EQC media response on multi-user buildings
EQC was asked about the way we calculate the residential component of mixed-use buildings. EQC provided these responses on 21 and 22 June 2018. The answers are attributable to the EQC Chief Executive, Sid Miller.
1. Have you changed the way you calculate the residential component of mixed-use buildings?
If the residential dwellings make up 50 per cent or more of the floor area then EQC insures the whole mixed-use building. Our approach is under the Earthquake Commission Act, which has not changed. If the residential dwellings do not make up 50 per cent or more of the floor area of the mixed-use building, there is still cover for those residential dwellings, but not for non-residential parts of the building, such as commercial premises.
2. If not, how do you explain the fact that Wellington’s Marion Square apartment building has been previously paid out on the basis that it is a primarily residential building, but is now being told it does not meet the 50% residential threshold?
The Marion Square apartment building had claims from both the 2013 Cook Strait and 2016 Kaikoura earthquakes. For the 2013 claim, EQC did not correctly assess the building against the 50 per cent threshold. Therefore EQC made payments for damage to areas in the building which were not covered by the Act, such as the ground floor commercial premises. We have accepted this error and that EQC’s 2013 settlement payment were higher than they should have been.
3. Can you confirm that areas that are shared, but available exclusively to residents - such as corridors and common spaces - are now being excluded from the residential classification?
4. Please explain why these have been classified as non-residential, when they clearly have no commercial purpose and are not accessible to the public. If a house has a corridor, do you consider it to be part of the house?
Under the EQC Act, the residential parts of the building at Marion Square are covered, including the 40 apartments, the residential corridors and common spaces, residents’ car parking and storage lockers. The non-residential parts of the building are not insured by EQC, for example, the ground floor commercial premises, commercial car parking and spaces between those areas. Insurance and repair costs for the commercial areas are a matter for the Body Corporate, their insurer and business operators.
5. If you have changed the way you calculate the residential component, on what grounds has that change been made? And how has that change been communicated to affected property owners?
As above, the 50 per cent threshold is set out in the Earthquake Commission Act, and the approach under the Act has not changed. Cover for mixed-use buildings is explained on our website in the Insurers’ Guide.
https://www.eqc.govt.nz/what-we-do/eqc-insurance/insurers-guide
6. The removal of areas such as assigned carparks and corridors appears to be at odds with your own advice. How do you justify excluding common areas from the residential component, given in Example 1 on pg. 11 of your EQCover Insurers Guide 2017, all the areas shared by the home owner and their B&B customers are included as residential space, despite also being used by paying customers.
Apartment corridors and assigned carparks and lock-ups, on the other hand, are never used by commercial customers.
Our approach is consistent with the examples given from the EQCover Insurer’s Guide 2017. In Example 1, the shared areas are all within the owner’s dwelling. The owner rents out three of the four bedrooms (30% of the floor area) in the building for their Bed & Breakfast business, but otherwise uses all of the other areas inside their dwelling (70% of the floor area). EQCover applies to the whole building as the owner’s dwelling space is 50% or more of the total area of the building. In the case of Marion Square, the access corridors, carparks and storage lockers are not part of any individual apartment owner’s dwelling.
7. In the same guide, on p13, example 2 relating to mixed commercial/residential properties talks about a property with three flats above a retail shop. The diagram included indicates the retail shop takes up the entire ground floor. In that example 50 per cent of the building is deemed to comprise dwellings. However, if access areas, carparks, lockups etc. were stripped out of the residential space calculation, the building would not meet the 50 per cent threshold.
For simplicity, the building in Example 2 does not include any access corridors, lockers, carparks or similar areas. Mixed-use buildings are usually much more complex than the examples shown and each building is assessed on its own characteristics.
8. How many mixed-use buildings have been reclassified from residential to commercial in the past five years?
We are not able to provide a figure as it would require a manual review of all of our mixed-use building claim files.
9. Have any of those building owners appealed the classification change? If so, have any of those appeals been successful?
See the answer above.
