Public Inquiry into the Earthquake Commission

EQCfix.NZ made the following submissions to the Public Inquiry

Submission 2 of 9 

Control Over Natural Disaster Fund (NDF)

Submission Date: 20th May 2019

Calculations completed by EQCFix.NZ show the size of the Natural Disaster Fund on 30 June 2010 would have been a conservative $9.6 billion, as opposed to the $5.63 billion as at 30 June 2010 had the Crown not ‘plundered’ the NDF from 1988 to 1996. 

While EQCFix.NZ understands the legal and accounting actions behind the reforms from 1988 to 1998, our concern is what the underlying motivation was for this ‘corporatisation’ and whether ‘independence’ from the Crown was, in reality, the opposite of what was achieved. Therefore, we ask in who’s best interests (politicians or homeowners) most influenced the operational decisions were by (and on behalf of EQC) in Canterbury from the 2010-11 event sequence? 

For example, we question to what extent the Crown and political control over the NDF dictated operational decisions of EQC such as a “Managed Repair Programme” as opposed to cash settlement post the Canterbury Earthquake sequence, when combined with the overarching Crown fiscal position and global economic conditions in 2010 and 2011. 

As alluded to by EQC itself in 1997, a valid question is whether the NDF is mythical or not. 

We also wonder to what extent the EQC, being in a negative equity situation since 22 February 2011, has affected its operational response to claim outcomes? Especially given EQC’s overall total estimate of the cost of the Canterbury earthquake as fallen between 2011 and 2018, which is in stark contrast to all other insurers’ liability developments (‘loss creep’) in Canterbury. 

Ultimately it appears to EQCFix.NZ that EQC was not in control of its own destiny, and decisions made many decades before the Canterbury Earthquake Sequence had already dictated the outcome that was experience by many. 

The NDF is a myth, and as a myth it means the only practical use of the EQC is as a ‘social contract’ between the public and the Crown. Whilst this is useful, it opens the question of who holds the power, at a time of each natural disaster, to alter or manipulate that ‘social contract’. 

SUBMISSION 3 OF 9 

EQC’s Approach to Land Damage in Canterbury 

Submission Date: 20th May 2019

EQC was aware of its statutory obligations for land damage, settling four land claims in Fendalton Christchurch, using its statutory provisions, just before the second major event in February 2011 struck. 

However, upon realising the cost of its statutory obligations, given the size of the February 2011 land damage which soon followed, and the Government of the day, hid and fudged these settlements from the wider public. 

The Crown stepped in to pick up EQC’s land obligations in an area that came to be known as the ‘Red Zone’ in June 2011. 

EQC then spent many years developing and refining a legal approach to land claims which was designed to minimise its liability for others outside the Red Zone. 

Some in Red Zoners were able to put this experience behind them, but the advantage of this cohort came at the disadvantage of the ‘non-Red Zoners’. The non-Red Zoner’s received either ‘cheques for small amounts’ for an invented ‘reduction in value’ of their land or received nothing at all because of arbitrary thresholds. 

The constant shifting sands of the EQC’s approach to land claims delayed the Canterbury recovery for many years. It has resulted in inequitable treatment for land owners and is contrary to the intentions of Parliament when the land cover was introduced in 1984. 

SUBMISSION 4 OF 9 

EQC's approach to residential building claim outcomes in Canterbury  

Submission Date: 20th May 2019

EQC was designed to mirror fire insurance in the private sector. When the private sector moved from ‘indemnity value’ cover to ‘replacement value’ cover, Parliament moved EQC cover to mirror this. However, for reasons that likely sit somewhere between financial pressure and confusion, EQC believed Parliament had intended their standard of replacement value to be less than the private insurance industry. 

That was fundamentally incorrect and makes no sense. 

EQC’s most senior Case Manager knew this, and she communicated it to EQC’s senior executives very early on in the Canterbury sequence recovery. 

The likely pressure on EQC from its Minister and monitor (Treasury) to save money, combined with poor legal advice, appears to have resulted in a decision to manage repairs in order to take advantage of a fictitious ‘proviso’ in its legislation, which naturally lead to the production of a Guidance document to fully take advantage of the perceived ‘proviso’. 

