Property law specialist Kristine King looks at the legal landscape one year on from the devastating North Island floods and Cyclone Gabrielle.
What has changed and what lies ahead? Auckland Council and the EQC share the initiatives they have implemented and what this means for home and landowners.
We have now passed the one-year anniversary of the North Island Floods and the impact of Cyclone Gabrielle which saw many areas receive an entire summer rainfall in a few hours. For some locations it was the wettest day in their recorded history. Lives were lost, four in Auckland during the Anniversary Weekend floods and another eleven as Cyclone Gabrielle tracked down the country from Northland causing widespread havoc.
The scars are still visible in our communities. Our daily commutes give stark reminders of the devastation, the stickered houses with overgrown gardens and strewn rubbish, homes dangling precariously over cliffs that still appear raw without their previous covering of vegetation. The marks on the property industry from the weather events are not as obvious to the eye but are permanent. We have new processes, new terminology and perhaps a need to reassess how we approach land transactions.
Residents in regions hit by the two weather events have lodged a record number of claims, which the Insurance Council tallies at over 115,000.00.1 By 1 December 2023 it was reported that 87 per cent of private insurance claims had been settled.
Kristine KingSettlement is a relief to the homeowner but triggers a fresh set of issues. Many owners have utilised the funds to undertake the repairs themselves or have had the process managed by their insurer. Following repair some owners are placing the properties for sale where we are seeing inconsistent methods of disclosure of damage. Some owners disclose the damage with a short clause in the Agreement for Sale and Purchase acknowledging that the house was impacted and repaired; however, supply no supporting information. Some have a statement regarding the damage within the marketing materials or the agent’s “Disclosure Statement”, which is often not provided to the lawyer for review. Other owners simply are not disclosing at all.
For a prospective purchaser this is a troubling situation. They may be buying a property that has been damaged with no knowledge of the scale of damage or scope of repairs undertaken. This is impacting finance and insurance arrangements and we have already encountered purchasers that have been refused insurance on the eve of settlements because of weather claims that have not been disclosed to the purchaser. It is also common for lenders to require, as a pre-condition of drawdown, an undertaking from the solicitor confirming there has been no weather damage, claims made or pending claims in addition to the usual requirements to disclose all materials aspects affecting the security property.
The vendor warranties in the standard agreement for sale and purchase do not require the vendor to disclose any damage, claims or repairs if these occurred before the agreement is entered into. It is incumbent on the purchaser to investigate and request information. Despite published guidance from the Property Law Section2 encouraging the inclusion of clauses requiring disclosure of weather damage and insurance availability, there is little to no uptake in agreements. Purchasers seem entirely ignorant of the significant risk that they are exposed to.
Some owners are disgruntled to discover that settlement funds from an insurance payout are first paid to the mortgagee pursuant to Schedule 2 of the Property Law Act 2007.
We do also know that settlement payments aren’t always applied towards remediating properties. These decisions have flow on effects, often to the detriment to the purchaser. A subsequent purchaser may only discover a previously settled EQCover claim when they make a future claim themselves and the insurer or EQC queries the status of the matters under the original claim.
The release of the EQC Natural Hazards Portal3 in August 2023 has been timely. For the first time, in one information source, the public has access to all settled EQCover claims from 1997 onwards on residential properties in the country and can access local and national-level risk information from multiple government agencies, such as council hazard maps. The portal is a useful tool in educating and protecting consumers but is not a complete panacea. It also raises questions for practitioners as to liability if a search of the portal is not recommended to purchasers.
No discussion of the insurance process following the weather events is complete without acknowledging those owners whose claims remain unresolved. For many owners whose houses were rendered unhabitable, the weather events were only the beginning of a nightmare year in temporary accommodation. As per the Insurance Council’s figures, 13 per cent of claims by volume and 25 per cent by value had not been settled ten months after the weather events.
Another theme that has come from the weather events has been the limits of land cover and time it can take to resolve land claims. “New Zealand is fortunate that EQCover is the only insurance scheme in the world that covers damage to land. But many people do not realise until after an event that land cover has limits, in both the land area covered and the entitlements,” explains Toka Tū Ake EQC Chief Executive Tina Mitchell.