10. Do you accept that changing the rules - or their interpretation - with no notification or consultation is a breach of fairness and good faith?
The 50 per cent threshold is set by the Earthquake Commission Act. It has not been changed and any changes would need to be made by Parliament. Parliament’s processes include opportunities for members of the public to make submissions on Bills and to be heard at a Select Committee.
EQC has explained the 50 per cent threshold to the Marion Square Body Corporate. Our engagement with the Body Corporate has been in good faith. We accept that we overpaid for the 2013 claim in error, and we have not sought to recover any of the overpaid amount.
EQC is awaiting further information from the body corporate in order to complete settlement of the claim. The information needed is around the repairs that were carried out to the building following the earthquake damage in 2013, and we understand that it will be provided shortly.
The Body Corporate representing the residents of the Marion Square apartments most recently wrote to EQC on Friday 15 June and a response is being prepared.
Replies to follow-up questions
1. Exactly what areas does EQC deem to be "residential" when calculating the residential component of a mixed-use building? Please provide an exact description, without using the term dwelling. Eg - only the area accessible through the front door of each individual apartment.
In a mixed-use building under the 50 per cent threshold, EQC covers just the homes (or holiday homes) along with some appurtenant structures and services. Those areas are called the “residential building” and the exact definition can be read in the EQC Act.
The homes are the self-contained residences that contain all the facilities necessary for day-to-day living and those facilities must be for the exclusive use of the home. The floor areas of the homes are used for the 50 per cent threshold, not other parts of the building, such as commercial areas.
The appurtenant structures are buildings or structures outside of the home and we cover those that are for the household use of the occupants. Services are the pipelines and cables providing services (such as power, water and drainage) to the homes and we cover services for 60 metres from the home.
Further detail can be read in the Insurers’ Guide on EQC’s website.
2. If the act was so clear in terms of how the proportion of residential space is to be calculated, how did EQC misinterpret it in 2013?
EQC staff made an error when assessing the 2013 claim. It was mistakenly settled on the basis that the dwellings made up 50 per cent or more of the floor area of the building, but the dwellings actually do not meet that threshold. This was not a case of misinterpreting the EQC Act; it was a human error.
3. In the context of a standalone house, do you consider a corridor to be part of the dwelling?
Yes, if the corridor (i.e. hallway) is inside a standalone house that is a dwelling. A corridor inside an apartment that is a dwelling is also covered on the same basis.
4. As you point out, areas such as corridors and residents' car parks are covered by EQC, because they are acknowledged to be residential spaces under the act. How can they be residential spaces for the purposes of cover, but not residential spaces for the purposes of determining the residential component of a building?
This is how the EQC Act operates. Only the floor area of the dwellings is used to determine whether or not the whole building is covered. However residential areas outside of the dwellings (appurtenant structures and services) can also be covered by EQC as we said in the response to question 1.
In the case of Marion Square, the residential parts of the building are covered, including the 40 apartments, the residential corridors and common spaces, residents’ car parking and storage lockers.
The non-residential parts of the building are not insured by EQC, for example, the ground floor commercial premises, commercial car parking and spaces between those areas. Insurance and repair costs for the commercial areas are a matter for the Body Corporate, their insurer and business operators.
5. You say in your answer to question 5 that your approach under the act has not changed. This is demonstrably untrue, given you have admitted that your current interpretation is different to your 2013 interpretation. How has your changed interpretation been communicated to potentially affected property owners?
The 2013 claim was settled incorrectly as a result of human error, not because of a change in the way the 50 per cent threshold operates. As we said in our previous response, this has not changed.
6. Further to your response to question 7, do you accept that the Example 2 cited must have an access corridor, and that the building cannot reach the 50 per cent residential threshold if that corridor is excluded from the residential component. Therefore your two interpretations are inconsistent.
No, that is not correct. Buildings come in many different configurations and not all multi-unit buildings have access corridors. For example, some buildings in this configuration have separate external access for each upstairs unit. As we said in our previous response, this is a simplified example, and does not include access corridors. Buildings that are like this example can meet the 50 per cent threshold.
