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Friday, 27 July 2012

Assigning insurance policies

The Press has an article on the problems with assignment of insurance policies written by Duncan Cotterill lawyers Richard Lang and Stephanie Grieve.

It is a useful article and provides some background along with observations on how to handle the situation. The article is here. It is also on the Duncan Cotterill website here.

There appear, to my layman's eye, to be four significant errors of fact or issues in the article.

The first is in the paragraph that reads:

The problem now is that IAG and Vero say they are not obliged to repair or replace properties for buyers who have taken an assignment of the seller's insurance claim. Instead, the insurers will pay the buyer the indemnity value.

So far all news from IAG and Vero has been to the effect that repairs will be honoured but, should a damaged property turn out to be too expensive to repair, the new owner will be paid out the indemnity value. The following is from a Press article on the 21st of July (here):

IAG and Vero's approach is that if a homeowner with full replacement insurance decided to sell their quake-damaged house, the buyer would take over the insurance claim for repairs, but if the property became uneconomic to repair settlement would be limited to the indemnity value.

On or about the 5th of July the Property Law Section of the New Zealand Law Society wrote to both IAG and Vero asking them to confirm, amongst other things, whether their practice to assign claims allowed for assignment of the right to repair but not a right to rebuild. Can't find any sign of a reply. Consequently the statement "are not obliged to repair" may be incorrect and unnecessarily disturbing.

The second error or issue involves the following:

Unless the insurance policy states that insurance claims cannot be assigned (as some do), the insured person has the legal right to assign that right to anyone they want.

This seems extraordinarily broad.

What if the purchaser was a known risk to insurance companies and had previously been denied insurance (e.g. insurance fraud)? Can the insured really over-rule the insurer's right to determine who holds or benefits from a policy?

In cases where there were assignments of entitlements covered by contents policies, it is quite unclear how these could be considered part of the agreement for sale and purchase of a house.

Reference to legislation or case law would be comforting here.

The third issue relates to the comment:

You also need to review what due diligence you did in relation to the earthquake damage and insurance claim when you purchased the property.

What is meant by “… due diligence you did…”. It seems to me that buyers and sellers of property engage lawyers to undertake the due diligence work for them. This being so, any lawyer who did not think or bother to clear the deed of assignment with the insurance company may be the party at fault.

It may be a complaint to the Law Society will be necessary, especially in the more clear-cut cases of agreements to assign entitlements for benefits covered by contents policies.

The fourth is the comment:

One of the most difficult aspects of this change in approach is that it is effectively retrospective. This means that people, who bought properties on the basis that the insurance claim they were taking over would give them the same rights to reinstatement as the original owner, will be caught out.

What does “effectively retrospective” mean? Surely it is either retrospective or it isn’t? My understanding is that one of the insurers concerned discovered what they had been doing was a “mistake” and changed their practice. How does the law cover mistakes?

The bottom line: in a post-earthquake world, where nothing is normal, a prudent course of action would have been to assume nothing.

If somewhere in the process lawyers had taken the simple step of confirming with insurance companies whether they agreed to the transfer of policies, and what conditions might apply, perhaps all of this would have been avoided.

The Duncan Cotterill article concludes:

In short, take care, get really good advice …

Surely that is what buyers thought they were getting by going to a lawyer?

There was a blog post on some of this on the 5th of July here.

Thursday, 26 July 2012

Alpine fault

The website Science Daily has an article on the alpine fault (here). This news has been reported in New Zealand, but the Science Daily approach is less emotive.

The introduction reads:

A new study published in the journal Science, co-authored by University of Nevada, Reno's Glenn Biasi and colleagues at GNS Science in New Zealand, finds that very large earthquakes have been occurring relatively regularly on the Alpine Fault along the southwest coastline of New Zealand for at least 8,000 years.

The team established that the Alpine Fault causes, on average, earthquakes of around a magnitude 8 every 330 years. They estimate the 50-year probability of a large Alpine fault earthquake to be about 27 percent.

The University of Nevada, Reno media release is here.

Wednesday, 25 July 2012

Council communication audit report

The audit report has been released, and is to be considered by Council next Tuesday.

The Council’s take on the report, accentuating the positive, is:

The review found that the Council was doing an excellent job keeping people informed about the projects and services it delivers; it especially praised the Share an Idea community engagement initiative around the Draft Central City Plan. It also pointed to recent resident surveys which show residents do not understand the Council’s decision-making process. The report makes a series of recommendations which it says outline "a need for Council (elected members and management) to adopt a culture of open communication and engagement with residents and stakeholders so that the Council can build understanding and mutual support for its objectives, plans and decisions".