This Guidance was also willingly adopted by private insurers and supported by brokers on behalf of international reinsurers. 

Even if it was accepted that EQC initially made a mistake, it is difficult to accept why they then continued to promote and apply this wrong standard to other events. 

SUBMISSION 5 OF 9 

Technical Guidance 

Submission Date: 20th May 2019

In this submission we discuss the development of a technical guidance document that is known as the MBIE Guidance. We place a specific focus on the EQC’s involvement in the development of a technical guidance document.

The [MBIE Guidance] document can be located on the MBIE website. URL: https://www.building.govt.nz/building-code-compliance/canterbury-rebuild/repairing-and-rebuilding-houses-affected-by-the-canterbury-earthquakes/ . 

Through our research, it is apparent that one staff member within the EQC is instrumental in the development of the MBIE Guidance (Guidance) document. It is our opinion that the lack of in-depth analysis prior to its development, followed by its extensive use by insurers and their agents, is a root cause of many of the issues experienced by homeowners in relation to missed damage, under-scoped damage, and failed repairs. It is the view of many, that have researched the Guidance, and its formation, that it is a poorly considered document resulting in ill-conceived repair strategies. 

With appropriate investigation it will be found that the application of the MBIE Guidance has placed a significant financial and emotional burden on individual homeowners. That burden is spreading outwards, from the individual, and is being played out in our health system, property market, insurance markets and so forth. It is impacting our local and central government as they begin to incur the costs to rectify what has gone before. The MBIE Guidance is a long-term legacy with far reaching consequences. 

It is our understanding, that the intention in development of the Guidance, was to create a set of ‘engineering guidelines’ to concentrate engineering resources, refer Figure 4: Dave Brunsdon from Kestrel provides Hugh Cowan, of EQC, with advice. However, the consequence of the decision, coupled with an ‘I know best approach’, a lack of research, evidence gathering, and auditing resulted in the EQC, and consequently private insurers, under assessing CES structural damage to residential homes, misinterpreting structural damage as ‘cosmetic damage’. There is no doubt these concerns were raised very early on, refer Figure 6: EQC being made aware of risk of under-assessment of damage and the likelihood of boomerangs. 

SUBMISSION 6 OF 9 

Expert Analysis - Foundations  

Submission Date: 20th May 2019

Summary | Discussion Points 

  • If an engineer is making a decision their reports must identify the material used in the construction, how it behaves in an earthquake, and how it has been damaged, how the repair strategy reinstates to the policy entitlement and the calculations that support their proof to be replicated.

  • Engineering is maths and it is time we demanded engineers to use the math to verify the opinion.

  • The EQC does not pay their bills until they have done all the things listed above!

  • The EQC develops a continually improving process for the identification of the material and then the nature of the damage before any decisions are made about reinstatement. Assumption is the enemy, proof is required!

  • Gathering of site data does not require an engineer to be on site. Technicians can gather the data, i.e. subject matter experts. Engineers should be considered a high cost resource, dedicated to repair strategy, not damage investigation. Lower cost options can be used rather than buying expensive opinions that are rarely supported with maths. $11,000k opinions are an absolute waste of money.

  • NZCSE is a prime example of rubbish in and rubbish out.

  • If taking an inquisitional approach, this will remove any need for an opposing opinion because there is independent data and any repair solution has considered entitlement and has a verifiable solution that the repair meets the entitlement – all without an opinion.

  • The EQC should not have preferred engineering suppliers. It creates a climate of distrust. It drags reporting down to the lowest common denominator, rather than lifting it to best practice. It removes the natural competition to secure work based on quality of the output which otherwise exists in these kinds of markets. It creates a group think mentality, i.e. if they all think it, it must be right, even if it is wrong, and a lack of willingness to challenge each other in case they lose the contract. It creates a mentally for some firms they are on the public gravy train – get paid regardless of output.

