The controversial ‘double-DRA’ earthquake insurance practice used by troubled Government insurance company Southern Response can be traced all the way back to its predecessor, the bailed out private company AMI Insurance, new documents show.
Lawyers for claimants believe the practice, which was found to be “deceptive” and “misleading” in a landmark judgement from the High Court, saw as much as $300 million in potential payments hidden from thousands of homeowners after the quakes.
The internal documents, obtained by 1 NEWS under the Official Information Act, show AMI insurance working with project managers to make two versions of their analysis system, known as DRA, in a way that kept some of the costs secret from its customers.
DRAs are first discussed in a meeting held between AMI Insurance and project management firm Arrow on December 6, 2010, just three months after the first earthquake struck in September.
AMI Insurance had a large portfolio in Christchurch and was under significant financial stress at the time.
The notes show that executives initially intended to provide “priced DRAs” to customers but the group discussed this and agreed it was “not a good idea”. The notes show they were worried that the information would “quickly get to builders” and create problems around commercial sensitivity.
The topic is discussed more extensively in an email trail between AMI and Arrow staff in April 2011, shortly after the second destructive earthquake, which hit in February of that year. The company now did not have enough money to pay out the earthquake claims and needed financial support from the Government.
The email discusses a “revised DRA layout” and shows the company moving to split its assessments into two. One would be kept with all figures except for a contingency, while a second “customer” DRA had certain costs removed. The emails do not discuss the motivation for this decision.
The Government later agreed to take ownership of all of AMI’s earthquake claims and created its own company to handle them named Southern Response, which continued to use the same policy on thousands of claimants.
Earthquake insurance lawyer Peter Woods says the emails show the “root cause of the problem”.
“This was the decision made that if there was going to be a cash settlement, we'll cash settle for less than we estimate the total cost of the rebuild will be,” he says.
“Those people were local people working in Christchurch and creating a system where other Christchurch folk missed out.”
Insurance claimants advocate Ali Jones says she was not surprised by the news and suggested new legislation should be introduced to monitor insurance practices.
“There need to be punitive measures put in place to hold these companies to account, they only understand what hits them in the back pocket,” she says.
“The sooner that our legislation changes so these insurance companies are held to account financially, then we may see some of these practices starting to change.”
It’s not clear how high up the company the decision was made. Responding to questions from 1 NEWS, the former CEO of AMI insurance John Balmforth claimed he was not aware of any kind of split DRA policy.
“From 26 April, 2011, until 31 May, 2011, I was absent from New Zealand in Australia, Bermuda, United Kingdom and Europe negotiating with AMI’s reinsurers,” he said.
“Upon my return I cannot recall having been updated on such a policy.”
While AMI started the policy, Southern Response continued it and was just last month criticised by the High Court. The judge described the policy as deceptive and misleading and ordered the company to pay out the costs that had been hidden, but the company has since announced it is heading to the Court of Appeal.
Peter Woods, who was the claimant’s lawyer in that High Court case, said the fact AMI developed the policy doesn’t let Southern Response “off the hook” just because a system was in place when the Crown got involved.
“They needed to do their due diligence, they continued that system for years knowing people were getting ripped off.”
In a statement to 1 NEWS this afternoon, Southern Response defended its actions, saying settlements were made based on their honest understanding at the time.
“Southern Response has said from the outset that not all costs that are provisioned for are necessarily payable to the customer under their AMI policy.”
They’ve already lost on that point in the High Court, but it will now be thrashed out again in the Court of Appeal.