Insurance – Funding of Fire Services

POSTED BY Karl Stolberger
Barbara Versfelt
24 June 2013

posted in Caselaw | Insurance

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The Government is undertaking a review of the Fire Service. Over time the functions performed by the fire services have changed and now cover a wider range of services, including non-fire emergency services. The funding arrangements in the applicable legislation no longer align with the services undertaken.

Currently, the management of rural services is governed by the Forest and Rural Fires Act 1977 and funding of those services is predominantly through local authority rates. The urban fire services are governed by the Fire Service Act 1975 (FSA) which establishes the NZ Fire Service Commission, which is also the National Rural Fire Authority. Funding for the urban fire services is from levies imposed on contracts of insurance of property against the risk of fire. The rate of the levy is presently 7.6 cents per $100 of the value insured.

Questions have been asked whether the basis for charging the levies under the FSA is equitable. Persons within New Zealand who do not purchase insurance do not contribute to the cost of the Fire Service but nevertheless receive the same protection as those who pay for it. Businesses may be able to structure their insurance in such a way as to limit the amount of levies they have to pay. In the circumstances, alternative methods of funding are being considered. Such methods include general tax or funding through property tax.

The Fire Review Panel was commissioned to undertake the review. In December 2012, the Panel submitted a report of its findings. It has recommended a mixed funding system. With respect to non-residential property, this involves a levy on the amount of premium instead of the amount for which the property is insured. The levy would be payable not only on contracts of fire insurance but on all material damage contracts of insurance. For residential property, the Panel recommends that the arrangements remain the same, but with the current cap of $100,000 per dwelling on which the levy is calculated adjusted.

Recently, the Insurance Brokers Association of New Zealand Incorporated (IBANZ) brought a declaratory judgment proceeding to determine the correct method of calculation of fire levies for commercial property under the FSA, involving the interpretation of section 48 of the FSA (Insurance Brokers Association of New Zealand Incorporated v New Zealand Fire Service Commission [2012] NZHC 3437).

Insofar as relevant, section 48 FSA provides:

"(6) For the purposes of subsection 2(b) of this section, the amount of which the property is insured for the contract of fire insurance shall be-
(c) in the case of other property, where the contract of fire insurance provides for the settlement of any claim for damage to or destruction of the property upon any basis more favourable to the insured person than its indemnity value or where there is no sum insured in the contract, be computed on the basis of the indemnity value of the property as stated by either of the following../..
[declaration, valuation]
(7) This section shall not apply to any contract of fire insurance that is limited to an excess over the indemnity value of the property or to any portion thereof which is in excess of its indemnity value
.”

Relevantly, section 2(1) of the SLA defines the term "contract of fire insurance” as "an agreement whereby any property is insured against loss or damage from fire, whether the agreement includes other risks or not, but does not include any contract of marine insurance or any contract of reinsurance.”

The first declaration sought by IBANZ concerned split tier contracts of insurance. Split tier contracts provide for different layers of insurance in one policy. For example a three tier programme may provide for (1) fire indemnity cover, (2) a fire excess of indemnity cover (i.e. up to the reinstatement value) and (3) non-fire indemnity cover. IBANZ argued that the fire levy should only be calculated on the indemnity sum stated in the first tier. High Court agreed with this and made a declaration accordingly. The effect is that the fire levies can be minimised by stating a low (albeit fair and reasonable) indemnity value in the first tier of the policy whilst higher values may be insured under other parts of the policy.

Secondly, IBANZ applied for a declaration in relation to a composite policy. Under a composite policy, the insurer has separate and distinct obligations to more than one insured in a single document (as opposed to each insured having its own policy). Under the composite policy before the Court, eight separate parties were insured under a single policy. Collectively, they purchased material damage insurance covering their respective properties individually. By doing so, they were able to purchase less insurance cover for the indemnity value of their insured property against the risk of fire, thereby reducing the costs of the fire services levies. The Commission argued that this arrangement was artificial and operated to avoid payment of appropriate levies and that, instead, the policy should be interpreted as one involving multiple separate contracts of insurance so that a levy could be calculated on the indemnity value of property of each insured separately. The High Court did not agree that the arrangement could be characterised as artificial. The policy had commercial benefits to each of the eight insureds that went beyond a reduction of the amount payable for the fire levy and, in addition, each of them took on business risks by entering into a single policy.

We understand that the Fire Service Commission is appealing the High Court decision.

Image creative commons licenced by Mr Thinktank

 

POSTED BY Karl Stolberger
Barbara Versfelt
24 June 2013

posted in CaselawInsurance

VIEWED 5479 TIMES

PERMALINK

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