Introduction 

Foundations are the biggest issue in the damage caused by the Canterbury Earthquake Sequence. This is because there are regional variations in the way in which buildings in Canterbury have been constructed over time. This is in part due to the nature of readily available materials in Canterbury, because of the braided rivers throughout the province that provide vast quantities of river rounds. These have found their way into foundations throughout Canterbury, but have subsequently been expressly removed from the New Zealand Standard (NZS3604:2011) for residential construction following the CES due to inherent deficiencies in their use. 

The EQC had historically commissioned research which demonstrated known differences in foundations in Canterbury, particularly the paper by R C Cooney (Cooney, 1979) on the structural performance of houses in earthquakes. It does not appear that EQC understood this research latterly in the work of the EAG, or earlier work developing the Earthquake Damage Assessment Catalogue (EDAC) by BRANZ. This knowledge was sidestepped in favour of assumptions that all damage was identical, as all housing stock was identical. The Chief Engineer of BRAN, who developed the EDAC, noted in an article we reference in a paper on Foundations (included as a supplementary document) the use of large quarry rocks in foundations requiring reinforcing when rebuilding. Engineers were thinking all foundations were modern concrete and in reality, did not and still do not understand the materials they are opining over. EQC still has no research into how these foundations behave in an earthquake, nor into the efficacy of the repair solutions proffered. Where repairs fail in the future, EQC will still be liable to repair, and will do so over and over again unless they take an approach which correctly repairs the material they are dealing with. 

Repair strategies were sourced based on the Auckland housing stock, and repair methods that are appropriate in the materials used there. As we know Auckland is built on volcanic rock, not silt and alluvial gravels. 

Discussion 

It is important to frame this discussion in the nature of the environment that claims settlement takes place. This environment is adversarial in nature, and what we have seen is that the correct technical argument is not necessarily the victor, but the one that is the loudest. 

If the outcome of the claims management process is to ensure the claim is settled to the entitlement of the policy, at the lowest reasonable price for the insurer, then it is likely an inquisitorial approach is a more appropriate model. 

Experts Advisory Group 

GCCRS: there is only an engineering panel 

Engineering New Zealand has provided a number of engineers for the engineering panel for the GCCRS to determine differences in engineering opinion between insurers engineers and engineers for the insureds. As discussed in the Submission on experts, this approach continues to glorify expertise, which simply isn’t there without training, but if training is undertaken it is facilitated by the insurers who have an interest in the outcome. 

This training, by the evidence that exists, has been provided to facilitate the insurers position, and this is in part the problem with the use of a chosen engineers’ panel for GCCRS. The majority of the engineers on the panel can be considered as insurer’s engineers due to the training they have been provided, this is inclusive of MBIE Guidance. 

If true independence and impartiality is required then this panel, must consist of subject matter experts who understand the materials in use, the policy entitlement, and be impartial and come from a wider pool of expertise. 

The attitudes towards subject matter experts and their knowledge, other than engineers, within the legal, and engineering profession remains dismissive at best. In many cases, and in fact at a mediation, I was told by counsel for Southern Response and EQC to be quiet and let the engineers talk. I was at the time discussing the nature of the construction of the foundation the engineer for the insurers was opining over, and trying to reach agreement on its construction. Many engineers fail to appreciate that there are a variety of differences in the way in which foundations in Christchurch and the wider Canterbury region were built, and how the CES affected those foundations. They simply do not have the expertise to provide opinions which fall within their ethical obligations because they do not understand the material they are dealing with. Most engineers rigidly hold to the MBIE Guidance, and how the insurers have trained them to respond, with little independent thought, and have been paid handsomely to do so. 

Understanding Concrete – MBIE Guidance 

What is concrete? This is the stuff that makes up most foundations in Christchurch, it was around in Roman times and today is quantified by s4.5.2 of New Zealand Standard for Timber Framed Buildings (NZS3604:2011) which is the prescriptive standard for construction of homes in New Zealand. It defines the strength required, the type of aggregate to use, the type of fines to use, even the type of fill that a slab can be placed upon. The recipe for the concrete is known to all, generally comes from a certified concrete supplier and meets the required standard. 

