05 April 2013

Insurance: O'Loughlin v. Tower Insurance


In a test case on the “repair in red” proposal by one insurance company following the Christchurch earthquakes, the High Court ruled an insurer may choose to pay out on a notional repair even though no repair is intended but it must be a payment based on a realistic assessment of the cost of any repair.  Where a notional repair cost will depend on substantial geotech surveys and a need for stronger earthquake-proof foundations, insurers are likely to opt for a replacement or rebuild elsewhere.
Tower Insurance faced a barrage of adverse publicity when media learnt that the insurer was proposing to pay repair costs rather than replacement costs on homes which were to be abandoned following major earthquakes in Christchurch in 2010 and 2011.
Mr and Mrs O’Loughlin had built an architect designed home on land in Gayhurst Road, Dallington in 1999.  The concrete base slab warped after two severe earthquakes and the building dropped between 0.3 and 0.6 metres after liquefaction affected ground contours.
Their property became part of a government-designated “red zone”: insured property owners were given the option of accepting a government offer for their property; or a government offer for the land alone with the property owner to recover compensation for building damage from their insurer.  The O’Loughlins chose the second option but could not reach agreement with Tower over the level of compensation.  Their insurance cover was described as a Tower Provider House Policy: Maxi Protection .
Justice Asher said red zone designation did not stop a person from getting building consent for a repair or rebuild, did not stop a person from living in the red zone and did not require residents to demolish or repair their homes.  But residents intending to stay have been warned that public utilities like power, water, sewage and roading are unlikely to be maintained or repaired.
The O’Loughlins hired a global claims management company called WorldClaim to negotiate with Tower.  WorldClaim is entitled to 25 per cent of monies recovered from Tower in excess of Tower’s offered $390,000 for repair costs.  WorldClaim assessed repair costs at $1.35 million.
Tower said the O’Loughlin house could be stabilised and then repaired by pumping polystyrene foam under the concrete base slab to fill the voids created by liquefaction.
After hearing evidence from Christchurch City Council, Justice Asher ruled that this proposal was unlikely to get building consent for red zone properties.  A detailed engineering study would probably show new pile foundations would be required.
He said even if building consent were granted, there were apparent risks of the method failing and significant cost overruns resulting.  It was not reasonable to expect Tower to make payment for a notional repair of this type when final costs could not be fixed adequately.
Justice Asher ruled that Tower’s offer of $390,000 for repair costs fell short of its contractual obligations under the insurance policy.
But the court was not able to determine what would be an appropriate payout.
The wording of Tower’s Maxi policy gave Tower the option of repairing the damage or replacement elsewhere.  Justice Asher said Tower had not committed to a repair, it had offered to pay compensation on a notional repair.  It was still open to the insurer to choose compensation based on buying a new home elsewhere or building at an alternative site.  Buying a new home would require finding an existing home elsewhere satisfactory as being in “the same condition and extent” as their red-zoned Dallington home had been when new.  Justice Asher said this does not require Tower to pay for a replacement property which is identical in terms of the position, dimensions, building design and finish as the Dallington property.
Alternatively, Tower could choose to pay for a rebuild.  Justice Asher said this does not require Tower to pay for the cost of a rebuild on the present Dallington site; payment is to be calculated on the cost of a rebuild on an alternative site.
Loughlin v. Tower Insurance – High Court (5.04.13)
13.008