Following the recent earthquakes, it is timely to consider the managing liability and litigation risk in relation to natural disasters. This article considers a framework that an organisation may use to approach any legal risk.

The Earthquake Commission (EQC) was established in 1945 and provides insurance for residential land, buildings and contents, within certain limits, against natural disasters, such as earthquakes, floods, landslips, hydrothermal activity and tsunamis. This is provided under the Earthquake Commission Act 1993 (EQC Act) where a private fire insurance policy is in place, subject to certain conditions being met.

EQC manages the risk of a major natural disaster in two main ways. First, it collects insurance premiums each year and a portion is retained to manage insurance claims. Second, EQC purchases reinsurance, in the event of a major natural disaster.

Legal Environment

After the Canterbury earthquakes of 2010-2011, about 500 individual civil litigation cases were lodged. Typically, this litigation involves proceedings against both EQC and a private insurer for the replacement value of a residential property, along with claims for legal costs, damages and interest.

EQC has successfully resolved a large number of litigation claims, with only a handful of cases requiring a court hearing in order to achieve resolution. In part this is due to the priority given by the courts to earthquake-related insurance litigation in Christchurch. There are also steps that EQC and insurers have taken to speed up resolution, with an aim of enabling customers to have surety about their position as soon as possible.

This has included cases where EQC decided to proactively seek declaratory judgments from the court to clarify the law where a significant number of claimants were affected. For example, land in Canterbury has dropped in height as a result of the earthquakes. EQC decided to approach the court to rule whether this was “damage” that EQC might be liable for. EQC and insurers also agreed to seek direction from the court as to how the EQC Act applies to multiple earthquakes. The court clarified that cover automatically reinstates after each event.

Four factors helping assess legal risk

The following is a brief overview of four factors when considering the risks of litigation, and determining the most appropriate response.

1. Assess the risk

There are a range of considerations when assessing legal risk, including whether the litigation concerns untested legislation, as in the case of the EQC Act, and how certainty for all parties can be achieved as soon as practicable. The following two factors are particularly relevant:

• Legal: The kinds of questions that can be considered here include: What ‘model litigant’ behaviours are expected? What is the comparative strength of each parties’ legal arguments? Is the litigation necessary? What is the chance of having the litigation struck out? What are the precedent implications?
• Reputational: Not surprisingly, all litigation comes with a reputation risk – even if you “win”. It is important to assess and understand the impact on the organisation’s reputation on going to Court. It is also be important to assess how public confidence in the organisation may be affected across any scenario.

2. Quantify the liability

• What would it cost to go to court in legal fees? These costs could be estimated based on previous experience.
• What might your organisation end up paying if unsuccessful?
• Where liabilities cannot necessarily be quantified, what impacts might the litigation have on future operating costs or opportunities?

3. Assess the risk appetite of the organisation

Our job as lawyers is to provide a risk assessment of potential litigation and liabilities so the decision makers can make informed decisions.

It is therefore important to keep decision-makers informed along the way, and to ensure there are no surprises. This includes identifying stakeholders who may be impacted by the litigation, even though they might not have decision-making rights in terms of how to steer the litigation. It is also important to consider and apply the values and culture of the organisation, and how options and potential solutions align with these.

4. Decide how to respond to the risk

Broadly, there are four responses to any risks facing an organisation.

• Avoid: Could your organisation have avoided being sued, or being in a position of “needing” to commence proceedings?
• Control: Can your organisation control the impact of the litigation? This may involve taking steps to resolve the dispute using negotiation or mediation. Could settlement be reached out of court?
• Transfer: Could your organisation transfer the risk of litigation? For example through insurance.
• Accept (the risk): Is there an element of risk that cannot be avoided or mitigated and needs to be accepted?

These factors provide a basic framework for in-house lawyers to use when advising their organisations. There will be a number of further considerations that are specific to each organisation, and you will be in the best position to determine these and their relative weighting. This is, of course, one major advantage that in-house lawyers will always have over external counsel.

Jeremy Ford is Chief Legal Adviser for the Earthquake Commission and a committee member of the Inhouse Lawyers’ Section of the New Zealand Law Society (ILANZ).