Kraal v Earthquake Commission

• Jurisdiction: New Zealand
• Judge: Asher J
• Judgment Date: 13 February 2015
• Neutral Citation: [2015] NZCA 13
• Docket Number: CA281/2014
• Court: Court of Appeal
• Date: 13 February 2015

[2015] NZCA 13

IN THE COURT OF APPEAL OF NEW ZEALAND

Court:

Wild, SimonFrance and Asher JJ

CA281/2014

Between

Helen Kraal and Bruce Robertson Irvine

Appellants

and

Earthquake Commission

First Respondent

Allianz New Zealand Limited

Second Respondent

Counsel:

N Campbell QC, C R Johnstone and R Hargreaves for Appellants

J A Knight, A Neris and N J Bruce-Smith for First Respondent I J Thain and K R Pengelly for Second Respondent

Appeal against a High Court (HC) decision that the appellants' house was not covered under the definition of natural disaster damage in s2 Earthquake Commission Act 1993 (the ECA) (physical loss or damage to the property) — appellants' house was not physically damaged by the Christchurch earthquakes but was in an area that was subject to the threat of rock falls following the earthquakes — council issued a notice under s124(2)(d) Building Act 2004 (notice restricting entry to a dangerous, affected, earthquake-prone, or insanitary building), which prevented the appellants from occupying the house — appellants' insurance policy would pay the difference between the cost of repairing or rebuilding their house and the amount received from the EQC if it accepted liability — HC ruled that there had to be physical disturbance to the property, and the definition did not extend to losses which did not arise from physical disturbance — whether loss of the use of the house and the house's resulting unsaleability were “natural disaster damage” for the purposes of the ECA.

Held: Section 18 ECA (Residential buildings) provided for the insurance of residential property against natural disaster. It had three requirements for cover:

(a) the property must be a residential building situated in New Zealand;

(b) there had to be a contract of fire insurance with an insurance company in respect of that building; and

(c) there had to be natural disaster damage to the property.

The section defined physical loss as including “any physical loss or damage to the property that (in the opinion of the Commission) [was] imminent as the direct result of a natural disaster which [had] occurred).

The definitions of “natural disaster damage” and “physical loss or damage” showed that natural disaster damage could therefore be of three different types:

(a) physical loss or damage to the property occurring as the direct result of a natural disaster (Definition A);

(b) physical loss or damage to the property occurring (whether accidentally or not) as a direct result of measures taken under proper authority to avoid the spreading of or otherwise to mitigate the consequences of any natural disaster (Definition B); or

(c) physical loss or damage to property that (in the opinion of the Commission) was imminent as the direct result of a natural disaster which had occurred (Definition C);

When assessing Definition A, it was necessary to consider the adjective “physical”, the nouns it qualified of “loss or damage” and the phrase that followed of “to the property”. The word “physical” indicated something material or tangible as opposed to mental or spiritual, and ordinarily meant “of or concerning the body”. The “body” in the context was the “property”. Property was not defined, but had to be the building or land that had suffered the loss or damage. In this case it would be the structure and materials of the house.

The ordinary meaning “damage” was of harm done to something which impaired its value or usefulness. The word often had a connotation of physical harm, but it could mean emotional or reputational or other non-physical harm. In ordinary parlance it would not be said that a s124 Building Act 2004 notice prohibiting occupation had caused “damage” to a property.

The word “loss” had a broader meaning than the word “damage”, and could mean the concept of deprivation of a thing or the ability to use her property, and other associated losses, However, the definition referred to loss “to the property”, and not loss to the insured person. The word “loss” had a belts and braces purpose. In the context of the definition it could be seen as adding, to the concept of damage, the concept of total destruction. Both involved a physical event happening to the building. The word as used in the definition could not be read without the qualifying adjective “physical”. Therefore, it was loss or damage that reached and touched the house and not loss or damage to objects other than the property, such as the insured person or that person's enjoyment of the property that was covered.

Nothing physical had happened “to” the property. The only reason the house could not be used was because there were legal prohibitions on its use. Those legal prohibitions in themselves were not physical loss or damage “to” the property.

