages.
There is one other exception; when the land is so badly damaged the home cannot be rebuilt, or it would be uneconomic to do so. It could mean people having a home rebuilt in the middle of a severly damaged section, or left facing a higher future risk of flooding if their land has sunk. Tim Grafton from the Insurance Council said: "Private insurers worldwide don't insure land. It is just fraught with difficulty."
Land cover only came into the EQC scheme after the Abbortsford landslip in 1979, in which homes built on land that should never have been used for building slipped after heavy rains.
LIFTING THE EQC COVER TO $200,000: Insurers wanted to keep the old cap, but Treasury was worried that this could result in unaffordable insurance.
The reason is that insurers are getting smarter about charging more to people with homes in higher-risk areas. That trend would gather pace. EQC cover would remain the same around the country. In effect, people in more stable areas would be cross-subsidising those in riskier parts. Treasury decided the higher cap would be "likely to better maintain the high levels of homeowner take-up of natural disaster insurance".
This would lift the EQC levey homeowners pay from around $150 to $200. If the $2000 excess was also passed into law, the EQC levy would be around $175.
WHERE THE COVER COMES FROM: The EQC's Natural Disaster Fund (NDF) is going to be empty soon.
Refilling it to prepare for the next big shake will take decades. Until then, reinsurance is being used to plug the gap. But other options exist. Levies paid by homeowners on their insurance go to pay for that reinsurance, but Treasury wants the NDF to be able to use other financial tools to get cover. One of these would be Catastrophe bonds, where investors lend their money to the fund. The fund then uses levy income to pay interest to the investors, but if a catastrophe happens, the fund gets to keep the money, and pay it out in claims.