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Part Two: Homeowners in the red zone

31 August 2011

Duncan Cotterill Lawyers continue their review of  what homeowners in the red zone need to consider before accepting an offer from CERA. Andrew Oh and Janine Ballinger discuss your options in the second of this four part series.

The starting point to making a fully informed decision which will net the best possible outcome for you is to identify the extent of damage to your house. Is it “repairable” or is it “a total loss?” And what does your insurance policy entitle you to?

Once your insurer has completed their assessment, they will send you a report setting out the entitlements under your insurance policy. Until you have this report you will not be able to make a completely informed decision on what option provides you with the best payout.

However, you may opt for a quick resolution and choose Option 1 so that you can put it all behind you. A word of caution though. If you choose Option 1, and the Government is able to negotiate a better settlement with EQC and your insurer, you are not entitled to it.

If you haven’t already done so, contact your mortgagee because you need their written consent – regardless  of what option you choose.  There’s no guarantee that your mortgagee will agree with your choice as any decision you make affects their security. So understand exactly what their requirements are. It is unlikely your mortgagee will have a problem with any decision that results in a payment which covers your outstanding debt to them.

If you choose Option 2 and sell your property to the Government for its rateable value, remember that you are agreeing to sell the best security that the mortgagee has to get repayment of any outstanding loans from you. If you decide on this option, and the sale of the land will not completely clear any loans that you have with your mortgagee, don’t be surprised if they ask you to assign your insurance claim with your private insurer to them. Their consent may actually depend on this. In many cases all or part of the payment from your private insurer will be the only way your mortgagee can secure repayment of any outstanding loans that you have. You must also be clear on any terms and conditions that have been offered by your mortgagee on any “redraw facilities.” These would allow you to redraw your loan if you buy a new house or build elsewhere. So, before making a decision on Option 1 or Option 2, work out what your mortgagee’s position is.

There is a lot of discussion about the EQC payments that some red owners have already received, how this impacts on your ultimate payout and how these funds can be used for new properties. If you accept Option 1, then any payments you’ve received from EQC and your insurance company will be deducted from your settlement funds - unless you can show that you have used them to carry out the various earthquake repairs on your property that they were paid to you for. There may also be a deduction if your property was underinsured. However, under Option 2 it gets a little bit trickier. If you choose Option 2 it is unlikely that you will have received funds from EQC to remediate your land and the chances are you may not see any deductions on your settlement with CERA. But, the payments you have received in relation to your house will be of interest to your insurance company. In any settlement offer, they will take into account any funds you have already received.

For those deciding to build a new home, then before your insurance company foots the bill for your replacement home, be aware that they may require you to either pay the first few progress payments from the insurance funds you have already received or to transfer these funds to them directly and they will pick up the entire bill for your rebuild. So, if you are in the position of having already spent your EQC payout you should discuss this with your lawyer.

One of the most frequent questions from red zone owners is when are they going to be paid. If you choose Option 1, then your full payout can happen fairly quickly, CERA has given a minimum period of 4-8 weeks after receiving the final agreement. With Option 2, since your payout relies on your insurance company providing you with an offer (which may require further discussion or negotiation) your full payout will probably be a little more protracted. However, you can settle your payment for your land as quickly as Option 1 and the balance of your payout will come from your insurer once you have reached agreement. If you are going down the path of Option 2, bear in mind that most insurance policies have temporary accommodation provisions. So, if you need to rent before you either buy a replacement home or before your new home is finished, contact your private insurer to discuss your entitlements. You should also check whether there is any government assistance available.

If you have not received your offer letter, contact CERA immediately. If you returned your CERA consent form then the chances are that you did not complete it correctly - contact CERA to fix this for you. No offer will have been issued to people who did not return their consent form. If you are in this position then either contact CERA or your lawyer who will help you download and return the required form.

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

• Duncan Cotterill is producing a booklet looking at some of the most pressing issues for residential property owners following the earthquakes. For a complimentary copy, please email Christchurch@DuncanCotterill.com. Andrew Oh and Janine Ballinger are working with many clients who are assessing their CERA offer. J.ballinger@DuncanCotterill.com