The interim decision in the recent court case against Tower involving issues about repair v rebuild, and the red zoning of the area, has been released on-line.
The Summary of Findings is reproduced below, and the full judgement can be downloaded from here. While the decision focuses on a Red Zone situation some of the judgement may have relevance for those in the Green Zones where repairs are being assessed and costed.
Some basics from the case so far seem to be (references in brackets are to the sections in the Summary of Findings below):
- Insurance companies are bound by the terms of their insurance policies and
- Zoning of areas of land are outside the terms of insurance contracts because the zoning decisions did not cause any physical damage to the property (a, b) and
- Insurance companies can exercise their discretion on whether to repair, rebuild or offer a payment if this is allowed by the policy (c, e) and
- If the insurer elects to repair a property, the pricing for the repair is to be on the basis of doing so on good ground, unless there is a serious intention to build on the existing site (f), and
- The insurer, in pricing a repair, is obliged to ensure it’s calculation is reasonable and in accordance with its contractual obligations (e), and
- The insurer, in offering payment, must offer an amount that is the replacement value, or equates to the actual cost of bringing the house back “to the same condition and extent as when new” under the insurance contract ( c).
The judge’s interim decision is in section (h) below.
For those concerned that the repair being offered by an insurer is inappropriate (e.g. re-levelling) should look at the full judgement starting at para .
As always, I am not a legal specialist and may not necessarily have explained this as was intended in the judgement. Consult a legal advisor if this information is important to your claim. Click on the link to continue.
The following is taken from the judgement
Summary of findings
 For convenience, I summarise at the outset the reasoning and the conclusions I have reached below:
(a) The creation of the red zone did not give rise to a claim under the primary insurance clause in the policy. That is a clause covering physical loss or damage to the house. The red zone did not require physical alteration or repair to the house, and did not prohibit habitation, repair or rebuilding, or the grant of a building consent.
(b) The creation of the red zone did not give rise to a claim under the natural disaster special benefit clause in the policy. The clause extended cover to direct loss arising from measures by proper authorities after earthquakes to reduce their consequences, and did not include the word “physical”. However, the wording of the document and the wider commercial context indicate that claims are limited to physical loss or damage to the house, and not economic loss. In any event, no economic loss to the house was proved to arise from the creation of the red zone, given that the creation was accompanied by a CERA offer to buy the house at the 2007 valuation, which has not been shown to be less than the market value at the time of the earthquakes.
(c) Tower has elected to proceed on a repair basis rather than a rebuild or replacement basis, and to settle by making a payment rather than having actual work done. Tower, in offering to pay and making a payment based on the costs of repairing the O’Loughlins’ house using a low mobility grout (LMG) injection method to relevel the concrete base, was not acting in accordance with its obligations under the policy. On the evidence presented the LMG method may well encounter serious problems and not secure a building consent. The amount Tower has chosen to pay has not been shown to be the replacement value, and does not equate to the actual cost of bringing the house back “to the same condition and extent as when new” under the insurance contract.
(d) The cost of rebuilding the house on the existing site is $620,000 and on a sound site in a comparable position elsewhere is $540,000.
(e) It is explicit in the policy that it is Tower’s option whether it makes a payment, rebuilds, replaces or repairs. Tower has elected to make a payment to the O’Loughlins rather than to repair, rebuild or replace. It has not elected to rebuild, and is not bound to pay based on a rebuild. It can pay on another basis such as replacement, provided that the calculation is reasonable and in accordance with its contractual obligations.
(f) If there is a payment based on the costs of rebuilding the O’Loughlins’ home, that payment must be on the basis of the costs of rebuilding on a good site ($540,000), not on the present weakened and vulnerable section ($620,000). This is because the O’Loughlins have chosen not to rebuild on the existing damaged site, and both parties have proceeded on the basis of a cash payment which will enable them to purchase elsewhere in Christchurch out of the red zone. They are not entitled to a payment in excess of the cost of replacing the house.
(g) The terms of the policy require Tower to pay for a house for the O’Loughlins that is comparable to the O’Loughlins’ house as when new. It does not obligate Tower to pay for a replacement property that is identical in terms of the position, dimensions, building design and finish to the previous house.
(h) The O’Loughlins have succeeded in proving that the offer and payment based on the LMG repair did not meet Tower’s contractual obligations. They have not succeeded on their red zone argument, or their claim that Tower must pay on a potential rebuild basis on their existing site. Therefore, the relief sought by them in the present pleading cannot be granted.
(i) Different relief may be granted in accordance with these determinations, but the parties have not made submissions on declarations or orders in accord with these findings. The parties should now make submissions on the exact form of relief that is appropriate. For the same reason, general damages cannot be determined without further submissions.
(j) This judgment is, therefore, an interim judgment.