Approved Dispute Resolution Schemes: Minimum Compensation Cap for Insurance Disputes

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1 Approved Dispute Resolution Schemes: Minimum Compensation Cap for Insurance Disputes Submission by: Insurance Brokers Association of New Zealand Inc. No Questions: Submission 1. Do you agree with this characterisation of the problem? If not, why not? We agree the schemes can be a cost effective way to resolve consumer disputes and the current arrangements achieve this. However assuming the average cost of repairs is $280,000 or a rebuild $420,000 then we disagree that the cap is acting as a barrier. There are a number of other factors which affect the ability of consumers and insurers to resolve disputes residential property insurance disputes arising from earthquake damage claims. The common approach of schemes is to have the cap applied to the amount in dispute not the total amount of the insurance claim. This being the case and given the averages above, most disputed amounts are likely to be well within the cap. Other jurisdictions such as Australia and the UK may have increased their cap but not to the levels being suggested in this discussion document with the 60% increase. Also the issues associated with earthquake related claims are unique to NZ. We agree that the cap should be regularly reviewed to allow for inflationary impacts and ensure effective access to resolution mechanisms for all consumers across all financial services and products. While it is not easy for an insurer to change scheme membership as 12 months notice is required and there is a limited number of alternatives available, it seems to us that changing schemes because something disagreeable occurs is not a realistic option. In any case there is already general consistency in the terms of reference between schemes making it somewhat pointless to change because of a disagreement over the application of terms of reference.

2 No Questions: Submission 2. Do you think the proposed rule is the best to way of increasing access to schemes for real property insurance claim disputes? Access by consumers to a dispute resolution scheme is not the issue. As stated above most issues can already be addressed within the existing limits or schemes can already accept higher claims if both parties agree to this. In our members experience increasing the cap for real property claims will not be effective. The experience from our members is that the majority of litigation claims and disputes have involved cases where the EQC were arguing the claim was under their $100K limit while the client believed it was a total loss. Given the insurers policy does not respond until EQC have agreed to pay the full $100K, and EQC are not party to the dispute resolution schemes, none of these claims would be picked up if the dispute scheme cap was increased. Ensuring the EQC are a party to the scheme would have far more effect in terms of resolving earthquake claims/complaints which would fit within the current jurisdiction limits. Once over the EQC $100K limit virtually every claim is accepted by the insurer and any remaining issues have related to: very technical and untested policy issues which are effectively precedent setting/making law (which should be resolved for the benefit of all potential policyholders in the courts and once resolved inevitably lead to a flurry of settlements) claims associated with Body Corporate apartment buildings, multi-unit dwellings, boarding houses, etc. which need to have some precedents set for future claims Earthquake or otherwise purely a quantum dispute based on technical expert advice. Very hard to see how a scheme would add value in this area where the difference in value is over $200,000 as the basic repair/rebuild methodologies would be so vastly different it s hard to see a scheme would have the right expertise to make an appropriate call. It would be better to have an independent engineers/qs panel or mediation service clients can refer to who could make a call on the competing expert advice.

3 We understand clients are spending circa $6K to $10K on independent QS/engineers advice to counter Insurer and EQC offers of settlement so this is a great idea but as insurance doesn t cover the expert advice who pays? Also we believe retrospective application is incredibly unfair to every customer who has potentially waived quantum to fit within the jurisdiction of a scheme and reached a settlement already, or have spent a lot of money on litigation as a path of resolution and did not have this as an option. It also has the potential to load in cost of scheme membership. 3. Do you agree that the amount of compensation to be awarded should be the difference between what the insurer has agreed to pay and what the customer thinks the claim is worth? 4. Do you have any feedback on other ways access to the schemes could be increased for these kinds of disputes? We agree that the current approach of considering the difference between what the insurer and customer compensation calculations is appropriate. Raising the profile and role of dispute resolution schemes will through increased awareness lead to greater use of the schemes. We understand the promotion of the schemes is something they have jointly discussed. There have also been discussions on setting up a common access point such as a call centre where customers can be directed to the appropriate scheme or alternative solution. These sorts of initiatives will have a positive influence on ensuring clients understand their options and receive correct advice on the best alternatives for a quick resolution of their issues. 5. Do you agree that the schemes cap should be in relation to the amount of compensation they can award, rather than in relation to the value of the dispute? If not, why not? 6. Do you agree with our proposal to increase the minimum compensation cap? What analysis or rationale do you have that supports the cap being at least $350,000, or higher or lower than $350,000? Assuming the amount of compensation is as stated in question 3 then we would agree that it is appropriate for the cap to be in relation to this amount. We do not agree with this proposal and have seen no compelling evidence to show such a move will result in claims being resolved quicker or more cost effectively. The discussion document provides no data on level of existing disputes or the effect raising the cap would have on the number of additional disputes which would potentially fall within the jurisdiction of the scheme.

