Liability for forest owners - Cannot see the wood for the trees?
Jo McIntosh, New Zealand Tree Grower May 2016.
It seems that New Zealand’s business environment is getting more difficult and all business owners, including forest owners, are exposed to an increasingly complex myriad of liability risks. So how does a small business cope with all this change and complexity? Here are some simple, practical ways to help you tackle them.
First of all, you need to be aware of the major liability areas you are exposed to. The Forest and Rural Fires Act, Resource Management Act and the Health and Safety at Work Act are the big three. While there are other areas of risk, and every business differs, the recommended controls you put in place to manage the big three will generally flow on to help all other areas in the business.
Forest and Rural Fires Act
We can start with the Forest and Rural Fires Act. This is, in my opinion, not a particularly well drafted piece of legislation. It is open to interpretation and, as it is enforced by each individual Rural Fire Authority, we see variation in how it is applied. To muddy the water even more, there are a few rural authorities where the rules are changed by gazette and differ from the main published legislation.
The first thing I recommend you do is find out what rules apply in your specific forest location. If you are in a normal rural fire district, the main sections that you need to have a basic understanding of are Section 43 and Section 46. Section 43 deals with recovery from the person responsible for the fire It is this section which allows the costs of control, restriction, suppression or extinction of a fire to be levied against the person responsible for the fire Importantly, it also allows for those who have suffered loss in their property to recover their costs. Section 46 deals with the ability for the fire authority to levy owners in a district to recover the costs of fire fighting operations.
Let us look at some real examples of these two sections of the Act. Over the summer there were a number of large fires Some have been clearly caused by individuals, such as contractors when carrying out harvest operations. Where the person who started the fire is known, the Rural Fire Authority will levy them directly.
Other fires have been started by ‘persons unknown’ or perhaps the cause might be something such as a lightning strike, where no individual is at fault. In those cases, Section 46 allows the local authority to levy forest owners in the district to recover their costs. For many of you it might be a shock to know that a fire which started down the road could potentially mean a bill heading your way to contribute to these costs.
Ask more questions
Let us say you are harvesting your forestry block. You have engaged a contractor to carry out the work and they start a fire. What then?
Hopefully, before they started operations, you took some time to ensure that the contractor carried reasonable levels of insurance, and that they have good risk management in place to minimise the chance that their error might end up becoming your loss. You need to take a few more steps to be safe. We are seeing more and more contractors who either do not have adequate limits of insurance cover or, if they do, they have warranties under these policies which they often fail to comply with.
You should ask contractors what level of Forest and Rural Fires Act cover they have? Keep in mind that this limit is generally an annual aggregate sub-limited amount. This limit is the maximum payable in relation to claims under the Forest and Rural Fires Act in the policy period. If they are unlucky and have a large fire at the beginning of their insurance policy period, they will have to repurchase this limit which is not always going to be easy or cheap.
You should also ask contractors if they have particular warranties with respect to forestry practices. Policy warranties are conditions that the insured, in this case the contractor, must adhere to in order to have insurance. For example, we are seeing requirements such as spark arrestors, adequate fire-fighting equipment, complying with loss prevention procedures and remaining at the block to carry out a thorough examination of any burn-off area one hour after finishing the day’s operation.
Help protect yourself
That is all well and good, but what if on the day of the loss Murphy’s Law comes into play − the fire starts and your contractor has not complied with the terms of their liability cover. Things are potentially going to get interesting and there is a chance that as the forest owner, the liability comes back to you. What can you do to protect yourself? Some suggestions are −
- Be careful about how you engage contractors and make sure you require them to hold adequate cover including confirming their Forest and Rural Fires Act limit
- Ask your contractors if any particular warranties apply on their liability cover and how they plan to comply.
- Carry your own insurance. As noted above, even if someone else starts the fire, if it starts on your land liability can still bounce back to you and the risk of being levied for fires in your area under Section 46 of the general levy is always present.
The policy you need in place to cover your risk under the Forest and Rural Fires Act is public or general liability. This provides cover for damage to someone else’s property, resulting from your business activities or products for which you become legally liable. Importantly, the policies also include defence costs meaning the insurer will fund your legal defence.
These policies also have an extension that covers risk under the Forest and Rural Fires Act. As noted above, keep in mind that the limit for most policies is an annual aggregate limit and usually a sub-limit. It is part of the main policy limit, not in addition. We see many limits which are too low. For example, many standard liability policies have a $250,000 Forest and Rural Fires Act sub-limit. This is frequently not enough with an increasing number of fires costing over $1 million and a number last year creeping up to $1.5 million.
Resource Management Act
The other big risk is in respect of the Resource Management Act. Again, exposure seems to vary by region, as some local councils seem to be more active than others in how they enforce the Act. Claim examples include allegations that forest owners’ harvesting activities have damaged roads and infrastructure or allowed run-off from forest operations into waterways.
How do you protect yourself? Once again, if you engage a contractor to carry out work, make sure that you require them to comply with the Resource Management Act and obtain all necessary consents. I would encourage you to see these consents and gain some understanding of the requirements.
Health and Safety at Work Act
The final big risk is, of course, the Health and Safety at Work Act. This, and the Act it replaces, has been in the spotlight for forest owners for a number of years but new safety legislation came into force at the beginning of April. The new law creates due diligence obligations and those in governance roles must proactively manage workplace health and safety. Failure to comply with the Act’s requirements could result in prosecution and fines
There is a three tiered liability regime for penalties imposed on individuals and a significant increase in the maximum penalty levels −
- Category 1: Reckless conduct with fines up to $600,000 for a director and/or five years in jail and for the entity, a maximum fine of $3 million.
- Category 2: Exposing a person to serious harm with fines up to $300,000 for a director and for the entity, a maximum fine of $1.5 million.
- Category 3: Breach of duty with fines up to $100,000 for a director and for the entity, a maximum fine of $500,000.
What insurance cover can you arrange? You should ensure you have a statutory liability policy. This provides cover for defence costs for alleged breaches of most statutes, as well as costs associated with representation at an investigation or enquiry, and fines or cash penalties payable following conviction for an offence under an insured statute. The policy cannot cover any fine or penalty under the Health and Safety at Work Act as this is prohibited.
Why should you still take this cover? The policy can still be very valuable as it provides cover for legal costs and defence and reparations. With this increased regulatory scrutiny, it will become more important than ever to arrange appropriate insurance which will assume responsibility for managing and funding an effective defence.
Read the contract
The last piece of advice is simple and old fashioned. Take some time to read contracts, including insurance contracts, and make sure you get quality advice. I also take this time to remind members that we have a scheme for NZFFA members for tailored standing timber cover and forest owners’ liability cover. Aon also pays a contribution to the NZFFA.