A government settlement with a group of uninsured Christchurch property owners known as the Quake Outcasts may provide an incentive to shun cover, the Insurance Council of New Zealand (ICNZ) warns.

Cabinet last week agreed to pay 16 litigants 80% of the pre-earthquake rateable value of uninsured property improvements, plus a one-off payment to account for extra uncertainties and costs.

They have also previously received 100% of the pre-quake value of their land.

The settlement follows a Court of Appeal ruling in favour of the Quake Outcasts, who said offers made to them by the Canterbury Earthquake Recovery Authority were unfair compared to those made to residents with insurance.

ICNZ CEO Tim Grafton says the Government offer acknowledges the lack of insurance by paying less than 100%, but the settlement still creates a moral hazard for the Crown.

“Increased levels of government support in place of insurance will provide a greater incentive for people not to insure their property,” Mr Grafton said.

To avoid the hazard, governments have supported an arrangement in which the Earthquake Commission (EQC) levy is paid on insured property, meaning those who do not cover their homes are not entitled to EQC payments.

“It therefore makes no sense at all for the Crown to be stepping in to pay out to the uninsured,” Mr Grafton said. “It simply isn’t fair on all those that take out insurance.”

ICNZ says governments need to provide clarity on how they will treat uninsured property owners after natural catastrophes, and must avoid undermining the EQC scheme.

“Specific legislation is required and the current review of New Zealand’s natural disaster insurance scheme in the Earthquake Commission Act provides that opportunity,” Mr Grafton said.

Minister Supporting Greater Christchurch Regeneration Nicky Wagner says the decision to settle was not taken lightly and took into account fairness, financial responsibility, protecting the value of insurance and litigants’ wellbeing.

Any other decision in response to the Court of Appeal judgment will be made after the September 23 general election, Ms Wagner says.