By: Jeff Kenny
Published: 18/07/2012
An insurer, under usual replacement insurance policy terms, has to reinstate a building. Typically the insurer will, as part of this, have to comply with building requirements applying at the time of reinstatement.

However, the insurer is not responsible for any building work other than the actual repairs to the building. So if the territorial authority imposes other requirements, the cost of meeting them will usually fall on the insured. The reasons are as follows:

 
Earthquake repair work must comply with New Building Standard
A building repair is treated as an "alteration" (s7 BA definition of "alter").
An alteration is treated as "building work" (s7 BA definition of "building work").
A person is not allowed to carry out building work except in accordance with a building consent (s40 BA).[1]
So for significant earthquake repairs a building consent will usually be required.
To issue a building consent the territorial authority must be satisfied the building work (assuming it is performed properly) will comply with the building code (ie the new building standard (NBS)).
Under s49 BA the territorial authority must grant the building consent if the territorial authority is satisfied the building work (assuming it is performed properly) will comply with the NBS.
So in short, earthquake repair work must comply with the NBS and the territorial authority must issue a consent for it if a building consent application is properly made.
 
Limited obligation to upgrade building because of a repair
When a building is altered (ie repaired) the territorial authority must, under s112 BA, ensure the building:
  • Complies (as nearly as reasonably practicable) with the NBS regarding means of escape by fire; and
  • Complies (as nearly as reasonably practicable) with the NBS regarding access and disabled facilities; and
  • Continues to comply with the rest of the building code to at least the same extent as before the repair.
Section 112, when coupled with s40 (repair to comply with NBS) more or less means that the repair work must be done to NBS but the rest of the building can stay as it is (except for fire, access, and disabled facilities). So there is no obligation to upgrade the seismic performance of the rest of the building under s112.
 
 
Exception - seismic performance upgrade can be required for change of use
Section 115 BA says that before an owner changes the use of a building the owner must get a notice from the territorial authority saying the building:
  • Complies (as nearly as reasonably practicable) with the NBS regarding means of escape by fire, protection of other property, and sanitary facilities; and
  • Complies (as nearly as reasonably practicable) with the NBS regarding access and disabled facilities; and
  •  
There are quite a few issues with this. Two that I think are important here are:
  • First, there are lots of relatively undamaged buildings where a change in use has happened due to businesses moving into them just after the February 2011 earthquake. As a result, the territorial authority has been placed in a difficult position. Its response has been mixed. If the letter of the law is applied so that the buildings have to be upgraded (and this includes relatively new buildings) the result will be unrealistic and uneconomic for many businesses and landlords.
  • Second, it reduces the likelihood of a building (such as an office building) being converted to another use (such as a hotel). I think this is less of an issue now anyway due to demolition decisions having been made for larger buildings where this kind of idea was being floated.
Complies (as nearly as reasonably practicable) with the NBS regarding structural performance.
 
The first issue isn't an insurance issue but it is important and probably needs looking at in the current situation.
The second issue relates to the economics of a decision whether to repair a building and is therefore relevant to negotiations between an insurer and an insured. I am unaware of anything in insurance policies allowing an insured to claim for building work required because of a change of use. So the Insurer will have to pay for the repairs up to NBS but the insured would need to pay for other strengthening work etc required from a change of use. I don't think anything can be done about that other than giving the territorial authority more discretion to agree to lower standards but this might be pretty unpalatable.
 
Exception - seismic performance upgrade can be required for earthquake prone buildings
Under s131 BA the territorial authority must have a policy for earthquake prone buildings. This provision allows each territorial authority in NZ to set its own policy to cater for local conditions. Historically there have been arguments about whether a NZ wide standard should be used and the issue has never been satisfactorily resolved. So the "standards" are left up to each territorial authority to decide. As a result, there are significant differences in approach although Christchurch has been a big wake up call for many territorial authorities.

