New Zealand: Insurance risks drive robust legal activity

Almost half a decade after the first powerful quake shook the Canterbury region in 2010, we might expect earthquake-related legal insurance work to be tailing off. While the opposite is true – 3,000 reclassified cases is just one of many catalysts for new work – there are a number of other maritime and regulatory risks driving insurance activity in the legal industry.

It's been almost five years since Canterbury was charged with a 7.1 magnitude earthquake, the first of many powerful quakes to hit the region from September 2010.

The following February, 185 people lost their lives as a deadly 6.3 magnitude quake struck closer to Christchurch. It changed the city and its residents forever, and several years on, many of them are still dealing with the aftershocks as they attempt to rebuild their lives.

From a legal perspective, one might have anticipated that the Canterbury earthquake would be a diminishing source of work for lawyers in this area. But that's not the case, says Andrew Horne, partner at Minter Ellison Rudd Watts; in fact, the opposite is occurring.

"You might have expected that as increasing numbers of claims were resolved, the dispute would die down, but we're seeing the opposite occur," he explains.

"There's an increasing number of intractable cases that insurers haven't been able to settle, which is perhaps owing to a greater willingness by private individuals to take matters further; these are people who have been waiting patiently, but realise that they can't resolve matters any other way."

There's another big driver of Canterbury activity that has emerged in recent months, says Richard Johnstone, partner as Wynn Williams.

"There is actually a bubble of new claims that have come about, as the Earthquake Commission (EQC) has resolved to push these claims over cap," Johnstone says.

"These are claims that have been sitting within EQC's responsibility for some years, but in the course of this year, the Commission has identified them as being over-cap – so there's a dump of nearly 3,000 claims that were, until now, virtually unknown to insurers. That's a significant change, and for homeowners who have been dealing with EQC for many years, they now have to almost start again with their insurer."

Other key changes over 2015
Reclassification of cases isn't the only major change impacting the industry.
Johnstone reports that a number of house repair programs have come (or are coming) to a close, which is adding complexity to already complicated cases.

"EQC closed their repair program earlier in the year, and a couple of the other large insurers have also done so, officially or unofficially," he explains.

"They're trying to encourage homeowners to cash out rather than repair, and that's raising significant issues about the scope of works, coverage under the policy, and finding building contractors to actually do the work. Ultimately, a homeowner who is not a repeat client will pay a different figure to an insurer who brings them a lot of business. The last few months has seen a lot of new disputes."

Elsewhere in the insurance legal landscape, lawyers are guiding their clients through significant changes to three major Acts.

"The key regulatory changes over the last year in insurance law are the amendment of the Fair Trading Act 1986, to prohibit unfair contract terms, and the amendment of the Sentencing Act 2002 to allow reparation sentences to top-up ACC payments," explains Crossley Gates, Insurance Partner, DLA Piper New Zealand.

"The amendment of the Fair Trading Act 1986 led to most insurers reviewing their policy wordings and making some changes. The industry is generally taking a 'wait and see' approach to the amendment to the Sentencing Act 2002."

There's also the Financial Markets Conduct Act (FMCA), which came into force in two stages, in April and December 2014.

"This means that brokers now fall under the jurisdiction of the Financial Market Authority (FMA) rather than the Commerce Commission, and the FMA are likely to be much tougher regulator," says Andrew Horne.

"We're seeing increasing activity in that area already. Brokers need to be aware that they're in a new era, and they need to understand their duties under the Act and make sure they perform them."

Insurance law on the high seas
It's not just earthquake-related claims and regulatory change driving legal insurance activity in 2015.

With its relatively isolated geographical position, to the east of Australia and far east of Asia, New Zealand is exposed to some unique and noteworthy maritime insurance risks.

There are, of course, the usual risks associated with marine industries –namely, that a ship could sink or leak. Such was the case when the Rena ran aground on the Astrolabe Reef, off the port of Tauranga, in 2011.

