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Friday, 6 July 2012

Earthquake Royal Commission–Transcripts of CTV Building hearing

The Royal Commission has published a transcript of the CTV Building hearing held on 4 July 2012 (here).

The speakers were:

  • Marcus Elliott, Counsel Assisting the Commission
  • Mark Zarifeh, Counsel Assisting the Commission
  • David Coatsworth, Structural Engineer, CPG New Zealand Limited
  • Brian Kehoe, Structural Engineer, Wiss, Janney, Elstner Associates Inc.
  • Thursday, 5 July 2012

    Transferring insurance policies – more on the issues

    In the previous post the unnoticed hazards arising from the transfer of insurance entitlements was raised. The situation seems to be widening and getting worse. The following is from a CanCERN media release:
    IAG and VERO have confirmed that The Deed of Assignment of EQC and Insurance Claims will not now be interpreted to mean that ALL the rights of a previous homeowner and their insurance claim. This means the new owner will not get full entitlements as declared in policies when purchasing an earthquake damaged property even though this is stipulated in the present Deed of Assignment wording. VERO told us that they have not been interpreting this part of the policy correctly and actually do not have to pay out full costs of a house that is deemed to be a rebuild if a property is sold and that only indemnity value would apply.  One justification we have been given for this is to mitigate against people seeing this as a business opportunity.  There was also a suggestion that the SouthShore residents seriously looking at "house swapping" also may be something that VERO wants to avoid.

    Southern Response has confirmed they will not be changing their interpretation of the policy although they have the right to interpret it as VERO and IAG are. They will continue to extend full rights to the new homeowner. We (CanCERN) have yet to hear from others about their position.

    The following is from a generic letter to purchasers from IAG (I have underlined points that need emphasising):
    Possible Expenses Not being met by IAG
    IAG will not transfer any Owner’s policy benefit for alternative accommodation or loss of rent.  The purchaser will at their own expense be responsible for any consequential losses which may occur with any repair works.
    The repair works themselves often require separate Contract Works insurance. IAG may be able to arrange the necessary cover but is not required to do so. If the purchaser arranges their own contract works insurance IAG is not required to meet the costs of this new insurance policy. 

    As part of repairs other property not insured by the Owner’s policy may be affected as part of  the repair. The costs relating to this uninsured property, other than necessary removal to  effect insured repairs, are an expense the purchaser will be required to meet at their sole cost. Examples include: carpet not suitable for relaying after lifting, landscaping restoration costs beyond the limit which may apply under the claim.
    If you have purchased a damaged house, and had the insurance policy assigned to you, have a word to your lawyer. Asked whether they checked to see if the vendor’s insurance company agreed to the transfer.

    Added 1 August 2012: there is a further blog post on the involvement of lawyers here.

    Monday, 2 July 2012

    Buying a house needing repairs - problems with aspects of transferring the insurance policy

    The latest CanCERN newsletter (29 June 2012) includes an important item headed Assignment of the Deed of Rights. The CanCERN website is here and the newsletters are here. DISCLAIMER: Although I work part-time as a researcher for CanCERN the views expressed here, and everywhere else on this blog, are entirely my own and should not be construed as reflecting the view or thinking of CanCERN or its members.

    Problems arising from the Assignment document.

    Anyone who has purchased, or may be purchasing, a property still needing repairs and where the insurance policy is signed over should read the item in the CanCERN newsletter (reproduced below).

    The problems raised are possibly a cause for concern if you bought, or are thinking of buying, a house needing significant repairs and/or you will need to move out while repairs are carried out. There may as yet be undisclosed problems.

    Depending on the circumstances of the property purchased, you may encounter two expensive situations that you and your lawyer need to be aware of. If it turns to custard (a repair turns out to be a rebuild, or you need alternative accommodation while repairs are being carried out) you may be faced with unexpected costs. If your lawyer recommended or checked the terms of the agreement for sale and purchase before you signed it, you might end up having to take action against them for your loss as they had not acted with a suitable degree of diligence.

    To the extent that the issue is clear, it hinges on what part of an insurance policy can be transferred at the time a property is sold.

    When house insurance is assigned to a purchaser, some insurance companies believe that the nature of the policy changes. For those buying a damaged house there are two very important changes that happen. The first, and biggest, is that at the time of sale a full replacement policy can become an indemnity policy (i.e. you are entitled only to current market value - what is an earthquake damaged house worth?).

    The consequence of this is that if the damage turns out to be more extensive than originally thought, and repairs are uneconomic, the new owner WILL NOT be entitled to have a replacement house built. Instead the insurance company will pay out what they assess to be the indemnity value. The difference between a rebuild and indemnity value will be eye-wateringly large (and likely to result in receiving less than you paid for the property).

    The second change relates to alternative accommodation allowances. While the owner of the property at the time of the damage was permitted a certain amount to live elsewhere during repairs, that allowance probably won't be transferable when the house is sold. As this allowance is usually part of a house contents policy, and the contents policy isn't being transferred, it does seem logical.

    Nowhere mentioned is what happens should a property be further damaged or destroyed by other events (new earthquakes, storm, fire). Is the policy also considered to have indemnity value under those circumstances?

    In the CanCERN newsletter the insurer mentioned is IAG, however this should not be seen as just an IAG issue. Chances are all insurers have a similar view. If in doubt ring your insurance company or lawyer.

    From the CanCERN newsletter
    Last week we summarised our understanding of the interpretation change to the Assignment of the Deed Rights. We have since sent this summary to insurers, the Canterbury Law Society, a few specific lawyers we know and CERA for further clarification and we will update you as we hear anything. We have also sought responses to the following questions from some of these people:
      • Who informed the insurers that they had been interpreting this part of their policy incorrectly and that the below interpretation was correct?
      • Have all insurers been informed of this change to interpretation?
      • Has the document wording of the Assignment of the Deed of Rights been changed to reflect this change in interpretation?
      • Who is responsible for passing this interpretation information onto lawyers and real estate agencies and other people that may be involved in a sale and purchase agreement on a damaged but unsettled home?
      • Do the individual insurers have a legal obligation to communicate this change of interpretation of policy to all policy holders or directly to those who have indicated they intend to buy a house rather than build?
    IAG has provided the following clarification in terms of their position:
    As discussed, the insurance policy on the existing dwelling is between the current owners and the insurer. IAG’s policies entitle a customer to rebuild or repair their home. If they elect to sell their home then they are foregoing the reinstatement entitlements and an indemnity settlement is the maximum settlement. IAG is willing to look at honouring repairs of a property for the new purchaser but if the home becomes uneconomic to repair then the maximum IAG will pay is indemnity or market value to the purchaser. Therefore we advise people to check with their insurers before entering into agreements so that they are clear on what they can transfer or have transferred to them. They should understand if the property is repairable or a total loss before making any decisions. In addition often other policy entitlements such as alternative accommodation cannot be carried over by the purchaser.
    Southern Response has supplied this initial response:
    There was a case (commercial insurance, we believe) to the effect that an assignees rights were limited to indemnity value rather than rebuild value.  This, it would appear, is the issue that you are discussing.  Our policy is that we would never exercise that option, although it is open to insurers to seek to do so. 
    ADDED 13 July: There is another post on the topic here.