The impact of the Christchurch Residential Red Zone on insurance claims was clarified on Friday (5 April 2013) by Justice Asher of the High Court in O’Loughlin v Tower Insurance1.
This decision has been eagerly awaited, not only by the thousands of policyholders affected by red zoning, but also by their insurers.
The two central issues before the court were:
The Residential Red Zone was created under the CERA Act in June 2011. Its boundaries have been modified, moved and redefined, until it now includes some 7,860 properties2. The Crown has made voluntary offers to purchase these properties. The legal status and effect of red zoning has always had an element of uncertainty: home owners can continue to live in their houses if they are habitable, but are faced with the prospect of services being cut in the future and possible compulsory acquisition of land if they reject the Crown offer.
The core of the O'Loughlins' case was that the red zone status caused loss or damage to their house that obliged Tower to provide full replacement. They argued that their house in the red zone had at least constructively suffered a total loss.
During closing submissions, Tower's barrister submitted that the O’Loughlin’s policy insured against “physical loss or damage”, and the red zoning of the property did not of itself cause physical harm to the structure of the house. Therefore, the lack of tangible physical damage caused by the red zone status meant that the zoning caused no loss covered under the policy. Even possible future harm, such as lack of infrastructure in the red zone, or loss of services, was not enough to qualify as physical loss.
The High Court agreed that Tower was correct in its interpretation of the policy requirement of physical loss or damage. Even the Natural Disaster Damage clause in the policy, which does not expressly state that loss or damage must be physical, was held to require actual physical loss.
Asher J found that the policy did not respond to claims for pure economic loss; even if it did, the O'Loughlins could not prove that red zoning had resulted in economic loss. The CERA offer to purchase the land at 2007 rateable value could not be shown to be less than the market value at the time of the earthquakes.
Tower's election to 'repair'
Despite the finding that red zoning did not cause a total loss, Tower's repair methodology was found to be lacking, and the O'Loughlins were successful in obtaining a payment based on the full replacement value of their house, rather than just the cost of repairs. The media has dubbed this a victory for the O'Loughlins, but the actual judgment on this point is relatively narrow and fact-specific.
The O'Loughlins' house had been scoped by Tower as repairable, using injections of 'Low Mobility Grout' ('LMG') to re-level the concrete slab foundation. The Plaintiffs' expert evidence was that on this land and for this house, there may be difficulties carrying out this repair, and obtaining the necessary building consents. Tower's experts conceded that they had never carried out a residential repair using only LMG methods, and that there was a risk the concrete slab would crack upon re-levelling. Accordingly, Justice Asher was not prepared to accept that Tower's policy obligations had been fulfilled by paying the cost of the LMG repairs, as "no reasonable insured or insurer would commit to carry out actual repairs in this way,"3 at least without more investigation and documentation of the repair method.
Under the Tower policy wording, it is expressly the insurer who is entitled to elect how to indemnify the policyholder4. Tower elected not to rebuild, and was not bound to pay for the cost of rebuild; purchasing a replacement 'comparable' house was also an option Tower could elect under the policy. If, however, Tower were to pay the cost of a rebuild, it should be on the basis of constructing a house on good land, rather than incurring the cost of additional foundations necessary for rebuilding in the red zone.
The High Court mentioned the decision in Turvey5, stating that rebuilding to a "when new" condition6 should be limited to what can be achieved with substitute materials and modern methods of construction. In this situation, Asher J confirmed that "the obligation is to replace with a property of the same general physical condition and size"7.
Projecting the effect of this decision into a wider insurance law context, the judgment will provide certainty for insurers that they are not bound to unwind the thousands of red zone settlements which have already been processed. Policyholders in the red zone can take comfort that they have been paid out in accordance with their insurer's legal obligations.
The judgment on repair methodology is specific to the facts of the claim, but emphasises the need for insurers and policyholders to ensure the scope and costing of repairs is accurate and realistically achievable.
We expect, assuming both parties are reasonable, that a basis of settlement will quickly be negotiated without further involvement of the High Court, including an agreement as to costs.
Whether the red zoning of a residential property is a total loss of the insured house, triggering a payment of full replacement value under the insurance policy;
If red zoning does not lead to a total loss, had Tower fulfilled its policy obligations by electing to pay the cost of the hypothetical scoped repairs?
To discuss in detail how this wide-ranging decision could impact your insurance claim, contact the Insurance team at Wynn Williams.
1O'Loughlin v Tower Insurance Limited NZHC 670
2 CERA website: www.cera.govt.nz
3 Asher J at paragraph 154
4 Tower Provider House Policy - 'How we will settle your claim' - page 11
5 Turvey Trustee Limited v Southern Response Earthquake Services Limited  NZHC 3344 per Dobson J
6 In Turvey, the policy stated "as new"
7 Asher J at paragraph 177