New Zealand: Body corporates navigate earthquake insurance issues

You can't pick your neighbours. You may not even like them. But when you own a property in a unit title development (as opposed to a fee simple or cross-lease title), you and your neighbours are covered by the same insurance policy.

Unit title developments aren't necessarily limited to large apartment complexes. Smaller blocks of flats and small to medium commercial developments are often unit title developments, especially where a number of individual properties share common facilities such as driveways.

With a unit title development, the Body Corporate takes out insurance for all of the units. Where any unit or common property has sustained earthquake damage, it is the Body Corporate that lodges the claim with EQC and their private insurer, and deals with the inspections, completion and costings of scopes of repair work. And ultimately the Body Corporate will make any decisions about repair or rebuild of the damaged property.

Body Corporates are funny things. They are created by statute and, as an owner of a unit title property, you are bound by the Unit Titles Act 2010 as well as any rules that the Body Corporate has passed which are particular to that development. Each unit in the unit title development is a member of the Body Corporate. At Body Corporate meetings, each unit is represented by an owner so that all owners collectively make decisions. When there are 10 or more units, the Body Corporate must establish a committee to look after the daily running of the development on the behalf of all owners.

Body Corporates facing significant earthquake issues and decisions on the fate of the development need to ensure all owners are actively involved in the process and understand the outcome.

One of the biggest issues facing Body Corporates is the lack of insurance cover. It has become quite apparent that unit title developments are heavily under insured and Body Corporates are scrambling to figure out how to apportion the insurance cover that is available among units and how to deal with contribution of any shortfall by the unit owners. If the Body Corporate resolves to rebuild (even without the agreement of all owners), it has powers under the Act to force owners to pay any shortfall.

Another issue is how damage is assessed from unit to unit. Earthquake damage inspections of units vary from development to development and it may be that not every unit is scrutinised. Inspectors may look at a few units, scope the damage and take the average cost of repairing the damage and apply it to all units. It is then for the Body Corporate to decide whether that is appropriate given the nature of the development and the damage sustained.

Serious decisions are required by the Body Corporate if the damage is deemed to be uneconomic to repair, and all owners need to agree on the way forward.

The first question is whether owners want to repair or rebuild. If there is a shortfall in the insurance payout, all owners must contribute to the shortfall. Such agreement is difficult. Owners tend to want their money out rather than put more in.

When a cash settlement is on offer from the private insurer there are still a few hoops to jump through. Accepting the money may seem easy, but it's not. The amount needs to be approved by the owners. Once approved, the funds come into the Body Corporate and then the biggest hurdle is agreeing on how those funds will be paid to the unit owners. There are no set rules here – it is simply what the owners agree to do.

A related issue is that damage may vary quite widely from unit to unit and some owners may dispute how the insurance proceeds are allocated. This can also become an issue when the unit title development is uneconomic to repair, because the distribution of the insurance proceeds is likely to be in proportion to each unit owner's ownership interest (based on the relative value of the units before the earthquake) than the extent of the earthquake damage to each unit.

But some unit owners may contest this, and the ownership interests of the unit title development can be reassessed after revaluing and may change. So, an owner could take their neighbour's interest if their ownership interest increases as there are only so many interests to go around. If your interest goes up, then one of your neighbour's entitlements must go down. It follows then that those owners that lose entitlements have an interest in fighting back.

When it comes to allocating insurance money to unit owners there are no hard and fast rules. At the moment, various methods are being used by Body Corporates to allocate the funds out, and it can be based on ownership interest, market value, or it can be some other mechanism whereby all parties have agreed.

If you find yourself in this position, where the Body Corporate is proposing resolutions as to the allocation of such funds, make sure you are aware of your rights if you are disadvantaged in the decisions being made by the Body Corporate. If the Body Corporate choses to vote on resolutions to allocate funds that not all unit owners agree on then there are minority rights that unit owners may look to pursue.

To get a result, all owners must ultimately work together and agree on the final method of payment. Compromises may beneeded so that all owners on board. The last thing you want is for some owners effectively "holding out" - which results in everyone suffering.

Once an insurance settlement is distributed, the owners still have to work together on further decisions. Even once a unit title development is demolished, the title to the land is still based on the physical boundaries of the former units. So unless the units are being rebuilt exactly as they were, the owners must agree either to the cancellation of the unit plan or the completion of a new redevelopment plan (as well as agreeing on any changes to the newly redevelopmed units). If the unit plan is to be cancelled, will the land be marketed and sold? If so, by who? What is an appropriate price to sell at? Should the Body Corporate obtain a valuation? All of these decisions require the input of unit owners. The Body Corporate needs to be confident that all owners will sign a sale agreement if and when presented at an appropriate amount, as any delays with unit owners signing could jeopardise the offer.

The issues are many and varied. If you own a unit title property, and the Body Corporate is currently completing insurance negotiations, seek legal advice so that you understand your position.

Similarly, if you are buying a unit title property, ask your lawyer to complete a thorough due diligence on the current situation with the EQC or insurance claim as well as the inner workings of the Body Corporate. Assess your risk, as well as your neighbours, before buying.


Issues with earthquake-damaged unit title properties:

  • Under-insured unit title developments
  • Contributions from owners for any shortfall in insurance
  • Agreement on the basis for inspection and scoping of damage to different units
  • Apportionment of insurance monies among units with differing degrees of damage
  • Securing owners' agreement to a cash settlement or reinstatement when a unit title development is so badly damaged as to be uneconomic to repair
  • Apportionment of cash settlements amount units on the basis of ownership interest
  • Reaching agreement as to reinstatement of the unit title development or sale of the site where the original units have been demolished
  • Due diligence needs to be completed if you are buying a unit title property that has been damaged

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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