It was described by then-Environment Minister Nick Smith as "New Zealand's most significant maritime environmental disaster", as the fuel on board consisted of 1,700 tonnes of heavy oil and 200 tonnes of diesel fuel. The New Zealand government estimates that the clean-up bill was in the vicinity of $130m, but marine insurance law expert Matthew Flynn, partner at McElroys, says the financial and safety ramifications of that event have continued to impact the shipping and marine industries in the years since then.

"There is an increase in concerns over navigational safety around the New Zealand coastline, following incidences such as the Rena, which has become the second-most expensive salvage of any vessel in the world," Flynn says.

"There also continues to be a high degree of interest internationally in the salvage of vessels, safe navigation and the regulatory prescriptions for limitation of liability, given the high value of a large number of maritime claims."

At McElroys, Flynn says they are "regularly working on a number of matters where cargos involved in international trade are damaged or delayed in transit from New Zealand".

"A number of issues [have arisen], caused by political and labour unrest at various New Zealand export destinations, all of which have a flow-on impact to the arrival of goods in time and in good condition, and there are challenges arising due to the vagrancies of the weather conditions encountered at sea, as well as differing methods of carriage of our primary products out of New Zealand," Flynn explains.

"As New Zealand is so distant from any markets, there can also be issues to do with sourcing the right type of ships, and for many ship owners it is a long way to bring a vessel to New Zealand with no cargo.

New Zealand has 10 export ports, which is a large number for a country of this size. The industry faces continuing issues over the logistic requirements to get its export goods from the place of production to its final markets, and our works revolves around some of those issues."

A "marked increased" in the amount of new construction work has been a recent development, with buyers coming to New Zealand to purchase vessels and construct new ones. "This seems to bode well for New Zealand's marine manufacturing industry," Flynn says.

Predictions for the year ahead: In 2015 and beyond

An increasing appetite to litigate
"Historically, New Zealand has gone from being one of the lighter regulatory environments, to now one that is becoming increasingly regulated, with a much more active regulator. With increasing activity from the New Zealand Exchange and other regulators, we're seeing a surge in the amount of work in directors and officers liability insurance. We're also seeing more insurance claims where people are brought in for questioning and proceedings are issued against them, with an uptick in professional negligence, and increasing instructions from insurers and the insured with an appetite to litigate." – Andrew Horne, Partner, Minter Ellison Rudd Watts.

Ongoing challenges for all participants
"Changes to the Health and Safety in Work legislation is expected to have a significant impact on the local marine industries, with relatively risky operations such as fishing and heavy equipment handling required to make changes to meet the more stringent requirements. Another interesting trend going forward is that ships are slowing down, resulting in large fuel savings and less environmental impact, but slower transit times. These trends are being managed by both the shipping companies and the New Zealand exporters, and represent an ongoing challenge for all participants," – Matthew Flynn, Partner, McElroys

Core changes on the horizon for some years
"The Canterbury earthquakes created a huge demand for legal work. The issues they raised were unprecedented on a global scale, because of the succession of separate events and the level of underinsurance. That work is still driving activity, although it is mostly the difficult claims that are left. Meanwhile, regulation is on the increase and core changes to insurance law have been on the horizon for some years now. The UK Parliament has recently passed a new Insurance Contracts Act and we expect New Zealand will follow suit in the near future. This will be a step-change for the insurance industry in New Zealand." – Crossley Gates, Insurance Partner, DLA Piper New Zealand.

Building disputes in Canterbury: 10 years to resolve
"We're involved in both the insurance side and the wider construction aspect in Christchurch, with building disputes related to unsatisfactory repairs and inadequate new construction jobs. I think we're going to see more building disputes coming out of Canterbury; it will literally be another 10 years' [worth of work].

We're also seeing more desperate homeowners, if only because the claims are getting harder. Legally, the work is still complex, still challenging and it's personally rewarding. The diverse work coming out of our Auckland practice – including general liability instructions, and life and health insurance work – gives us something to think about other than earthquakes." – Richard Johnstone, Partner, Wynn Williams

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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