Fire insurance ruse legal but immoral
INEQUITY IN the application of laws is cancerous to the sense of an inclusive society.
Offshoring assets, sheltering assets in trusts, tax minimisation schemes, and privileged access to the courts and the best lawyers are among the advantages of wealth, whether individual or corporate.
Last year fire levy minimisation was added to that list, with articles in this paper shedding some light on a hitherto unreported legal tussle between the Fire Commission and the Insurance Brokers Association.
It was around clever insurance schemes that allowed businesses to pool their fire risk.
The case centred on eight ports (Ports of Auckland included) that effectively had one policy predicated on the idea that the risk of more than one of the ports being ravaged by fire in a single year was pretty low.
Clever insurance brokers came up with the idea that in such situations, similar businesses could save money by choosing a collective indemnity value that was a fraction of their total asset base and pay a lower insurance premium, and hence a lower fire levy, which is calculated as a proportion of the sum insured.
Because such schemes proliferated, the fire levy households and smaller businesses paid spiked, and households, and for that matter smaller businesses, are not offered risk-sharing joint policies.
It’s not me saying that. It’s no less than Chapman Tripp, and that was 11 years ago.
In the case before the High Court, which was brought after years of ‘‘festering’’ discontent at the Fire Commission and the insurance brokers, the ports chose a sum of $250 million.
Importantly, the ports contract had a second element whereby a further $500m of excess property damage including by fire was provided, but on this, they believed no fire levy had to be paid.
The Fire Service objected, but the court found that the clever brokers had stuck within the wording of the law, which was in effect 1951 law left to languish.
The loophole the ports and others were using was legal, it found. Legal maybe, but moral it isn’t. I sympathise with any business with large infrastructure trying to keep down costs and remain competitive and profitable.
From its 2001 analysis, Chapman Tripp wrote: ‘‘Take, for example, the owner of the portfolio of properties with a current market value of $500m located in different parts of the country. The most valuable collection in any one location is, say, in Wellington, and these properties have a current market value of $100m. If the property owner purchases $500m of fire cover, then it is liable for a levy of $365,000. However, if the property owner purchases only $100m of fire cover, expecting that this is as much fire cover as it will need to cover claims in a year, the levy is only $73,000.’’ But none of that is the point. The point is that firefighters will risk their necks to save lives, including those of the company directors, should any of those buildings go up in flames.
It is nearly as bad as those who do not pay house insurance or car insurance and still expect the Fire Service to turn up when they need carrying down from a bedroom window, or cutting out of their overturned car.
The point is that someone else has to pay more to ensure there are firefighters there to tackle blazes, or help pull them from earthquake rubble.
Business can afford advisers who can find and exploit this kind of loophole, and what is legal has long been equated as what is moral by some in the business community. Indeed, competitive forces drive that. Brokers who refused to run such schemes would lose clients.
The Government has announced a review of the Fire Service, including its funding.
The final report was due to be with the Internal Affairs Minister Chris Tremain last month, and was to include, to quote Tremain, that: ‘‘Funding needs to be stable, equitable and predictable.’’
There are heavy hints that it will still be collected from insurance premiums so it remains to be seen whether the underinsured, the uninsured and the well-advised are to be allowed to continue to rely on a service for which they pay less than their fair share.
It seems hard to believe that can produce a fairer outcome than for levies to be collected on property rates and on vehicle registrations, which would finally mean everyone pays, and that households could pay a fairer, smaller share.