9 December, 2013

Legal News & Analysis – Asia Pacific – New Zealand – Dispute Resolution

2011 was a year of costly natural disasters. The magnitude 6.3 earthquake which rocked Christchurch on 22 February 2011 was the worst in almost 80 years: 185 people lost their lives, thousands were injured and much of the city was destroyed. Almost three years on, insurers are still helping the country to recover – but are encountering a number of issues in their efforts to pay claims. In particular, the New Zealand courts have recently grappled with issues such as:

• Whether damaged property in a red zone is a total loss for insurance purposes or whether the amount of reinstatement is the cost of repair.
• Whether a damaged period property should be reconstructed in the same style and of the same quality as the original.
• The extent of insurers’ liability for property which has suffered damage after multiple earthquake events.
• Whether insurers’ obligation to pay for the ‘present value’ of a property includes costs such as architects’, engineers’, surveyors’ and legal fees.

What has emerged following the Christchurch earthquakes is a mass of case law which is helpful in providing some guidance to insurers, home owners and businesses alike. Two recent decisions – O’Loughlin v Tower Insurance Limited [2013] NZHC 670 and Ridgecrest New Zealand Limited v IAG New Zealand [2013] NZCA 291 – have brought some particularly interesting issues to the fore. We consider both judgments and their implications below.

O’Loughlin v Tower Insurance Limited

The Claimants, a family called the O’Loughlins, claimed against their property insurer, Tower, for damage to their house as a result of the Christchurch earthquakes/aftershocks. In June 2011, in response to the earthquakes, the New Zealand government created four zones in the Christchurch area based on severity and extent of land damage, as well as cost effectiveness and social impact of land remediation. The red zone was for the worst affected areas and the government offered to buy houses in this zone. The Claimants’ house fell within the red zone and they accepted an offer to purchase their house while retaining the right to pursue Tower in respect of damage to their property.

Two of the main issues before the Court were (1) whether the designation of the house within the red zone engaged the full replacement cover, namely, rendered it a total loss regardless of physical damage to the house; and (2) whether the repairs proposed by Tower were in accordance with its obligations under the policy.

In respect of the first issue, it was held that the red zoning did not give rise to“sudden and unforeseen accidental physical loss or damage” as set out in the policy and therefore the Claimants could not claim for any damage to their house as a result of being within the red zone. A property simply being within the red zone did not automatically trigger full replacement cover. The Court also considered the meaning of “physical loss” and arrived at the conclusion that it must mean “some type of disturbance to the physical integrity of the property itself” – the corollary is that the policy did not respond to claims for economic loss.

In respect of the second issue, the policy required Tower to repair or rebuild the house “to the same condition and extent as when new”. The Claimants’ case was that Tower had failed to meet its obligations under the policy because it was obliged to pay the notional value of a potential rebuild on the existing site. The Court disagreed. It held that, whilst Tower had failed to fulfil its obligations under the policy, the terms of the policy required Tower to pay the cost of building or buying a comparable (not identical) house “as when new” outside the red zone.

Ridgecrest New Zealand Limited v IAG New Zealand

This case concerned insurers’ liability for damage to property caused by multiple earthquake events. The property owned by the Claimant, Ridgecrest, suffered damage as a result of four separate earthquakes which occurred during the policy period. In respect of the first and second quakes repairs had been started but not completed; after the third or fourth quake the property was irreparably damaged.

The measure of indemnity was set out in Clauses C1 (traditional indemnity cover, compensating for loss/damage to enable the property to be restored or replaced to the state it was in before the insured event) and C2 (the cost of restoring the property to the same condition as when new) of the policy. Ridgecrest argued that IAG was required to pay the estimated cost of repairs (even if they were not carried out) in order to fully restore the property after each quake, up to the limit of the sum insured in respect of each quake.

At First Instance the Court held that the limit of liability was available in respect of each qualifying loss within the policy period but that the policy had been frustrated. IAG was only required to pay the amount spent on actual repairs before the building became irreparable, plus the limit under the policy after the final quake when the building became damaged beyond repair. Ridgecrest appealed.

The question before the Court of Appeal was whether Ridgecrest was entitled to be paid by IAG for the damage to the property caused by each quake up to the limit of indemnity in each case, namely, the aggregate value of the damage caused by each of the four quakes. The Court of Appeal dismissed the appeal. Ridgecrest could not recover the costs of repair (which had not been carried out) in addition to the replacement value of the property.

Comment

The New Zealand earthquakes have put the spotlight on key property damage and business interruption issues which rarely come before the courts. Both O’Loughlin and Ridgecrest have assisted in clarifying the law concerning the construction of insurance policies in relation to the damage caused by earthquakes and the measure of indemnity.

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