That was the challenge facing Christchurch Council following the 2010 earthquake.

Council had the power and an obligation, under the Building Act 2004 (NZ), to develop policies on ‘dangerous, earthquake-prone and insanitary buildings within its district’ (s 131). Following the earthquake the Council determined that it would require damaged commercial buildings to be repaired to meet 67% of the earthquake standard that applied to new buildings. Further the council had the power (under s 124) to require work to be done to render a dangerous or earthquake prone building safe. Taken together Council took the view that it could introduce a policy requiring buildings to meet 67% of the new building standard and impose work orders to require that the owners of commercial buildings bring them up to that standard.

The Insurance Council of New Zealand argued, for reasons that will be explained below, that the council could not require the buildings to meet more than 33% of the new building standard. The Insurance Council sought a declaration that the city Council policy was invalid. The Insurance Council’s concerns were that the Council’s members had issued insurance policies, and issued premiums, based on their understanding of the risk. If buildings now had to be ‘built back better’ the cost of claims would be much more than the insurers had allowed for when setting premiums. The Insurance Council gave evidence that “if seismic strengthening to 67% is required the cost of reinsurance will increase and the willingness of reinsurers to invest in the New Zealand insurance market may be compromised” (Insurance Council of NZ v Christchurch City Council [2013] NZHC 51, [5]).

The Council was joined by the University of Canterbury and the owners of a block of apartments who wanted to build back better. If the requirement to build to 67% of the new building standard was required by law, their insurers would have to meet the extra costs of the repairs, if it was not required then they would have to meet those extra costs.

The application for judicial review was heard by Pankhurst J who found that the policy was not permitted by the Building Act. The University and the private land owner appealed to the Court of Appeal; the unanimous decision in University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471 was delivered on 8 October 2013. The court (Harrison, White and Asher JJ) confirmed the original decision; the requirement to require buildings to be upgraded to 67% of the new building standard was beyond the Council’s power.

Reasons
The case was not complex and depended on the words used in the Act. The Act said that “territorial authorities must adopt a policy on dangerous, earthquake-prone, and insanitary buildings” (Building Act 2004 (NZ) s 131; cited in Insurance Council of NZ v Christchurch City Council [2013] NZHC 51, [21]). The council said that it’s policy was a policy with respect to ‘earthquake-prone’ buildings. The Act defined the terms ‘dangerous’ and ‘earthquake-prone’ buildings. A building was dangerous if:

(a) in the ordinary course of events (excluding the occurrence of an earthquake), the building is likely to cause—
(i) injury or death (whether by collapse or otherwise) to any persons in it or to persons on other property; or
(ii) damage to other property; or
(b) in the event of fire, injury or death to any persons in the building or to persons on other property is likely. …
(Building Act 2004 (NZ) s 121 cited in Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [14], emphasis supplied by Asher J).

A building is earthquake prone if, and only if,

… having regard to its condition and to the ground on which it is built, and because of its construction, the building—
(a) will have its ultimate capacity exceeded in a moderate earthquake (as defined in the regulations);
and
(b) would be likely to collapse causing—
(i) injury or death to persons in the building or to persons on any other property; or
(ii) damage to any other property.
(Building Act 2004 (NZ) s 122 cited in University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [16] emphasis supplied by Asher J).

A moderate earthquake was defined as

… in relation to a building, an earthquake that would generate shaking at the site of the building that is of the same duration as, but that is one-third as strong as, the earthquake shaking (determined by normal measures of acceleration, velocity, and displacement) that would be used to design a new building at that site.
(Building (Specified Systems, Change the Use, and Earthquake-prone Buildings) Regulations 2005(NZ) r 7, cited in University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [17] emphasis supplied by Asher J).

The argument by the Insurance Council was that a building that could withstand an earthquake that was “one-third as strong as, the earthquake … that would be used to design a new building at that site” was not ‘earthquake prone’ and therefore any policy under s 131, relating to earthquake prone buildings, could not apply. Christchurch Council, and on appeal, the University of Canterbury and the Oxford Body Corporate, argued that the definition in s 122 should be read as if the word between sub-paragraph (a) and sub-paragraph (b) was an ‘or’ and not an ‘and’; that is if, in an earthquake, the building would be likely to collapse causing injury, death or damage then it should be considered earthquake prone and subject to a policy for earthquake-prone buildings (see University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [23]).

