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