The recipe for concrete is very much like the recipe for a cake. The recipe states x amount of flour, x amount of butter, y eggs, x amount of sugar, and provides a method for mixing. This differs from cake to cake, but a competent baker, with a recipe could replicate a cake from that recipe. Conversely if you are given a cake, not told what it is, what its constituent ingredients are and asked to provide a recipe and method simply based on its external appearance this may not be so easy. Now imagine a table full of cakes, all iced identically with no visible cake, how would you visually determine the cake ingredients and method used to make each cake? Do you know they are all the same, because they look the same on the outside? Were they all made the same way? If you do decide to cut open the cake it is only then you will discover the walnuts, peanuts, sunflower seeds, raisins, almonds and in a lot of cakes you will find almost no flour and lots of different sized nuts jammed together, then again, what if a vegan made the cake…(you get the idea)! 

The uncut, iced cake analogy is how engineers have been trained to identify damage, in this case foundation damage, but is applicable to other areas as well, e.g. linings. Just like the cakes, they don’t know what is in there, don’t know how it was made, don’t really understand how its been damaged. Rather the MBIE Guidance has been used to determine only the crack width on an external plaster finish (akin to the cake icing). 

This identification by crack width originates from a report into residential damage in the Northridge Earthquake in California. That report states that when a crack is 3mm or more or offset it requires the attention of a structural engineer due to the damage. In the MBIE Guidance this became a 5mm crack which does not require the attention of a structural engineer. In the original American document, the crack damage is in certified reinforced concrete. That is concrete built to specific and known recipe. In most residential situations in Christchurch the crack damage being assessed is in the plaster finish (akin to the icing on the cakes) and ignores the material beneath where the true damage lies. (In Emmons v Mitsu/Vero the court accepted the evidence of John Hare, a member of the Engineering Advisory Group that stated the 5mm guideline, that cracks as small as 0.2mm are structural damage, which have affected structural capacity). 

Coming back to the cake analogy. Using an iced nut cake. If the cake is violent shaken the nuts will separate, but let’s imagine the icing held together. You cannot rely on am exterior visual inspection alone (the good thing with foundations is you can look at them from the underside, i.e. interior). 

The way to think of this is the crack in the plaster is it may indicate damage or might just be a crack in plaster. It does not necessarily even mean the damage is at the location of the crack. 

The issue I have observed in the 100’s of reports and foundations I have reviewed is many o the insurers structural engineers relied only on exterior visual inspections. It is my opinion this is a systematic failing and the cost correct is significant. 

Use of Fitzgerald v IAG 

The GCCRS brokers used it. Engineers are using it. EQC use it. SR use it. 

Justice Gendall provided a judgement in the Fitzgerald v IAG case in December 2018. The case considered damage to a ‘Rubble Foundation’ made up of oversized aggregates, placed rocks, with minimal cement and fines. Justice Gendall found that an epoxy repair would be possible at the address, provided that it was able to get a building consent and an engineer’s sign off (PS4). He found the foundation was unique. The judgement was subject to a recall hearing, which did not succeed. Justice Gendall appesars to have placed significant weight on the testimony of Roydon Turner (LBP for IAG), when he stated that he had completed the repair 20 times under consent and exemption. No such consent has ever been issued by CCC, which we confirmed in an inquiry to David Hutt, Principal Building Officer (Consents) at the Christchurch City Council. (Note CCC consider epoxy repair of foundations no different to paint, entirely cosmetic with a life span of no more than 5 years.) 

When insurers have relied on this judgement to advance their position to the detriment of the claimant, they have failed to understand the judgement relates to one particular property, where the foundation was found to be unique. The insurers do not consider the qualifying elements in the judgement, nor Justice Gendall’s ruling that should IAG not get a consent or PS4 then the foundation is to be rebuilt. 

A subsequent case Plastertech v Auckland Council in the Auckland High Court, the court found that any work which touches an element which contributes to the structural stability of the building requires a consent. The Plaintiff’s argued that they were entitled to rely on the MBIE Guidance documents issued under s175, which was rejected. The court found that building work on an element which contributes to the structural stability of a building is not maintenance but requires consent, and must have a lifespan of no less than 50 years. Most work requiring re-repairs in Christchurch involve foundation works which have failed or been under-scoped. 

