Christchurch earthquake 3 years on. What have we learned?

It is 3 years since the massive earthquake hit Christchurch. The lessons learned are many as we learn new phrases such as BI, Business Interruption, and note that laymen and women have become authorities on insurance as they fight insurance companies for action. 

I am currently working for the Swiss Red Cross in the Philippines and have been working with Red Cross colleagues in drawing up a long-term recovery strategy and plan for the millions of people affected by Typhoon Haiyan, and my frequent visits to Christchurch and seeing the progress of recovery there, has helped my immeasurably in contributing to the overall plan.  

In July 2011 after the Canterbury earthquake, I was invited to keynote speaker at IBANZ the Insurance Brokers Australia and New Zealand annual conference.. The theme of my address was on Breakthrough Initiatives, those initiatives that accelerate recovery. It was an eye opener for me to mingle with insurance tycoons and as a result, I made it my business to add earthquake insurance knowledge to my extensive disaster experience, especially business insurance as keeping and creating jobs are crucial after a disasters.

Some key points came out of the CERA lessons learned report which are interesting and should be remembered by disaster practicioners.

During consultation it was noted that communities want to support one another, mobilise resources and collectively make decisions. Respondents also considered it important to emphasise the ‘temporary’ and short-term nature of some responses to the earthquakes. ‘Temporary’ responses can be exciting and innovative and should be captured and learnt from for the future.

Respondents noted the importance of better education, long-term planning and disaster preparedness to build adaptable communities. Aside from ongoing seismic activity, communities also need to prepare for other issues such as flooding, resource scarcity and climate change impacts.

Respondents stated they have learnt key lessons about insurance companies and EQC. Frustrations were raised that insurance issues are holding up rebuilding and there are difficulties associated with getting insurance to rebuild in the future. Dissatisfaction was raised about the complexity of processes.

An important part of recovery is understanding its pace and progress.

By monitoring and reporting on the recovery we can assess the effectiveness of recovery activities.

We can also identify the areas that may require additional effort or change.

Recovery activities continue to expand and evolve and lessons will be learned throughout the recovery. The greater Christchurch community has learned from other disaster recovery efforts in New Zealand and international cities. Relocation is known to break up established neighbourhoods or communities (e.g. the university or educational community) and creates additional hardship for people, families and businesses, and impacts on schools, shops and community facilities. This means that recovery must focus on economic, social and cultural elements as well as the repair and rebuild of the built and natural environments.

During consultation it was noted that communities want to support one another, mobilise resources and collectively make decisions. Respondents also considered it important to emphasise the ‘temporary’ and short-term nature of some responses to the earthquakes. ‘Temporary’ responses can be exciting and innovative and should be captured and learnt from for the future.

The following factors are considered critical to a successful recovery.

• building on the capacity, momentum, and initiative of community-led responses to ensure the supportive networks in a community continue to thrive
• building on the strengths of the region, including clear roles and responsibilities that suit capabilities
• creating innovative solutions to past problems for a future-focussed recovery
• the innovative and resilient nature of the business community contributing private sector investment for recovery
• two-way interaction and communication between all parties and better education about disaster responses
• the importance of leadership, trust and transparency
• decision making at the local level where possible
• focusing recovery work on the health and wellbeing of those people most affected
• economic recovery relies on retention of capital in the city and ability to retain financial equity
• restoring cultural, sporting and recreational life as part of community wellbeing, providing a sense of continuity with the past and a sense of shared identity
• government agencies working in a more innovative, flexible and collaborative manner, and in a more ‘joined-up’ approach with the private and volunteer sector
• coordinating recovery efforts and planning strategically for recovery and disaster resilience
• ensure future land-use decisions consider the seismically active environment and other natural hazards, such as those caused by building on land prone to liquefaction.

I need to get back to earthquake insurance and this is where I lean heavily on Michael McKay who is a lawyer with Malley & Co. He is acting for several insured in relation to issues arising from the Canterbury earthquakes. This is an excellent paper on business insurance,

Lessons from Christchurch: Insurance policies and significant events

Over the past 2½ years, Christchurch's business environment has challenged many assumptions and contracts. In this six-part series, lawyers from Christchurch legal firm Malley & Co look at some of the lessons all businesses can learn. In this article Michael McKay looks at some of the insurance issues.

Insurance is one of the biggest business issues to emerge from the Christchurch earthquakes.

It's led several businesses to consider whether they can claim under their existing policy and whether that policy is still appropriate.

After the earthquakes, it became apparent that many insured and insurers held different views about the scope of their policies. Policy provisions were often untested, and interpretations differed.

The courts have responded by allocating extra resources to Christchurch and setting up a fast-track process for precedent-setting cases. The decisions have clarified some legal issues. For example, one insurer that had to repair a building "as new" was allowed to use modern building methods, meaning some hidden features (such as covered rimu floors) did not have to be replaced like-for-like.

Under another building replacement policy, even if the insured elected reinstatement, the insurer had to pay the indemnity value of the property upon proof of loss. The insured did not have to wait until reinstatement was under way for a payout.

Policies differ and business may need specific advice about the meaning of a particular provision. Existing decisions, however, may guide businesses on how the courts are likely to interpret their case.

Business interruption insurance

Another important insurance lesson relates to business interruption (BI) insurance.

An English insurance expert says the point of BI insurance is to ensure a business promptly returns to comparative health and is "still in the game" after an insured event.

Many BI policies insure for reduced gross profit arising from damage to insured property. Some have an extension that covers loss of gross profit arising from damage to property other than that of the insured business.

Nearly all BI policies, however, contain an "adjustments" or "other circumstances" clause, which tries to refine which types of loss trigger recovery of reduced gross profit.

The clauses all aim to distinguish a reduction in gross profit that would not have occurred but for damage to the insured property (covered) from reductions that are likely to have occurred even if the property had not been damaged (not covered).

Gross profit fell for many Canterbury businesses after the earthquakes. If this was because of damage to a business's property, it was likely to be covered. If, however, the loss was due to fewer customers visiting the affected area, it may be excluded under another circumstances clause.

This has been described as the "depopulation" effect, but the principle has broader application. Insurers might question what caused the reduction of profit if, for example, a key person had left the business shortly before the February 2011 earthquake. So, too, for an orchard that had an infected crop shortly before the earthquake.

If part of a claim is rejected because it was caused by an uninsured event, there needs to be evidence to support the claimed causation. Businesses with several outlets can compare the performance of a similar store in another location with the damaged outlet. The Canterbury earthquakes did show, however, that in other cases determining the cause(s) of a reduction in gross profit can be difficult and time-consuming.

Is there a way forward?

Businesses should review their circumstances and determine what type of cover is appropriate and affordable. Some businesses have reduced the gross profit sum insured or abandoned that part of the insurance altogether because of the causation issues, and increased the sum insured for stock and other operating assets.

This is not without its issues but for those businesses replacing those assets is particularly important to trading again.

What will your business need to still be in the game?