May 2015
CLIENT BRIEFING
FIRE SERVICE LEVY DECISION BY THE SUPREME
COURT OF NEW ZEALAND
On 13 May 2015 the Supreme Court released its decision regarding declarations
sought by the Insurance Brokers Association of New Zealand Inc (IBANZ) and Vero
relating to tiered material damage policies and material damage policies insuring
collectives of insureds; and the calculation of the Fire Service levy.
The Fire Service levy is the primary source of funding for
the New Zealand Fire Service. It is payable by parties who
have insurance, which covers the peril of fire for property
situated in New Zealand. The levies are collected by
insurance brokers and insurance companies and paid to
the Fire Service.
The levy for property insurance policies is typically
calculated by applying the rate of the levy to the
indemnity value of the property insured or the sum
insured for property, whichever is the lesser.
However, a section of the Fire Service Act states that
excess of indemnity insurance does not incur a levy. This
has resulted in the use by some insureds of tiered
property policies, which separate indemnity insurance
from excess of indemnity insurance and place a cap on
the indemnity cover. Relying on this section the levy is
calculated on the sum insured of the indemnity cover and
not the excess of indemnity cover.
A policy structure of this type suits clients who insure
property situated on multiple sites around New Zealand
who are able to calculate a worst case loss for their New
Zealand property arising from one event. If this sum was
less than the indemnity value of all their property they
could decide to limit their sum insured for indemnity
value to this worst case figure, effectively assuming some
risk of under-insurance but gaining the benefit of
minimising FSL.
Taking this approach to another level, some groups of
insureds who have similar businesses have got together
and agreed to a collective approach to their property
insurance, sharing the policy limits. This had the potential
to substantially reduce the amount of levy otherwise
payable in total by the individual businesses. There are
other benefits for example with respect to minimising the
total amount of insurance market capacity required
compared to individual policies and coverage with less
restrictive terms and conditions, using the greater
leverage gained by the collective approach.
The Supreme Court has overturned the decisions of the
High Court and Court of Appeal, which had earlier ruled
that tiered wordings were effective to allow insureds to
limit their Fire Service levies. The result is that, in nearly all
situations, insureds will be required to pay a levy calculated
on the total indemnity value of all of their insured property.
An exception is the situation where the property sum
insured is less than this indemnity value, in which case the
levy will be calculated on that sum insured.
The Supreme Court also decided that an example policy
placed for a collective of different insureds in the same
industry was in effect eight different contracts, rather than
one contract of insurance, despite the fact that the
insureds shared the same overall coverage limits within
the same policy document. In association with the
decision noted above, this means that in this example
each insured is liable for Fire Service levies which are to be
calculated on the lesser of the indemnity value of all of
their insured property, or the total sum insured for
property in the collective’s policy.
The Supreme Court decision is a long and complicated
document and there are many stakeholders in the
insurance industry and associated with the insurance
industry currently reviewing them.
CLIENT BRIEFING:
FIRE SERVICE LEVY DECISION BY THE SUPREME
COURT OF NEW ZEALAND
However, there are some implications of the decisions which
are obvious and these are outlined below.
1. I have a tiered policy/I am a participant in a
collective policy
a. Is there any other legal avenue to appeal to regarding
the decision?
No
b. Will I be liable to pay additional levies/penalties/interest
on current or past policies?
The Supreme Court’s judgment records that the Fire
Service will not seek to apply payment of levies for
policies entered into before the Supreme Court’s
decision in their favour. The Fire Service would need to
publicly confirm this position before one is certain
there will be no retrospective levies/penalties/interest
c. Will I keep my tiered/collective policy at the next
renewal?
Tiered policies will not be renewed. Insurance
including the peril of fire will be arranged from your
renewal date on the usual single policy/single policy
limit basis
Collective policies are still an appropriate method of
reducing the amount of insurance market capacity
required when compared to the alternative of each
participant seeking an individual policy limit and
leveraging better terms and conditions of cover. So
yes, your collective policy can be renewed
2. I have a policy with a combined Material Damage
and Business Interruption limit
What will my levy be calculated on?
The lesser of the total indemnity value of all insured
property, or the policy limit. If you split the material
damage and business interruption into separate sums
insured the levy will be calculated on the lesser of the total
indemnity value of all insured property, or the material
damage limit. The levy is not payable on standalone
business interruption limits
3. I have a policy with separate sums insured for
Material Damage and Business Interruption
What will my levy be calculated on?
The levy will be calculated on the lesser of the total
indemnity value of all insured property, or the material
damage limit. The levy is not payable on standalone
business interruption limits
4. My policy has an aggregate limit for fire losses
Will my policy have this limitation in future?
It will always be an option for you – you may achieve a
lower premium than if the limit was removed
If your property sum insured exceeds the indemnity value
of all insured property you could remove the aggregate
limit and return to automatic reinstatement of the limit
subsequent to a loss with no fear of increasing your levy
If the indemnity value of all insured property exceeds the
property sum insured the current reason for having an
aggregate limit – to avoid being potentially liable for a
levy on the total indemnity value – is still valid
5. Will my levies go down?
In the short term the answer is no and, with reference to
insureds who have a tiered policy or a collective policy,
the amount of levy paid is most likely going to increase
substantially. In time we presume that the rate of the levy
will be reduced. The reason is that the current amount of
levies collected effectively fully fund the Fire Service - so
the result of calculating levies on a greater total indemnity
value pool measured nationally at the current rate would
result in an unnecessary surplus of funds for the Fire
Service. The levy rate should reduce so that the revenue it
generates only meets the Fire Service’s budgetary needs
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CLIENT BRIEFING:
FIRE SERVICE LEVY DECISION BY THE SUPREME
COURT OF NEW ZEALAND
6. Will these decisions prompt a legislative change,
to the extent that the levy is not collected only from
those with fire insurance, but on a more broadly
based approach to who should pay the levy and
thus contribute to the funding of the Fire Service?
There have been reviews in the past but nothing has
come of them. Generally the reviews have focussed on
changing the current approach only to the extent of an
alternative way of levying parties who have fire
insurance. The Supreme Court decisions may result in a
lot more focus on alternatives to the current approach of
funding the Fire Service primarily from parties who have
fire insurance
FOR FURTHER INFORMATION
All clients with tiered or collective policies will soon be
contacted in person by their Marsh Client Executive to
discuss the implications to them of the decision.
If you have any questions about Fire Service levies in the
interim, please contact us.
0800 627 744
marsh.co.nz
Disclaimer: Statements concerning legal matters should be understood to be general observations based solely on our experience as insurance brokers
and risk consultants and should not be relied upon as legal advice, which we are not authorised to provide. All such matters should be reviewed with your
own qualified legal advisors.
The information contained in this publication is based on sources we believe reliable, but we do not guarantee its accuracy. This information provides only
a general overview of the subjects covered. NZM_A_15-1233
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