The O’Loughlins’ home was damaged in the Canterbury earthquakes (its concrete base was warped) and was subsequently “red zoned”.
The O’Loughlins made a claim with their insurer, Tower, for a sum equal to the full cost of rebuilding on the existing site, despite having no intention of remaining there. They also claimed that the creation of the red zone caused loss in respect of which Tower was obliged to provide full replacement cover, regardless of any physical loss or damage. This was disputed by Tower, which sought to discharge its obligations by making a payment based on the estimated costs of repair.
The Court found, first, that the creation of the red zone did not constitute physical loss or damage, and there was no express provision in the policy for economic loss. As a result, the red zone classification did not give rise to an insurable claim.
Second, Tower was required to pay the “full replacement value” of the house, but could elect whether this was on the basis of repair, rebuild or replacement. The sum offered by Tower was based on the notional cost of repair using a ‘low mobility grout’ injection technique to re-level the concrete base. On the available evidence, there were material risks of complications or failure with this method, which could lead to significant overruns. In light of this, the Court was not satisfied that the sum being offered by Tower equated to the true cost of repair under the terms of the policy.
Tower could instead make a payment on a re-build or reinstatement basis. However, the calculation must be reasonable and in accordance with Tower’s obligations under the policy.
If Tower paid a sum based on the cost of rebuilding, this would need to be on the basis of the cost of rebuilding on a good site, and not the (higher) cost of doing so on the existing weakened and vulnerable site. This was because the O’Loughlins had decided not to rebuild on the existing site and both parties had proceeded on the basis of a cash payment to enable the O’Loughlins to settle elsewhere in Christchurch.
The decision in O’Loughlin has been followed in the subsequent High Court judgments of Skyward Aviation 2008 Ltd v Tower  NZHC 1856 and Rout v Southern Response Earthquake Services Ltd  NZHC 3262, which deal with many of the same issues. The Court in Skyward clarified that the amount payable by Tower under its option to purchase a replacement house should be based on the fair price of a house comparable to the insured property when new (i.e. on a new-for-old, not old-for-old basis).
The Court’s determination on the “red zoning” of earthquake-affected properties in both O’Loughlin and Rout has set a useful precedent. Meanwhile, the finding in O’Loughlin that the low mobility grout method was not feasible and carried risks was specific to the case, and insurers are not precluded from looking at new or innovative repair methods if they are cheaper. However, the evidence in support of those methods will need to be robust from both a technical and costs perspective to discharge an insurer’s obligations. The Rout decision provides an interesting insight into the degree of testing that may be necessary to convince a judge of both feasibility and cost.
Many insurance policies employ a test of “damaged beyond economic repair” as the threshold for a full replacement claim. The High Court in Rout held that a house is only economic to repair if the actual repair costs are less than 80% of a full rebuild estimate. The judge based this decision on evidence of the standard practice of insurance companies involved in Christchurch earthquake damage claims.
The Rout decision provides a warning to both plaintiffs and insurers of the potential dangers of an adversarial approach to insurance claims. The judge criticised various aspects of the insurer’s conduct, including its changes of position, the limited scope of the evidence supporting its proposed repair methodology and a lack of transparency in its cost assessments. However the plaintiffs’ conduct in pursuing an inflated claim, which was not supported by quantum evidence, disentitled them to a claim for general damages.