Insurance specialist speculates on a possible insurance aftershock that could wipe out many Christchurch businesses Feb. 22
Source interest.co.nz – 17 January 2012
As we approach the first anniversary of the devastating February 22 earthquake, there is more than sentimental relevance to the date.
Most businesses hold insurance for loss of profits. That way, if their business is destroyed they will be reimbursed for lost profit while it is repaired.
However, the cover is for a limited time. It’s called the indemnity period. This indemnity period defines how long the insurance company will pay for loss of profits.
Indemnity periods vary, depending on how much you want to pay. The most common is 12 months and so on Feb. 22, 2012, a large number of businesses will lose their lifeline and will have to find funds to meet outgoings. It seems likely that a large number of Christchurch businesses will collapse after this lifeline ends.
When arranging insurance, a broker or business person will allocate an indemnity period that reflects a best guess about how long it will take to get back to business. No one could be criticised for assuming things would be back to normal in 12 months in Christchurch but the reality is that many businesses have not even started work because the insurance company has not yet decided on whether to repair or destroy the building.
There are many possible reasons for the delay. Insurance companies blame it on many factors including the inability to rebuild while zoning is clarified, or a shortage of construction companies and engineers.
That may well be the case, but should the insurance company be able to delay for over 12 months particularly where the building used by a business is apparently irreparable?
Is the delay reasonable?
A cynic might suggest that there are other reasons that the insurance companies are less likely to publicise:
• The longer the delay between the event and payment the more money the insurance company makes. If your claim is $1,000,000 then the insurance company makes (at say 8%) over $5,000 per month, $80,000 per year by keeping your money. With losses in the billions, the overall benefit to the insurance companies, or their reinsurers is huge.
• If the insurance company is having trouble paying, the longer it delays the more money it gets in the door allowing it to meet its liabilities out of future premium income.
• Many businesses made temporary repairs and got back to business, planning to get repairs underway once the dust settled. The trouble is, the indemnity period continues to tick away and now, nearly 12 months later, they face a serious problem when they have to close down for repairs at a time when their indemnity period has expired. In that case the insurance company will directly gain from the delay in commencing reinstatement.
No quick fix
It has become reasonably well known that insurance companies are looking at some quite novel processes for repairing what was previously thought to be irreparable. One process involves injection of resin into the foundation ground beneath the building to lift the building back to level at its original height.
There are cases in which this is being considered for severely distorted and cracked concrete slabs. So perhaps the delays can be attributed to insurance companies frantically attempting to reduce their losses by trying to find ways to repair the irreparable.
Who knows the real reason for the delays but it does seem somewhat incredible that 12 months after the event, insurance companies are still trying to decide whether to repair or replace. When Feb.22 rolls around it seems that many Christchurch businesses will find their financial situation will seriously take a turn for the worse.