EQC agreement with EQC Action Group has major implications
EQC's refusal to admit it was wrong - and insist Thursday's joint declaration had always been its position - expands its liability hugely by meaning all prior claimants can ask for a review, writes Massey University insurance expert Dr Michael Naylor.
OPINION: The Earthquake Commission and the EQC action Group on Thursday released a statement setting out their joint agreement on a series of basic principles about how to interpret the EQC Act regarding EQC's obligations around the stand of repairs.
As would be expected within a formal legal agreement, EQC argues that the points agreed to have always been its policy, and that the statement just clarifies existing practice. The EQC therefore does not admit that it has changed its position on anything, or that the statement will have major financial implications.
This EQC stance, will of course, come as a surprise to EQC Action Group members and Canterbury claimants, who have since 2013 been under the impression that EQC had differing interpretations of its repair obligations, and have thus sought a judicial statement that the agreed points were true.
They had tried to get EQC to agree to these exact principles in September last year, but EQC refused.
* Homeowners come out firing following 'landmark' EQC court settlement
* Ruling has 'implications for thousands'
* Court asked to rule on EQC's repair standards
* EQC budgets $5m for court cases in 2015/16
* 'First step' taken on EQC action
* EQC faces court challenge over repair policies
There are a number of areas to the agreement. The EQC Act requires repairs to be carried out to an 'when new' standard. Exactly what these words mean is, of course, the issue.
EQC has tended to interpret the words to mean the condition of the house prior to the quake, and to allow it to do partial repairs which involve parts "like" existing parts, even if those existing parts are worn. EQC has tended to interpret "new" as meaning the building code standard of when the house was "new" built and not "new" as per the current building code.
EQC has tended to interpret its rebuild responsibility as matching the minimal MBIE guidelines and not the full 2016 building code. Part of this is imposing partial repairs on an area of the house, so rooms do not have a uniform appearance.
Contrary to these interpretations it is clear that EQC had a responsibility to repair to 2016 building code even if that resulted in a substantial improvement of the house. The building code does not allow otherwise. It also has to repair foundations to a safe level, even if changes to ground stability mean that extensive design is now needed, when it wasn't needed in the original build. Thus it is inadequate to just test T3 land. All house foundations need reconsideration.
Thus, contrary to EQC's statement, the agreement will likely have a major impact on a number of areas. It is now generally accepted that the EQC repair process has not been up to expected standard for approximately 10 to 20,000 houses.
It is clear that "substantially as new" includes foundations engineered to ensure a house can sustain future quakes. Yet, very few EQC repairs have included extensive consideration of foundation or land damage, and the need for engineering consultation. Very few EQC cash settlements have included consideration of contingency sums for extensive foundation repair. This work can easily pass $50,000 or $100,000.
Given that the settlement means that EQC has affirmed that it "has always" upheld the principles, the agreement clearly does not just apply to EQC Action Group members but applies to all past and future repairs. Thus the owners of all EQC properties which have been repaired are free to get their work reconsidered from both a financial reimbursement angle and from an adequacy of engineering angle. The administrative costs of the reconsideration process, and the cost of repairs to the repairs, will both be considerable. This applies to both original claimants and new owners of houses since sold.
Those claimants who have taken cash settlements are free to reconsider their offers and approach EQC to readjust their offer, to match the newly found EQC repair principles.
Given that consideration of repairs to foundations quickly pushes most properties over-cap, insurance companies may find themselves facing a surge of new claims, possibly equal in number to what they have dealt with so far.
Southern Response in particular, will face major financial issues, especially considering the questions over its own repair processes. Several insurers are now facing financial difficulties from the size of existing claims, so a near doubling of claims could see their financial stability questioned.
The biggest issue and the one most likely to have long lasting implications, is the general feeling of mistrust prevailing in Canterbury over anything EQC says. Thus Cantabrians are likely to approach EQC's statement with wariness and to demand a change in EQC assessment processes and attitudes as well as a change in monetary settlement. Mutual good faith does not exist and this will unduly poison and extend the reconsideration process, substantially adding to cost.
Given that EQC reserve funds are gone, the cost of these reconsiderations will fall on the tax payer unless EQC levies are hiked. Treasury will have to rapidly rework its estimates. They must be hoping that most Canterbury quake claimants do not realise the implications of EQC's statement.
Normally with these agreements the corporation is very careful to limit the concession to the claimants who take the case. In this case EQC Action members. However because EQC chosen to refuse to admit it was wrong, it has decided to phrase the agreement as merely reaffirming what it is already doing.
This means that the concession is unlimited, as all prior claimants can ask for a review. This expands its liability hugely. I'm sure once Bill English realises the implications of this, he will be very unhappy.
The only way EQC can restrict the fall out is to play hard-ball with any claimants who ask for a review. However given the clear words used, lawyers will soon be all over any attempts by EQC not to honour the meaning of the words.
Massey is researching the good and bad points of the EQC and insurers response to quake claims. We would love readers to give us their experiences on www.quakesurvey.co.nz.
Dr Michael Naylor is a senior lecturer in finance and insurance at Massey University.