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earthquake-prone buildingsImportant information about

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We’ve put together this booklet to provide property owners with more information about earthquake-prone buildings, how the process works and some of the options and obligations that affect owners of an earthquake-prone building.

The Building Act 2004 requires each Territorial Authority (TA) throughout New Zealand to develop a policy for

earthquake-prone buildings. This is a significant operation for TA’s and has considerable and wide-ranging implications

for property owners.

This booklet is a guide only, using information generally obtainable at the time of publication and does not replace the

need for an insured to obtain appropriate professional advice in relation to their own specific insurance cover.

A building is ‘earthquake-prone’ if it fails to meet 34% of the current New Building Standard (NBS)

What is an earthquake-prone building?

The definition of an earthquake-prone building (EPB) is set out in Section 122 of the Building Act 2004. The definition of a moderate earthquake is defined in Regulation 7, 2005/32.

Earthquake-prone buildings are those likely to collapse causing injury or death, or damage to any other property, during or following a moderate earthquake. A moderate earthquake is one that would generate the level of shaking that would be used to design a new building at the site.

Earthquake-prone buildings are defined as those that fail to meet 34% of the current New Building Standard (NBS).

What the Building Act 2004 says about earthquake-prone buildings

The Building Act 2004 requires each Territorial Authority (TA) throughout New Zealand to develop a policy for earthquake-prone buildings.

TA’s are working through the following process to identify earthquake-prone buildings on the basis that all buildings constructed prior to 1976 must be at least 34% of the NBS.

The TA’s earthquake-prone building process has four stages:

`` Stage 1 – Identification: Completed on a priority basis with public buildings such as hospitals and schools identified first

`` Stage 2 – Initial Evaluation Process (IEP): A qualified structural engineer conducts an evaluation of the building’s earthquake damage performance

`` Stage 3 – Communication to building owners: Owner receives notification that their building has been considered to be earthquake-prone. They will be given three to four months to provide additional information so the assessment can be reviewed. A Detailed Engineering Evaluation (DEE) may be completed by the owner during this period.

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`` Stage 4 – Section 124 Notice: If no additional information is received, a Section 124 earthquake-prone building notice will be issued. This will classify the building as earthquake-prone, with the owner given a date they need to strengthen their building by. This notice is required to be fixed to the building.

TA’s are at various stages of completing their requirements under the Building Act 2004. Some TA’s are well advanced; others are just starting the process.

This means that most of the earthquake-prone buildings in New Zealand have not yet been issued with a Section 124 notice to date.

Lists of earthquake-prone buildings are often published on TA/Council websites.

The position prior to the 2004 Building Act

Following is a brief history of the position prior to the Building Act 2004.

The construction of Unreinforced Masonry (URM) buildings in New Zealand peaked in the decade between 1920 and 1930 and declined thereafter. Few large buildings of any material were constructed in the period between 1935 and 1955. It is worth noting that many heritage buildings pre-date 1920.

It was not until 1965 that much of the research at the time into seismic design was incorporated into legislation, that being NZS 1900 Chapter 8, which prohibited URM buildings of more than one floor.

The next version of the Seismic Design code was published in 1976 (NZS 4203).

Most major cities and towns adopted the NZS 1900, Chapter 8, 1965 legislation and, as a result, between 1968 and 2003 achieved strengthening or demolition of many buildings identified as earthquake-prone.

The Building Act 2004 introduced the current earthquake building code (NZS 1170.5:2004).

Prior to The Building Act 2004, the term ‘earthquake-risk building’ related only to URM buildings, but now an earthquake-prone building could be of any material; steel, concrete, timber or masonry.

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The level of risk posed by buildings constructed as recently as the 2000’s is now more widely appreciated, in particular the inadequate performance of reinforced concrete structures due to deficient detailing.

Section 124 Notices

The TA will issue a Section 124 earthquake-prone building notice if the building is deemed to be earthquake-prone. The notice could give a required strengthening date for completion of, as an example, 10-20 years time and this information, along with the percentage NBS grading, will be recorded on the Land Information Memorandum (LIM).

T h i s Ta b l e s h ows T h e s T ru c T u r a l   p e r fo r m a n c e   s c o r i n g

Structural performance score (percentage NBS)

Performance and risk

description

Seismic grade

Relative risk

>100 New building A+ Very low

80 – 100 A Low

67 – 80 B Medium

33 – 67 EQ risk C High

20 – 33 EQ prone D Very high

<20 EQ prone E Extremely high

An ‘earthquake-risk building’ is any building that is assessed at being between 34% and 67% of NBS. Therefore the risk of injury or death in an earthquake-risk building is lower than an earthquake-prone building, but the risk of damage to the building remains high.

The building code is primarily concerned with injury, death and damage to surrounding property.

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The Initial Evaluation Process (IEP)

A qualified structural engineer conducts an evaluation of the building’s earthquake structural performance. Many of these will be initiated by the TA unless the property owner is proactive and starts the process earlier.

