Future governments must pass legislation to clarify how they will treat uninsured property owners after natural catastrophes, says the Insurance Council of New Zealand (ICNZ) in a statement yesterday after the government reached an out-of-court settlement on Tuesday with 16 uninsured Christchurch homeowners who had property in the residential red zone.
Under the settlement agreement, the government will pay the litigants 80% of the pre-earthquake value of their homes. All of them had already been paid 100% of the value of their land. The litigants are branded as the Quake Outcasts. Being zoned red means that the land has been so badly damaged by earthquakes it is unlikely that it can be rebuilt on for a prolonged period.
The government had resisted including uninsured properties in the red zone buy-out offer it made to 7,700 households, because of the the moral hazard involved. It believed doing so would penalise those who had paid for insurance. However, the litigants argued that the clearance of homes in the red zone had destroyed any value left in their properties and it was unfair for them not to be included in the offer.
Insurance Council Chief Executive Tim Grafton said: “The settlement in the Quake Outcasts case announced yesterday raises concerns that people may not insure their properties. While it is positive that the offer was for less than 100% of the property value to acknowledge the lack of insurance, there is still a moral hazard for the Crown because increased levels of government support in place of insurance will provide a greater incentive for people not to insure their property.”
To avoid this moral hazard, successive governments have supported the Earthquake Commission (EQC) Scheme, which provides insurance protection for events like earthquakes, landslips, volcanoes and tsunamis. The EQC Scheme attaches a levy on every insured property so if people don’t take out insurance they don’t get EQC cover.
“It therefore makes no sense at all for the Crown to be stepping in to pay out to the uninsured. It simply isn’t fair on all those that take out insurance,” said Mr Grafton.
“Clarity and certainty is required as to how the government treat the uninsured and in doing that they must avoid undermining the EQC Scheme and being unfair to those who insure themselves. Specific legislation is required and the current review of New Zealand’s natural disaster insurance scheme in the Earthquake Commission Act provides that opportunity,” he said.