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 Darfield, or Canterbury, earthquake of 4 September 2010 measured 7.1 on the moment magnitude scale (MW). It was centred 40km east of the city of Christchurch at a depth of 10km. Although the quake caused no direct fatalities, it resulted in considerable insured damage in the local rural area and in the city (currently estimated at NZ$ 10bn). The event was followed by a prolonged sequence of smaller aftershocks.  

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

While in the months following the Darfield event people in and around Christchurch had been largely optimistic and focused on restoring buildings and infrastructure to pre-quake conditions, the community was now forced to face the fact that restoration was no longer an option. The CBD no longer existed, and infrastructure damage was so widespread that reinstatement, if possible at all, would be a long process. The extent and scope of residential damage were so vast that a large number of dwellings were widely recognised as permanently lost.

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.

Physical effects

In the period between the first earthquake on 4 Sept 2010 and late 2012 the Canterbury region and the city of Christchurch experienced more than 15,000 aftershocks and 30 earthquakes measuring above 5 on the MW. Although very few were at a magnitude that could have caused property damage, their sheer numbers and unrelenting recurrence were tangible proof that the area remained seismically active. This ongoing seismicity was not only unsettling for residents, but also led to hesitation in undertaking repair and reconstruction work. Projections of continuing tremors proved correct for some months. As outlined above, the extent of shaking damage was extreme and large areas of the city (built on low-lying sediment) suffered significant liquefaction damage. In other residential areas on hills overlooking the city, shaking severely damaged homes, destroyed retaining walls and destabilised large boulders. In total, approximately 8,600 homes were in areas declared no longer habitable. Within the CBD, 1,350 buildings were so severely damaged that partial or complete demolition was the only way to ensure public safety. Due to limited available demolition resources, the process continued over an extended period, and access to the CBD had to be controlled for many months. Vast areas of the CBD were converted into open ground suitable only for vehicle parking. Because of this limited access and the number of unsafe buildings, the city’s business hub moved from the CBD to surrounding low-rise industrial and commercial areas. Memories of the earthquake sequence were so strong that these low-rise buildings became the preferred type of workplace.

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.

Insurance complications

A unique feature of the New Zealand insurance market is the government-established Earthquake Commission (EQC). Since it was set up in the 1940s, the EQC had undergone a number of reforms. By 2010, it provided cover up to a cap of NZ$ 100,000 for residential property damage as well as the first NZ$ 20,000 for damage to contents. At the time these amounts were set in the 1990s, they represented realistic average replacement costs, but had not been inflation-adjusted for many years. In addition, the EQC provided cover for land damage under the dwelling and in a prescribed area around it. The outcome was a reinstating first-loss insurance cover with an additional land cover element, in a region with a significant number of properties built on either sedimentary land or on relatively steep hill terrain that would ultimately be hit by a sequence of damaging earthquakes.

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.