Under s 122 BA a commercial building is earthquake prone if:
  • Its seismic load capacity will be exceeded in a moderate earthquake; and
  • It is likely to collapse causing death, injury, or damage to other property.
The Christchurch City Council adopted a policy in the Earthquake-Prone, Dangerous and Insanitary Buildings Policy 2010. This was prepared before the September 2010 earthquake and adopted just after it. The Royal Commission has questioned the territorial authority about its policy and had some searching questions about it.
The term "moderate earthquake" is defined in regulations. The bottom line is that a commercial building will be earthquake prone if its seismic load capacity is less than 1/3 NBS.[2]
If a building is earthquake prone the territorial authority has the power under s124 BA to require the owner to upgrade it by structural strengthening.
Under the Christchurch City Council Policy, if a building was undamaged, it would have taken many many years to actually identify the building as earthquake prone. And the owner may then be given decades to actually upgrade it. This long time period was largely driven by the economic cost of upgrading buildings.
CERA have now stepped in and have been requiring detailed engineering evaluations of commercial building. It will still take a long time to do this but at least the process has been speeded up. These evaluations identify earthquake prone buildings and buildings which have certain other dangerous attributes that might cause them to collapse.
Once a problem building is identified, access to it can be prohibited and the handling of any repair and upgrade is handed over to the Christchurch City Council.
So, the time periods for upgrading buildings may be accelerated under the CERA process.
The time period can also be accelerated where a building consent is sought for other reasons. Most earthquake repairs will fall within what is called a "significant alteration" in the Policy. If a repair falls within the significant alteration category and the building was built before 1976 then this will automatically trigger an investigation by the territorial authority and an upgrade if the building is found to be earthquake prone.
Either way if a building does have to be upgraded the new target for structural strengthening is 67% of NBS. This is the target suggested by the NZ Society of Structural Engineers. It is the same target adopted by Gisborne District Council for buildings damaged in their 2007 earthquake.

I think there are a few things to note here about this:
  • First, if the territorial authority receives a valid application for a building consent for a repair, they will have trouble refusing it just because they think the building is earthquake prone. Under s49 BA the territorial authority must grant the building consent if the territorial authority is satisfied the building work will comply with the NBS.
  • If the rest of the building will remain earthquake prone then the territorial authority can issue a notice under s124 BA requiring an upgrade or prohibit the building from being used under s128 BA.
  • Secondly, if the territorial authority requires an upgrade under s124 BA it is not a "repair". I am unaware of anything in insurance policies allowing an insured to claim for upgrading work required because of a building being found to be earthquake prone.

CONCLUSION
So in conclusion, I think an insurer under usual insurance policy terms cannot be required to pay for anything other than the actual repairs to the building.
All this highlights some of the problems with the Building Act:
  • The territorial authority is in a difficult position where there have been changes in use. The legislation says it should enforce s115 BA and require structural performance upgrades. This doesn't make sense. It would force some tenants to choose an old, possibly earthquake prone building (with the right use) over a new safer one with the wrong use. The planning rules were modified to take into account the earthquakes. The Building legislation should be too by adopting a pragmatic solution based on actual building safety rather the fairly ad hoc current situation.
  • There are problems where the territorial authority receives a building consent application for an earthquake prone building. The territorial authority is forced use s124 as a gatekeeper. The section isn't designed for that and this will probably lead to problems.
I think these should be looked at pretty hard as the current position is clearly unsatisfactory on quite a few fronts and places territorial authorities and others such as building owners and occupiers in unsatisfactory positions.
 
 
 




[1] There are some exceptions to this in s41 BA where, for example, the work is exempted in Schedule 1 of the BA (replacement of components, closing in patios, low retaining walls, certain work to commercial premises, etc) or the work is exempted by the territorial authority.
[2] Regulation 7 of the Building (Specified Systems, Change the Use and Earthquake-Prone Buildings) Regulations 2005.
 
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