The 2010–2011 New Zealand earthquake sequence
New Zealanders showed resilience in the aftermath of the quake that rocked Christchurch in autumn of 2010. Despite aftershocks, the prevailing attitude was positive and people were eager to pick up the pieces and get on with their lives. Yet a far more devastating earthquake with 185 deaths in early 2011 challenged the community’s spirit. Four years after this complex and unanticipated series of events, reconstruction efforts and insurance settlement processes are still underway.
The response, including assessment activities, was hampered by resource constraints, but by mid-February 2011 modest progress had been made toward commencement of reconstruction. The mood was positive and, with the exception of a small number of property owners with significantly damaged assets, attention was focused on getting back to normal. There were residential areas with liquefaction issues and some (predominantly older) buildings with heavy structural damage. In general, this was an event from which the city could recover in a well planned and measured manner, with insurance ready and able to handle claims in a routine and uncomplicated manner. The Lyttelton earthquake of 22 February changed all that.
At 6.3 on the MW, the Lyttelton earthquake was weaker than the Darfield event, but was centred only 10km from the centre of the city and at a depth of only 5km. This close proximity to the city along with the underlying geology led to far greater insured damage (currently estimated at NZ$ 21.5bn) as well as 185 fatalities. Much wider residential areas of the city were significantly affected by liquefaction and shaking damage. In the Christchurch central business district (CBD), buildings of all ages suffered, predominantly from shaking, but also some liquefaction. Important areas of the city were determined uninhabitable and the CBD was subject to a lockout on safety grounds that was not fully lifted until mid-2013. Despite the lockout, a small number of buildings have remained occupied, their owners resisting settlement offers.
As many as 8,000 homes were in areas of such severe liquefaction damage that authorities decided to demolish or relocate the houses, as infrastructural services could no longer be economically provided. This was typically because the land could no longer support dwelling and the low lying areas had sunk to the extent that sewage and other drainage systems relying on gravity would be ineffectual. Ultimately, 1,084 buildings of all ages in the CBD were demolished, as they presented ongoing safety issues and could not be cost-effectively repaired.
A change of attitude
One feature of the New Zealand market is its very high level of insurance penetration, estimated by some in excess of 80%. By any measure, per capita personal/residential and commercial insurance is exceptionally widespread. Accordingly, individual expectations placed on insurance payouts were particularly high, as was the resistance to claims settlements that offered less than policyholders’ perceived or real entitlement. It would be fair to say that the event highlighted an alarming gap between what was covered and what was thought to be covered – for insurers as well as insureds.
The fatalities and damage resulted in a deep questioning of prevailing engineering practices. Not surprisingly, an attitude that strongly favoured conservative approaches to rebuilding and reconstruction ensued. The desire to produce a resilient environment that would not repeat the structural deficiencies of the past – unrecognised at the time of design/construction – was widespread.
The expulsion of liquefaction material from beneath the earth surface had three significant consequences: one was that over large areas of the city, the already low-lying land sank even further, leaving it more susceptible to flood damage in adverse weather conditions; as a further consequence, gravity-dependent infrastructure like sewage systems were no longer feasible; the third effect was that the already thin layer of stable material overlying the liquefiable material was made even thinner. The consequence of this last factor was that thousands of homes were now located in areas where any further seismic activity would likely bring the first two factors into play and affect the land to the extent that it would no longer support buildings. Considerably stronger foundations than had existed prior to the earthquakes were required for homes that were repairable.
To complicate this situation even further, the legislation required that payment be made to the homeowner rather than to the insurer of the damage that occurred above the loss cap. The first-loss nature of this cover meant that for dwellings with significant damage – there were thousands – EQC assessors had to differentiate between damage from each earthquake and, additionally, insurance company assessors had to undertake a similar exercise when the damage exceeded the underlying EQC cover. The resulting workload for the EQC required it to gear up from around 20 staff members to close to 2,000. Over the many years without a significant earthquake prior to 2010, the wider property insurance market had developed an overwhelming focus on fire damage – effectively a single-risk coverage focus. As a result of this and the converging factors mentioned above, this multi-event, wide-area damage situation revealed many unanticipated and problematic situations for underwriters. The most challenging cover elements include the following:
Replacement cover for domestic property
This universally provided cover meant that there was no sum insured. For a single house fire, “replacement” might be somewhat difficult due to any inaccuracies in the valuation basis, but in general the desired outcome would be easily achievable. With thousands of homes involved, not only did any inaccuracies compound into the catastrophe reinsurance, but they also led to extreme difficulty in establishing an upper estimate for total claim damage.
Reinstatement cover for underinsured buildings
Again, for a single fire loss this is a relatively simple loss assessment. With a large number of buildings involved, underinsurance prevalent and cover reinstated after each damaging event, the outcome is the potential provision of multiples of the sum insured up to the replacement value of the building.
Repair to the required legal standard on the date of commencement of repair
For a fire this might occasionally mean additional building services or disabled access. With the damage resulting from the earthquake sequence calling for a reassessment of required seismic strengthening, the accumulation of additional costs into the catastrophe programme is significant (on top of the additional service/access costs for a single loss).
Constructive total loss
In the event of a very significant fire loss, the viability of rebuilding what is left can be questionable, making this clause useful. Wide-area damage brings many other considerations into play, such as people’s reluctance to work in multi-storey buildings or in an area that has lost its attraction. The question is then not only whether rebuilding is feasible, but also whether it is desirable.
Coverage provided to a standard of “substantially the same as new"
This wording and others like it have proven problematic, as they can mean very different things to insurers, insureds and lawyers.
Buildings with shared structural features and land ownership
Cross-leasing was common, with each owner insuring his or her own asset, requiring unanimous agreement on repair among the affected parties. In the worst of outcomes, this meant that residential properties with individual EQC entitlement affected by multiple events had several owners insured by different carriers (and some not insured). The complexities are enormous.
Today, the majority of claims arising from this unprecedented series of events have been settled (>90% of commercial; <70% of residential). Yet it must also be noted that New Zealand’s insurance industry and insureds continue to struggle with the complexities listed above more than four years after the initial earthquake. At least one primary insurer has withdrawn from the country. Currently, insurers are projecting the completion of their residential programmes by 2017. To learn from the 2010–2011 New Zealand earthquake sequence and help avoid this unsatisfactory set of circumstances in future, all stakeholders are called on to cooperate for greater transparency, unambiguous wordings and adequate covers.