Solution 

There is a huge breadth of expertise developed by individuals as a result of the CES. There are silos of information and they need to come together if we are to adequately prepare for the next event. The question is how do we best do this given the adversarial nature of the process most have been through, and the entrenched positions, on both sides? 

It is imperative that this knowledge is captured and analysed in order to be able to identify a best practice process, which incorporates this knowledge and reduces potential harm in any future response. 

Knowledge Management and Knowledge Sharing 

Needs trust, and compensation for the knowledge being shared. Mel has provided some correspondence between herself, the EQC and ENZ on this topic. 

SUBMISSION 7 OF 9 

Training and Use of Experts to Assess Damage   

Submission Date: 20th May 2019

Summary | Discussion Points 

In this submission, we discuss the use of experts, what makes someone an expert, alongside how we could go about being better prepared for the future. 

Discussion Questions 

This submission is intended as a catalyst for discussion around the following key points, which are: 

  • What competencies are required to assess damage to a structure when an insurance claim is involved?

  • What grouping of experts is required to determine natural-disaster damage when an insurance claim is involved?

  • What grouping of experts is required to determine the most appropriate repair strategy when an insurance claim is involved?

  • What does a structural engineer need so they can design a repair methodology that presents the least risk of failure to a client?

  • When a structural engineer and other experts are engaged, who is the client -- the insurer, the insured, or both?

  • How do an insurer, the EQC, and the insured know whether a person listed as an ‘engineer’ on the ENZ database actually has a specialised degree in structural engineering?

  • Is it appropriate to use a ‘graduate engineer’ to identify damage to homes?

  • Does an engineering degree provide appropriate expertise for determining natural-disaster damage?

  • Why do they (the EQC and insurers) appear to refuse to trust the experts engaged by an insured person, even when those experts have the same, or better, qualifications and experience than those selected by the insurer?

  • We had the Engineering Advisory Group (EAG), why not have an “Experts Advisory Group, made up a range of subject matter experts.

  • Why are we now in a culture where every report is countered with yet another report - $1.5 billion in claims management!

SUBMISSION 8 OF 9 

Claims Reopened | Claims Preparation | Customer-Managed Repair  

Submission Date: 20th May 2019

  • What is an Insurance Response?

  • An Appropriately Conservative Approach 

  • Unforeseen Costs 

The EQC needs to take a more process-orientated approach to their decision making. This includes looking at trialling a project-management process that offers quality assurance and control processes, being willing to learn from that process, and implementing what works. 

I strongly recommend they take a pragmatic approach to their ‘customer managed repair’ programme and implement a process that is realistic, appropriate and provides the right level of risk mitigation. 

It is also worth exploring an element of claims-preparation costs for the policyholder to access as part of the cap payment. 

SUBMISSION 9 OF 9 

Power Imbalance and Critical Points for Future Planning 

Submission Date: 20th May 2019

Summary 

The Recommendation 

We recommend that a regulatory body be established whose role is support, educate and empower natural disaster claimants. This body would be connected a larger body who is charged with the wider insurance industry. 

Key discussion points 

  • Wealth and powerful organisations are on one side, individuals on the other.

  • The scale of vulnerability after a disaster everyone is vulnerable.

  • The ICNZ is a lobby group for the insurance industry; a lot of people do not know this.

  • Post-CES, the community had to educate itself at its own cost.

  • Could a regulatory authority correct the power imbalance?

    • Support, educate and empower insured homeowners.

    • Connect the new initiative with the MBIE.

    • Start with the right people.

    • Use the current situation in Canterbury as the test case for the regulatory authority.

    • Give it real independence from insurers and the EQC.

    • Ensure that it provides a way to regain confidence.

  • What after the CRG, HOAG and other similar groups? What is their lifespan. Short term?

    • Put the funds towards a long-term initiative doing work towards future preparedness, for example: Education, Support and Empowerment.

    • Connect it to other initiatives to provide protection and support for the insured.

  • Incorporate mechanisms for ensuring good faith.

  • Empower people by educating them. Insurers might not like that, as people are then informed and empowered, whereas a climate of ignorance means people do not know what they are entitled to.