Fire Service and brokers go to court

A festering, long-running dispute between insurance brokers and the Fire Service is finally being brought to a head in the High Court at Auckland.

New Zealand's 8000 firefighters and 400 stations are almost entirely funded by a Fire Service levy, which is added on to fire insurance policies for buildings and vehicles.

But the vital emergency service's revenue has been consistently eroded over the years by brokers using loopholes to minimise the levies paid by their commercial clients.

Although that has bled the Fire Service of millions of dollars, it was the industry lobby group Insurance Brokers' Association of New Zealand (IBANZ) that brought yesterday's civil action.

"This is a situation where there have been disagreements . . . for more than a decade," said IBANZ's counsel Ralph Simpson, of law firm Bell Gully.

"We thought it was time that the matter was brought to a head and judicial clarity was obtained."

Simpson said insurers were caught up in a "quagmire of disputes", with some facing penalty interest payments as high as 42 per cent if the levy was incorrectly paid.

"It's a lose-lose situation," he said. "We really need to tidy this up so that everyone knows what they're doing."

The disputed practice involves insurance brokers bundling together groups of unrelated commercial properties and taking out a single collective fire insurance policy.

By gambling on the extreme unlikelihood that more than one building will burn down in any given year, the corporate collective can hugely reduce its indemnity cover, which is tied to the Fire Service levy.

Another strategy is to take out cover at an artificially low indemnity value, and then get a secondary policy to cover the excess.

The "guinea pig" that IBANZ chose to represent its case is a collective of eight unrelated port companies around the country, formed in 2008, which have agreed to be bound by the court's decision.

The ports took out collective fire insurance cover from lead insurer Vero for $250 million, and were able to divide the reduced Fire Service levy between the eight of them.

But the Fire Service Commission's counsel, Craig Stevens, said that strategy misinterpreted the wording of the Fire Service Act.

The ports should pay the levy based on the real indemnity value of their property, he said, not the value of the pooled cover they had bought.

"It's not eight times $250m - it depends upon the indemnity values."

Justice Paul Heath made it clear that unlike tax avoidance issues, his decision would be determined purely by what the relevant statute said and how it applied to the situation.

If Parliament did not like the interpretation, then Parliament could change the law, he said.

If IBANZ wins its suit and the legality of the loophole is affirmed, the Fire Service's forecasted funding deficits could grow gloomier.

The total scale of the losses is unknown, but a 2009-10 audit found 38 per cent of commercial fire insurance policies checked had some degree of non-compliance with levies.

"It will also cast more doubt on the viability and fairness of the funding model itself, which the Fire Service has lobbied the government to overhaul."

Critics also include insurers and IBANZ, who have previously said it would be more equitable to fund the Fire Service out of the tax take, or through local body rates and car registrations.

"There's no link between the levies you pay and the service you get," Simpson told the court.

"If you run a fireworks factory and you can't get insurance, you still get the Fire Service turn up."

Simpson said talk of legislative change had been going on since the 1990s.