The court rejected the argument reading the words of the Act as they were written, if the ‘and’ was read as an ‘or’ then a building would be earthquake prone:
a) if its ‘its ultimate capacity [would be] exceeded in a moderate earthquake’ even if there was no risk of death or injury; or
b) if it was only likely to collapse in an earthquake more severe than a moderate earthquake (as defined in the regulation).
The court took the view that it was “unlikely that such consequences were intended.” It was more likely that the Parliament intended the two clauses to be read together so that building was only earthquake prone if it was likely to collapse during a moderate earthquake – “To be earthquake-prone it must be both a building that will have its ultimate capacity exceeded in a moderate earthquake, and also a building that would be likely to collapse.” (University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [26]-[27]). Further:

Section 122(1)(b) only refers to danger of collapse and does not refer to the cause. If it could be read alone, as the appellant suggests, then any likelihood of collapse, whether or not it had any connection to an earthquake, would mean that the building was earthquake-prone. (University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [28]).

If the building was not likely to fail during a moderate earthquake, that is if meet the new building standard by at least 34%, then it was not an earthquake-prone building and if it was not an earthquake prone building then council could not impose, as part of its earthquake policy, a requirement that the building be retrofitted to a higher standard of earthquake proofing.

Discussion
This case was a simple application of giving the words of the statute their normal and natural meaning. If the law was, or is, inadequate, then the Parliament of New Zealand can change it and amend the definition of earthquake prone.

One might think, from a community and public safety point of view, that requiring buildings to withstand an earthquake 2/3 the strength of the earthquake used for new building standards would be a good idea; but a court isn’t there to ruel on what is or is not a good idea, but no what the law is. Further, when matters get to court it’s because there are competing interests and in this case the critical issue would be ‘who has to pay?’ and the insurance council, on behalf of its members, did not want to be burdened with these extra costs when they had made their premium and commercial decisions on an understanding that a building was earthquake prone if, and only if, it was likely to collapse during an earthquake greater than 1/3 of the new building standard.

It is however that point that is most interesting. The mantra in disasters management circles is that money spent on prevention is money well spent, the money spent restoring buildings to 67% of the new building standard could be expected to save more money when the next earthquake strikes. A question can be asked therefore why don’t insurance companies encourage and contribute to mitigations measures? The answer is as shown here, the insurance receive a premium income that is calculated by reference to their risk. If the risk changes (eg by a change in building codes after the event) then their premium calculations are wrong. The primary role of an insurance company, like any company in our economy, is to make a profit and deliver a return to shareholders. In the Court of Appeal it was said that the Insurance Council:

… was concerned that the new policy would increase the cost of earthquake repairs for building owners who would in turn seek to claim the cost of those repairs from their insurers. If a 67 per cent requirement was to be imposed, the estimated increase to the repair bill of insurers could run into hundreds of millions of dollars. (University of Canterbury v Insurance Council of New Zealand [2013] NZCA 471, [5].

There may be savings in the future, but that will be different insurers who have calculated future premiums. It might also be inferred that if buildings were now able to withstand a more severe earthquake, then the risk and therefore the premium income would also be reduced. The lesson is that even when there are large payouts, well run insurance companies, that have assessed their exposure and collected appropriate premiums and obtained appropriate re-insurance, do not start making losses during these events but they might if the costs of repairs are increased by regulation.

The position can be compared to the University that saw the value in increasing the strength of the buildings but, like the insurance council, did not want to meet those costs alone. It may be true that at a macro level money spent on preventing damage is money well spent but the simple maths hides the fact that it makes a fundamental difference as to who is paying it, and who is being saved. If property owners pay for the mitigation, the insurer saves money (and may reduce the premium) if the insurer pays for it they may save money if the event occurs (which it may or may not) and the premium income in their hands today may be worth more than the projected saving in the future.

What I think can be inferred from the response of the insurance council is something that should come as no surprise, they’re in the business to make money and they do that by collecting a premium based on their know risk. All the parties to this case may agree that the 67% standard would be good practice, but it went to court as no-one wanted to pay for it.

Michael Eburn.