“The governing legislation for the scheme includes well-defined caps on payments for natural hazard damage to properties. The statutory cap is $300,000 for damage to homes. Payments for land are limited to certain areas on the property, as defined by the Earthquake Commission Act 1993, that are damaged and only up to the value of that land. The Act also provides some indemnity cover for insured damaged land structures.”
“Homeowners have access to additional, top up cover for their home cover through their private insurance policies, but the private cover does not extend to land.”
Ms Mitchell said, as a result, the maximum pay-outs available for land damage may only cover a portion of the repair or reinstatement costs in some cases.
“We acknowledge the process for land claims can be frustrating for customers, as it is a technical piece of insurance cover, and the assessment process often takes longer than a building claim. We have worked alongside insurers to scale for the size of these events and to provide technical claims expertise. We’re also continuing to support people to better understand both their natural hazards insurance and the natural hazards risks to their property,” says Mitchell. “Our goal is to help people to be better prepared, and to recover more quickly when events do happen.”
Three risk categories were announced by the New Zealand Government in the update on assessment of affected properties post cyclone and flooding to apply a framework for homes affected by recent extreme weather and residential properties that may be considered high risk in future events. The risk categories below relate to ‘intolerable risk to life’ from flooding and/or landslides for people in residential properties on the property (not the land):
Category 1, Low Risk – Repair to previous state is the only requirement to manage future severe weather event risk.
Category 2, Managed Risk – Community or property-level interventions will manage future severe weather event risk. This could include the raising of nearby stop banks, improving drainage or raising the property. (Category two is split into three sub-categories, 2A, 2C and 2P)
Category 3, High Risk – Areas in the high-risk category are not safe to live in because of the unacceptable risk to life from future extreme weather.
Many are surprised to learn that the Government’s property risk categories do not align with the coloured placards issued after the councils have carried out the rapid or emergency building assessments. When there is a state of emergency or designation in place, the Government’s risk categorisation considers future risk at the property, while the councils rapid building assessments consider the immediate risk to life and safety following the storms.
The risk categories will determine what assistance may be available to a homeowner, with some Category 2P property owners offered funding to mitigate the risk to a tolerable level and Category 3 property owners permitted to engage in the buy-back process, co-funded by the councils and the Government.
With Auckland alone predicting an estimated 5,000 individual property risk assessments needed, the process around the country of categorisation will take many more months to complete. Whilst categorisation information will appear in property files for all categories and a Land Information Memorandum (LIM) will note if a property is Category 2 or 3, this information will only be noted once the categorisation process is complete and potentially will be removed once relevant council actions are completed for the property (for example a buy-out), or the scheme otherwise comes to an end.
Aerial photographs show the extent of damage caused by a landslip at Muriwai. Photo: NZ Herald/George HeardOn 1 June 2023, the Government announced a one-off funding opportunity for councils in cyclone and flood affected regions that would support these councils to offer a voluntary buy-out for owners of Category 3 designated residential properties. The funding is known as the Future of Severely Affected Locations (FOSAL) buy-out programme. Under the FOSAL funding arrangement, the Government will contribute 50 per cent of the cost of buying out these properties, and council funds the other 50 per cent. The Government’s contribution is contingent on the council contributing. To date, the Government has entered into arrangements with Auckland Council, Central Hawke’s Bay District Council, Gisborne District Council, Hastings District Council, Thames-Coromandel District Council, Wairoa District Council, and Hawke’s Bay Regional Council.
To determine the starting point for the voluntary buyout offer, a pre-weather event market valuation is used. Auckland Council offers 95 per cent of the value of an insured property, less any insurance payout (including EQC). For properties that are not insured, Auckland Council offers at least 80 per cent of the value of the property (and up to 95 per cent, the same basis as an insured property). Other councils are following similar processes. Auckland Council has moved forward with the buyout process with the first settlements having completed in December 2023.
Auckland Council’s Category 2P Property Risk Mitigation Scheme will provide two grants to each 2P homeowner to complete the mitigation works within two years. The total of the two grants has a maximum value of 25 per cent of the property’s capital value (CV) provided for in the council rates database on 26 January 2023. Owners are responsible for managing the work, including finding professional services and tradespeople to complete it. The grants will support homeowners to scope and complete building work to reduce the risk at their property to a tolerable level:
Kathryn Hickling, Auckland Council’s Associate General Counsel (Property) has been part of the team that developed Auckland’s Category 3 buyout scheme. She says that being able to settle the first property buyouts prior to Christmas represented a huge milestone in Auckland’s recovery and enabled the first of Auckland’s storm-affected homeowners to move on.