4 The underlying basis of the discussion document is that number of earthquake claims which could quickly be resolved if the cap for dispute schemes were increased. There is no evidence that this is the case. Scheme involvement in larger claims will only reduce cost if the consumer wins. Given there is no cost to the consumer to go to the dispute scheme and the outcome is non binding on the consumer, it does not reduce the prospect of the consumer subsequently seeking redress through the Court to achieve a satisfactory outcome This leads to an even longer resolution timeline. Our understanding is that insurers will only take disputes to the dispute schemes or court if they believe they have an excellent case to argue or an issue of wider application beyond the specific dispute, otherwise they believe it is just simply better to settle the claim. Thus if a claim does go to dispute resolution it is likely to go against the client who then has the option of rejecting the outcome and going to court. In high value claims the client inevitably chooses to sue which overall leads to even longer timelines than if they had gone directly to the court. 7. Do you consider there to be any risks associated with a cap of at least $350,000, and if so what are these risks? We see a number of risks associated with a cap of at least $350,000: Clients will be subjected to even longer delays and therefore increased frustration Higher limits inevitably involve greater complexity both technically and legally. These will be beyond the resources of the schemes Costs will increase for schemes if they have to address complex technical or legal issues in terms of policy response Because scheme decisions are non-binding on clients they may well end up in court resulting in a duplication of costs

5 8. What, if any, additional costs would be incurred by schemes or their members? As above, schemes could face substantial increased cost if by raising the cap more complex, technical claims and legal issues are taken to the schemes. The schemes do not have significant in-house expertise in technical areas e.g. geotechnical. Nor are they set up to handle what have often proved to be new and unique legal issues. Moving the forum for resolution of earthquake claims by lifting the dispute scheme is not appropriate given what is usually required to determine the outcome of the claims. If they are to be resourced to a higher level of expertise in these areas there will be a substantial increase in costs which then would feed through to increased scheme charges for the scheme members. Additionally for our members, general insurance brokers being financial advisers, there are potentially increased costs for professional indemnity insurance. Their insurers may well take the view that a higher cap increases the exposure for brokers. The resulting higher insurance cost will impact brokers and could flow on to clients. 9. How do you think this proposal will affect the numbers of additional disputes that would be considered by these schemes? What is the basis of this view? Our general impression is that not a lot of claims from Christchurch have been brought before the schemes. This may be because of the current limit although we suspect it is more likely that the issues in dispute cannot be addressed by dispute resolution schemes. When significant amounts are at stake or the issues are legal in nature, the court system is perceived to be the appropriate forum. Many of the issues arising out of Christchurch are new legal matters not previously addressed and need the expertise of the courts to make a determination. 10. Do you agree that the minimum compensation cap should only cover real property insurance claim disputes? If not, what other types of disputes should it cover? 11. Would it be preferable to introduce this requirement via an implied term, or via a minimum requirement that schemes must amend their rules to meet? The driving force for this proposed change is Christchurch and in particular a desire to address resolution of residential earthquake property issues. The discussion document notes that this matter will be addressed in a wider review of schemes as part of the review of the FA Act and FSP Act. We agree that is appropriate. A minimum requirement allowing schemes to transparently incorporate changes to their rules is the appropriate approach.

6 12. Should schemes be able to consider and apply the new cap to some or all complaints that are out of time? The explanation for this issue talks about the event giving rise to the claim. What does this mean e.g. An adviser sets up an insurance programme well before the earthquakes in Christchurch i.e. before August 2010; subsequently a claim/dispute arises through an earthquake claim. Is the event the advice or the earthquake or deadlock? Potentially backdating years could cause significant complications after such a lengthy delay. Determining exactly what occurred can be difficult hence why schemes currently require notification within 2 months. To increase this to 5 years would be very unwise for this type of forum. 13. Is the proposed exception to scheme rules about the timing of complaints appropriate? 14. Should there be a backstop date (e.g. x months after the regulations take effect) by which out of time complaints must be made to a scheme? 15. How do you think this proposal will affect the numbers of additional disputes that would be considered by these schemes? What is the basis of this view? We do not believe it is at all appropriate. The existing approach is there for a very good reason and the current problems will not be fixed by ignoring protocols built on experience. For the reasons mentioned above it is entirely appropriate to have a backstop limiting the timeframe for submitting a complaint. It is our view that this proposal will have limited impact on resolving disputes. The dispute resolution forum has a place in solving issues but this is entirely different to what the courts offer. The process is different, the resourcing required is different, and the outcomes being sought are different.