The objective of the IEP is to:

`` Determine the level of performance in relation to the current code

`` Establish whether or not the building meets the one-third threshold of 34% NBS.

The IEP will show:

`` The structural engineer’s process

`` The percentage NBS and Seismic Grade.

The Detailed Engineering Evaluation (DEE) Report

This is a more detailed evaluation completed by a qualified structural engineer, usually commissioned by the building owner.

The objective of the DEE is the same as the IEP. In assessing the building’s structural performance there may have been some conservative assumptions used during the IEP process and a DEE will address these assumptions.

A DEE will generally cost more than an IEP.

The DEE will show the same information as in the IEP report, with more detail included.

A qualified structural engineer conducts an evaluation of the building’s earthquake structural performance.

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Options available to the owner of an earthquake-prone building

If a property owner has received a Section 124 notice on the building, the following options apply:

1. Re-strengthening of the building can be undertaken and usually there is an extended period of time allowed in which to do this – 10 to 15 years is common . The Section 124 notice will be removed once the re-strengthening has been completed;

2. The building can be demolished. This is unlikely to be an option if there is an Historic Places order on the building;

3. Do nothing. In this case:

a. The building will be condemned by the TA once the date for re-strengthening contained on the S124 notice has passed

b. It is likely to be difficult to attract a tenant, or a potential buyer if the owner is wanting to sell.

The cost of re-strengthening work

It’s not easy to provide a general answer in respect of the cost of re-strengthening work. The cost will depend on:

`` The existing structural performance

`` The location

`` Construction type/materials

`` Historical places orders

`` Methods used

`` Final outcome objective.

Generally re-strengthening is a very expensive undertaking. In some cases the cost to re-strengthen may be more than the current value of the building.

Every building is different and will be assessed on its own merit regarding insurance cover.

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Insurance implications

Insurers should be notified immediately if it is considered that a building is earthquake-prone.

Insurance cover will almost certainly change if it is determined that a building is earthquake-prone and it is insured with NZI. Every building is different and will be assessed on its own merit regarding insurance cover.

However, the minimum changes likely to apply are:

`` The basis of settlement on the building will move to Indemnity Value, if it is currently insured on another basis

`` Seismic upgrade costs will be excluded from cover.

There might also be other changes depending on the cover in place within a specific insurance programme.

One of the basic principles of insurance is to cover the actual financial loss of the insured. A building, once it has been identified as earthquake-prone, will potentially have a lower value than it held previously due to the known financial liability on the owner to undertake seismic strengthening work.

Therefore providing reinstatement cover for an earthquake-prone building would mean a substantial level of betterment which would not be aligned with covering the financial loss and putting the insured back in the same place as they were prior to the loss. This is why cover is restricted to Indemnity Value.

Indemnity Value

Indemnity Value is the value of the building to the Insured at the time of loss, sufficient to place the Insured back in the same financial position to that immediately prior to the loss.

Whilst insurance case law has identified various methods that could be used to arrive at an Indemnity Value, Depreciated Replacement Cost and Market Value are by far the most common methods used. The individual circumstances surrounding the building, the ownership and what the building is used for will determine the method to be used, as well as any particular conditions stipulated within the relevant insurance policy.

If there are any doubts about the Indemnity Value sum insured to be used, professional advice should be sought.

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Definitions

`` Depreciated Replacement Cost – The current cost of replacement of an asset less deductions for physical deterioration and all relevant forms of obsolescence and optimisation.

`` Market Value – The estimated amount for which a building should exchange between a willing buyer and a willing seller in an arm’s length transaction after proper marketing, wherein the parties had each acted knowledgeably, prudently and without compulsion.

Tenants of an earthquake-prone building

A tenant should obtain information about the age and percentage NBS of the building they occupy. This information should be notified to their insurer.

Any tenant of an earthquake-prone building will also receive a copy of any Section 124 notice issued on it and, again, this information should immediately be notified to their insurer.

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Summary

The Building Act 2004 has required Territorial Authorities to identify and develop a plan for earthquake-prone buildings in their area.

An earthquake-prone building is one whose seismic performance is rated at less than 34% of the requirements under the New Building Standard.

If a property owner owns an earthquake-prone building:

` They will be served by a Territorial Authority with a Section 124 Notice which will require seismic upgrades to the building to be completed within a stated timeframe

` They should consider their long term plans for the building which might include re-strengthening work on the building, demolition or divesting the asset (or liability).

While their building remains earthquake-prone, their basis of insurance is likely to be restricted and they should:

` Immediately notify their insurer if their building is declared earthquake-prone or they have reason to believe it has a seismic strength of less than 34% of the requirements under the New Building Standard

` Discuss the cover change implications with their insurance broker

` Review the insurance obligations detailed in agreements and contracts they have, for example mortgage contracts.

The images of buildings used throughout this booklet are not New Zealand buildings and have been used for illustrative purposes only.

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