“The risk framework was only unveiled by the Government in May, and this was followed in June by their funding announcement. Councils in storm affected regions have done a huge amount of work in a very short space of time to develop the Category 3 and Category 2 policy and get the schemes established.
“By the end of January, we had around 60 Category 3 homeowners at various stages of the buyout process, and that number is steadily increasing each week as more risk categories are finalised. We expect there will be upwards of 500 Category 3 homes across the Auckland region.
“Our legal colleagues are critical in helping ensure homeowners understand the categorisation process and make informed decisions about their own individual situations. We’d really appreciate everyone helping to spread the word about categorisation and what it means, so that affected homeowners who have high-risk properties know to contact Auckland Council to get information about the programme.”
The Natural Hazards Insurance Act 2023 will replace the EQC Act 1993 for all damage that occurs to residential properties from 1 July 2024
- The Act incorporates recommendations from the public inquiry into EQC and reflects lessons learned from the experience of Canterbury homeowners.
- The Earthquake Commission will become the Natural Hazards Commission Toka Tū Ake to be better reflect the role its scheme plays in supporting New Zealanders and the range of natural hazards it provides cover for, beyond earthquakes.
- Fundamentally, the scheme remains the same, with key changes, including
- it makes the rules for mixed and multi-use buildings clearer
- it clarifies law relating to repairing buildings and land following a landslip or other land damage
- it simplifies the excesses and calculations for retaining walls, bridges and culverts
- it introduces a claimant code and a standing dispute resolution service to improve claims management processes and the customer experience.
- Claims lodged under the Natural Hazards Insurance Act 2023 will be known as ‘Natural Hazards Cover’ or ‘NHCover’ claims.
The claim statistics from the 2023 weather events are staggering and produced the highest proportion of land claims for any event in New Zealand’s history. However, the number of weather-related insurance claims does not represent the actual number of properties damaged by the two weather events.
Another aspect to consider is the potential impact of a notice registered against the title of a property under section 36(2) of the Building Act 1991 or section 72 of the Building Act 2004. Often overlooked, these notices can have significant consequences. Both types of notice serve as a public notification that the property is at risk from one or more natural hazards. Property owners who have a notice registered on their title under section 36(2) or section 72 may find themselves without any insurance coverage. Insurance companies have the authority to reject insurance applications for properties if they determine that the hazard risk is unacceptable. Additionally, section 3(d) of Schedule 3 in the Earthquake Commission Act of 1993 states that the EQC has the right to deny a claim if the property’s title includes an entry under section 36(2) of the Building Act of 1991 or an entry under section 74 of the Building Act of 2004 (noting that building consent has been granted under section 72 of the Building Act of 2004). Consequently, property owners could find themselves without coverage for both their buildings and the land.
As owners move forward with remediation, it may be determined that the land they own is now compromised and susceptible to one or more natural hazards. Legislation requires councils to assess whether a section 72 notice is required as a condition of issuing a building consent for the required building work, with that notice possibly resulting in the owner having no ability to insure their property and without cover for loss caused by another natural hazard.
Much like the section 36(2) and (72) notices, the land categorisation process will impact the availability of insurance for properties falling under the designations. New Zealand’s largest general insurer IAG announced in September 2023 that it would no longer be offering new insurance policies for properties in Category 3 or Category 2, even though some Category 2 homes are considered repairable.4 IAG also announced that existing policies for Category 3 and some Category 2 properties will not be renewed; however, cover would continue until the properties are either acquired by council under the buyout scheme, or the owners refuse the buyout offer or opt-out of the categorisation scheme. Subject to the extent of damage, existing policies would continue to be renewed for Category 1 and Category 2 properties.
There are potentially hundreds of thousands of properties that have been impacted by the Auckland Anniversary flood and Cyclone Gabrielle. Over time much of the damage caused by the weather events will be repaired; however, many properties will never be free of the impact – their owners finding that they can’t secure insurance and finance or they are without cover for future losses from another natural hazard event.