Limits on insurance given by commision
There is a great deal of confusion among members of the public about how the Earthquake and War Damage Commission works and whether it'is obliged to pay out to insurers in all circumstances or the full amount of loss. One such grey area has : emerged as a result of a ; Letter to the Editor and subsequent inquiries of the commission. But it seems from the commission’s reply that in this case the fault may arise because of illegal practices by some insurance firms.
The letter asked how the commission could change a premium on the writer’s house cover on which it had no intention of paying out.
When his house was insured for indemnity value, his insurance company assessed the value and he was charged, in addition to the firm’s premium, a commission premium on the assessed value.
Later, when he asked the company about a replacement insurance policy, he found the commission would charge him on the full replacement value assessed by the insurance company but would only pay out on the indemnity value.
When the insurance company assessed the replacement value it also assessed the indemnity value which the commission had accepted and charged a premium upon before. He asked why the commission could not accept it and charge on it now, since that was the maximum the commission would pay out? On getting an architect’s valuation for indemnity value the commission would accept that and then charge its premium on it. The writer questioned whether the commission could expect the average house-owner to pay $5O-$6O in an architect’s fees just to “fit in. with red tape.” If the commission was unable to give a satisfactory reply, then this was obviously a case for the Price Tribunal, the writer said. The secretary of the commission (Mr J. L. Gill) explained how the requirements of the Earthquake and War Damage Act, 1944, worked in these circumstances.
Most policies, including cover under the act, were ‘contracts of indemnity,” which meant that in the event of loss only market value was payable, Mr Gill said. The sum insured under a fire contract set the overall limit of cover under the act.
Where replacement-typi
contracts were issued, there was provision for a commission premium to be paid on an approved indemnity valuation. This provision did not alter the cover available under the act. When this provision had been introduced it was norma! insurance practice to require a valuation before issuing replacement insurance, he said.
Comparatively recently, some insurers and insurance companies had dispensed with the requirements of a valuation before issuing cover on dwellings, and it was uneconomic in many cases to obtain one merely to reduce the amount of commission premium otherwise payable. It was the commission’s experience that many properties were found to be under-insured at the time of loss, Mr Gill said. This was one reason why the commission did not favour a system which permitted an insurance company to insert an indemnity value in a replacement contract. In fact, there was a base during the major floods along the Clutha River a year ago, where a replacement contract was found to
have an indemnity value only one-third of the actual value of the goods.
If the owner was confident of the true indemnity value and replacement value of his property, he said, then an insurance company might be prepared to issue a] normal indemnity contract and insure the difference between indemnity and replacement under an “access of indemnity” contract. The commission's premium had never been payable on “excess of indemnity” contracts. Two years ago, the commission sent a circular to all insurance companies pointing out the anomaly of’the situation complained of by the original writer to "The Press.” In this circular, Mr Gill said the commission was aware that under replace-ment-type fire contracts, some insurance companies had adopted the practice of specifying an agreed indemnity sum — either by inserting an “indemnity value” clause or by an “indemnity value” column in the policy schedule — and stipulating this indemnity figure as being the sum insured for the purpose of cover under the 1944 act.
A valuation certificate was not being submitted under such contracts for commission approval, and a commission premium was being levied on the in-
demnity figure so stated in the contract.
This practice did not conform with the requirements set down in the act, Mr Gill said.
The commission's legal advisers considered that an indemnity figure so stated in a replacement-type contract would not limit the liability Of the commission if an indemnity loss exceeded the indemnity sum stated. There were only three ways under which reinstatement or replacement value types of fire contracts might be dealt with, Mr Gill said: — 1. A commission premium paid on the full amount insured (this would be the replacement sum) in which case, in the event of a loss under the act, the insured was entitled to receive the full indemnity value at the time of loss. 2. By the issue of two contracts — (a) one
contract for the full indemnity cover on which commission premium was collected on the tull sum insured, and (b) another contract for the excess of indemnity on which no premium was chargeable. 3. By requiring a valuation certificate which, if approved by the commission, would permit payment of a premium on the indemnity value certified by an approved valuer. The commission could see no reason why the two-con-tract svstem set out in (2) could not be incorporated within the one policy of fire insurance by taking out a normal indemnity contract and by way of extension, Mr Gill said. He added that any re-placement-type contract which was not dealt with in one of three manners set out was failing to comply with the terms of the legislation.
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Bibliographic details
Press, 11 August 1979, Page 22
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969Limits on insurance given by commision Press, 11 August 1979, Page 22
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