The review is less enthusiastic in a number of areas. It can be downloaded from the bottom of the web page here.

Tuesday, 24 July 2012

Police explosions and gunfire coming up in Burwood

According to a Press online article, Burwood residents (Queensbury Street area) can anticipate hearing explosions and gunfire from Red Zone properties this week as police undertake training.

Remaining residents will be visited, signs put up, and pamphlets distributed.

The article is here.

London underwriters have business interruption cover issues over Christchurch

Australian website has an article (here) on the concerns being felt by London underwriters on the issues associated with business interruption insurance, and the extent to which tougher regulations on strengthening buildings will affect the cost of repairs and rebuilding.

A couple of points of interest are the observations:

“… reinsurers are closely watching Christchurch business interruption issues because of their much larger exposure to the Thai floods, where disruptions to manufacturing caused global disruption in a range of industries.”

“…insurers and reinsurers want to know the extent to which the Christchurch City Council can increase seismic strengthening requirements for buildings that have to be replaced or repaired.”

Any policy or legal gains made by businesses here, have the potential to set undesirable precedents for the global insurance industry. Similarly, if the council is able to require that rebuilds and repairs meet new and tougher codes, then insurance companies will face higher costs. Will we see insurance companies seeking dispensations from new codes, seeking court action to prevent or review the new codes, or forcing their clients to rebuild elsewhere?

In a similar vein, some months ago, there was a blog entry on how insurers and reinsurers were concerned at being hurt financially by zealous health and safety requirements in the inner city Red Zone (here). In that situation too it was a case of watching Christchurch to see what undesirable precedents might be set.

Monday, 23 July 2012

Ansvar credit downgrade

Ansvar (now ACS NZ Ltd.) credit rating was downgraded last week by insurance rating agency A.M.Best. The following is A.M.Best’s full media release (on line here).

HONG KONG, JULY 17, 2012
A.M. Best Co. has downgraded the financial strength rating to B- (Fair) from B+ (Good) and issuer credit rating to “bb-” from “bbb-” of ACS (NZ) Limited (New Zealand). Both ratings have been placed under review with developing implications, which reflects the company’s near-term regulatory risk.

These rating actions acknowledge ACS’ risk-adjusted capitalization and its separation from Ecclesiastical Insurance Office plc (EIO) (United Kingdom) as well as the potential vulnerability of ACS’ capital position. Following the recently approved Scheme of Arrangement, EIO has strengthened ACS’ capital position. Also, EIO is providing additional reinsurance cover (to extend the cover up to NZD 570 million) to extend reinsurance protection for the February 2011 earthquake event.

However, ACS’ current risk-adjusted capitalization remains stressed as reinsurance recoverable risk remains a significant drag. Adverse development to the February 2011 earthquake cost estimates and slower than anticipated claims settlements during the first half of 2012 have resulted in a higher than anticipated level of reinsurance recoverable risk as of June 30, 2012. ACS’ Scheme of Arrangement and the transfer of its majority ownership away from EIO remove the likelihood of any further financial support from EIO. This leaves ACS’ capital position vulnerable to any further increases in claims estimates, especially if these develop beyond ACS’ extended reinsurance coverage (NZD 570 million), which could weaken ACS’ ability to fully meet policyholder claims. The company faces near-term regulatory risk. A.M. Best was informed by ACS that it has yet to submit its final solvency calculations as of June 30, 2012 to the Reserve Bank of New Zealand (RBNZ). It remains to be seen whether the RBNZ will view ACS’ final solvency calculations as compliant. A.M. Best has sighted the draft calculations the company has lodged with the RBNZ. While these show a positive regulatory solvency margin, it is thin and the RBNZ has publicly voiced concerns on ACS’ regulatory solvency.

Partially offsetting these negative rating factors are anticipated cash settlements by ACS of major claims by December 31, 2012, since the company’s management recently informed A.M. Best that it reached agreement on cash settlement amounts (totaling around NZD 366 million) with major policyholders. This could lead to a significant reduction in reinsurance recoverable risk by December 31, 2012 and an improvement in risk-adjusted capitalization. Also, an agreed cash settlement of major claims would reduce the impact and likelihood of any further adverse claims cost development and would help to protect the company’s capital position.

Developments that could result in negative rating actions include negative regulatory action, a slower than anticipated reduction in ACS’ reinsurance recoverable risk and erosion of its capital position.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding Universal BCAR.” Best’s Credit Rating Methodology can be found at