As a result of the Christchurch earthquakes and recent natural events, insurance has been thrust into the limelight, with regard to the increasing cost (and the extent) of cover. The cost of fire and general insurance has increased dramatically and, accordingly, people are looking much more closely at what they are getting for their premiums and at the level of cover they have. In some instances, people are deciding to live with a level of risk, but two recent cases^[1] involving the same incident show just how dangerous some of these decisions can be.

Both cases involve the same incident on a ‘lifestyle’ farming property at Glenhope, south-west of Nelson owned by a company called Three Tuis Limited (TTL). Stephen Garnett and his partner Tracey Lynch own TTL. Stephen and Tracey live on the property and they have several tourist cabins which they built and run as a bed and breakfast business through TTL.

Guests of TTL built a fire in the wood-burner in their cabin on 24 November 2009. At about 2pm on 26 November, some 36 hours after he last saw a fire in the wood-burner, Mr Garnett cleared the ashes out of the woodburner and dumped them by a scrub-covered bank at the edge of a mown lawn surrounding the cabin.

Shortly after that a serious fire took hold on the bank. This spread to the north into an adjacent large forest owned by Nelson Forests Limited and caused considerable damage before the Fire Service controlled it some hours later.

Under s43 of the Forest and Rural Fires Act 1977, property owners and the Fire Service are entitled to recover costs and damages from a person who causes a rural fire.

Nelson Forests Limited claimed $488,944.24, the New Zealand Fire Service Commission claimed $571,593.81 and the Waimea Rural Fire Committee claimed $31,209.69 all against both TTL and Stephen Garnett personally.

Mr Garnett looked to his insurance company which provided cover ”for up to $2,000,000.00 for your legal liability … as a result of injury or property damage as a result of accidents in connection with your business occurring …”

The Policy Renewal Certificate issued by Tower to Mr Garnett and Ms Lynch stated “you have declared that the type of farming which is LIFESTYLE FARMING …”

In 2009 Tower had been advised by Ms Lynch that the property was being run as a tourism venture. Tower had responded that it was unable to offer cover for this type of commercial use. However, after obtaining a quote from another insurer for an additional $4,000 premium, Mr Garnett and Ms Lynch decided not to insure the tourist (cabin) business. Instead they continued with their existing policy.

The court found that the accident related to the cabin business, not the lifestyle farming business and so Tower was correct to decline cover. While there was limited cover for liability under the Forest and Rural Fires Act 1977 by virtue of a statutory liability cover (up to $200,000), Mr Garnett and TTL were left to pay an amount in excess of $890,000 plus interest for which they were uninsured. This case has several lessons:

• If you decide not to insure for certain risks, or you only insure parts of your business, expect no sympathy from your insurer or the courts if you suffer loss from those risks. It is not all uncommon to run a normal farming operation in conjunction with other businesses such as home stays, hunting and fishing trips, and adventure tourism.
• When making a decision not to insure against certain risks, you need to be very aware of what those risks are and how they are managed so that you make a properly informed decision.
• You need to understand the terms of your policy. In the Garnett v Tower Insurance case, Mr Garnett argued that the Forest and Rural Fires Act 1977 indemnity was at the $2 million level of the rest of the policy. It was not – it was a special extension of up to $200,000 – no more.