Definition B added to the triggering event of “natural disaster”, physical loss or damage to the property that resulted from measures under proper authority, taken to avoid the spreading of or to mitigate the consequences of natural disaster. Natural disaster remained the trigger, and physical loss or damage to the property remained the loss covered but the cover for the loss was extended where a measure was taken to mitigate the natural disaster. That measure still had to cause physical loss or damage to the property. There was no reason why the meaning of “physical loss or damage to the property” should differ between (a) and (b).

The context of the ECA supported a requirement of physical loss. The long title recorded that the ECA was to provide “insurance of residential property against damage caused by certain natural disasters”. The reference was to “damage” rather than “loss”. Further the emphasis in s18 was on replacement value insurance which as defined as costs that would be reasonably incurred in the demolition and removal or reinstatement of the building. This definition indicated there was insurance for physical damage, rather than for loss of the right to occupy the house.

The extended definition of physical loss or damage in s2 also indicated it was physical loss or damage to the property rather than the deprivation of possession that was contemplated by the ECA drafters.

The history of the ECA supported the interpretation of the EQC rather than the appellants. It indicated an intention to cover events which damaged land or the materials or structure of buildings, and to extend that to situations where physical damage was imminent. There was nothing to indicate that contrary to the natural meaning of the words, damage or loss that was not physical and to the body of the property was intended to be covered.

The authorities also supported the view that an interpretation of “loss or damage” in the context of this area of insurance law required physical damage. While not themselves determinative of this issue of statutory interpretation, they made it clear that in respect of insurance clauses that had similar definitions, the insured had to demonstrate some physical damage caused by the triggering event, and that the loss claimed had to result from physical loss or damage.

The ECA limited the meaning of natural disaster damage to physical damage that arose from a natural disaster, and which was suffered by the land and buildings that were the subject of the claim, or such loss or damage when it resulted from an authorised measure to mitigate the damage from the disaster, or when such loss or damage was imminent. If the property was a building, there had to be a physical disturbance to the materials or structure of that building, and the ECA did not extend to a claim for losses arising from an event which had not physically affected the body of the property.

The Allianz policy required that the EQC first accept liability for cover under the ECA. Given that the EQC had not paid anything and had not accepted liability, and that it had been held that the EQC was not liable to do so, this condition was not met and cover was not engaged. If the EQC had been held liable, the policy on its text would have required physical loss of damage.

Appeal dismissed.

JUDGMENT OF THE COURT

• A The appeal is dismissed.

• B The appellants must pay the respondents' costs for a standard appeal on a band B basis and usual disbursements. We certify for second counsel for each respondent.

REASONS OF THE COURT

(Given by Asher J)

Introduction

1 This appeal arises out of the catastrophic earthquakes in Christchurch. It concerns the claim of the appellants, Helen Kraal and Bruce Robertson Irvine, that they are entitled to insurance cover of their house under the Earthquake Commission Act 1993 (the ECA). Their claim results from the Christchurch City Council (the Council) prohibiting any occupation of their property due to a significant and ongoing risk from rock fall.

2 The first respondent, the Earthquake Commission (EQC), is the successor of the Earthquake and War Damage Commission. 1 The second respondent, Allianz New Zealand Ltd (Allianz), is an insurer that insured the home of Ms Kraal and Mr Irvine under a Premier (Accidental Damage) Replacement House Policy.

3 In the High Court, Mallon J held that the Council was not liable to pay the replacement value of the appellants' house because their property had not suffered “natural disaster damage”. 2 In particular, she held that the definition of natural disaster damage, “physical loss or damage to the property”, required physical disturbance to the property, and did not extend to claims for losses (such as loss of the right to occupy) which did not arise from physical disturbance. The primary issue on appeal is whether this is a correct interpretation of “natural disaster damage” in the context of the ECA.

Background

4 The property in question is at 119 Wakefield Avenue, Sumner (the property). At the time of the earthquakes, Ms Kraal and her partner lived there. They had lived there for 18 years and had raised two children...