The second major earthquake in Canterbury in February 2011 was more devastating than the first in September 2010. Although it was of a slightly lesser magnitude, it was shallower and centred nearer the Christchurch CBD. This resulted in loss of life and greater damage than occurred during the September earthquake.

The incidence of two major related loss events in a short period has raised complex insurance coverage issues beyond those arising from each loss alone. This is particularly so for those policyholders who suffered both losses in the same policy year.

APPLICATION OF DEDUCTIBLES AND AGGREGATE LIMITS

The application of deductibles and policy limits can be dictated in the policy by whether the events are in a series and arise from the same source or original cause. We have had to obtain expert geotechnical advice from earthquake specialists in order to advise underwriters on this issue.

A further issue has been policy wordings that refer to a single total sum insured across all the insured buildings in the policy wording. Usually, when the cover is written, sums insured have been allocated for each building and the premium has been calculated on this basis. Can these sums insured be relied upon by underwriters when the damage for a particular building exceeds that figure, but is still within the total sum insured stated in the policy?

REINSTATEMENT OF SUM INSURED

Many policyholders have discovered they are under-insured. Sometimes this has been deliberate, but often not. One of the interesting aspects of such widespread damage is that sums insured based on replacement cost valuations have proven to be woefully low. The valuations may have been accurate for standalone damage, but prove far from adequate when costs become inflated by the sheer scale of the surrounding damage.

Many policyholders are trying to apply the reinstatement of sum insured condition found in most commercial property policies to obtain a top-up in cover between the September 2010 and February 2011 earthquakes. The standard wording of this condition is difficult to interpret. Just when is the amount by which the sum insured is depleted by the loss "automatically" reinstated? This becomes difficult in instances where no repairs had been started on the damage caused by the September 2010 earthquake before the February 2011 earthquake hit, causing more damage and in many cases, total loss.

LIQUEFACTION

One of the unusual aspects of the Christchurch earthquakes was the large amount of liquefaction that occurred, particularly in residential areas. Many houses suffered minor and reparable damage but the land has sunk and is no longer suitable to support houses. As insurance policies do not insure land, what is the underwriter obliged to pay when the house is reparable but will probably have to be abandoned because the land won't support it anymore?

BUSINESS INTERRUPTION

A multitude of issues have arisen under business interruption policies. The most difficult is whether the policy only covers interruption caused by the damage to the insured building or whether interruption caused by the wider area damage and consequent loss of attraction can be taken into account.

A further issue is whether the cover available under sub-limited extensions can be "stacked". The widespread nature of the damage often meant more than one extension continued to apply over a period of time. Once one 10% sub-limit was exhausted, can you move on to the next one?

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