O'Loughlin v Tower Insurance Ltd Hc Chch

JurisdictionNew Zealand
CourtHigh Court
JudgeAsher J
Judgment Date05 Apr 2013
Neutral Citation[2013] NZHC 670
Docket NumberCIV-2012-409-002385

[2013] NZHC 670



Matthew John O'Loughlin and Valerie Jean O'Loughlin
Tower Insurance Limited

GDR Shand and KP Sullivan for Plaintiffs

AR Galbraith QC and MC Harris for Defendant

Claim under house insurance policy for the cost of rebuilding a new house instead of merely repairing the house-plaintiffs' house damaged in Christchurch earthquakes-land sold to the Crown-insurance policy with defendant insurer insured the house but not the land-whether payment of $197,179 based on estimated costs of repair met insurer'obligations under the policy-whether creation of the “red zone” in Christchurch caused loss or damage to the house so insurer was obligated to provide full replacement cover irrespective of physical damage-whether insurer had met its obligations under the policy by offering a payment for a sum equivalent to the cost of repairing the house.

The issues were: (1) whether the creation of the “Red Zone” in Christchurch caused loss or damage to the Os' house so that irrespective of physical damage, Tower was obligated to provide full replacement cover; (2) whether Tower had met its obligations under the policy by offering a payment to the Os for a sum equivalent to the cost of repairing the house, adopting a low mobility grout (“LMG”) technique to level the concrete base; and (3) if Tower was in breach of its contractual obligations, what was the appropriate quantum that it should pay?

Held: The creation of the Red Zone following the earthquakes did not give rise to a claim under the primary insurance clause in the policy. This clause stated that the policy would cover “sudden and unforeseen accidental physical loss or damage unless excluded by [the] policy”. The word “physical” meant “of or concerning the body”, and in the context of the insurance of a house from loss or damage from accident, plainly meant loss or damage to the materials and structures that constituted the body of the house.

There was a requirement for some type of disturbance to the physical integrity of the subject property itself. In the New Zealand context the approach by the English courts in interpreting insurance contracts (as in Pilkington United Kingdom Ltd v CGU Insurance plc) was to be preferred to the more generous interpretation to physical damage that the United States' had adopted (where it was suggested that unsaleability in itself could be physical damage). There still had to be a physical event in relation to the building before there was a loss ( Graham Evans&Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd).

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. Nor did the creation of the Red Zone give rise to a claim under the natural disaster special benefit clause in the policy.

The natural disaster special benefits clause extended cover to direct loss arising from measures by proper authorities after earthquakes to reduce their consequences. This clause did not include the word “physical”. The O'argued that this clause applied, as the absence of the word “physical” in the definition of natural disaster meant that damage by diminution in value was covered and there was no requirement of physical damage. The creation of the red zone was “a measure” by a proper authority under the clause. Its creation together with the offer to purchase was in combination a measure taken to reduce the consequences of an earthquake. The other types of loss referred to in the special benefits clause all stemmed from physical loss or damage which indicated that later references to loss or damage imported the same concept as the primary insurance clause. The presence of the word “physical” was assumed because it was in the primary insurance clause.

The contra proferentum principle was only an aid to interpretation and was not a rule that could overcome a clear contextual indication of meaning. Here, the wording of the document and the wider commercial context indicated that claims were limited to physical loss or damage to the house, and not economic loss. In New Zealand, the words of the contract were the initial focus and while the background matrix of facts was used to assist in establishing meaning, it did not assume primacy. Whatever the Os might have reasonably expected to have cover for, there was no case where a reasonable expectations doctrine had been applied in NZ for the interpretation of insurance policies. The natural disaster special benefit did not include cover for economic loss.

In any event, no economic loss to the house was proved to arise from the creation of the Red Zone, given it was accompanied by a CERA offer to buy the house at the 2007 valuation, which had not been shown to be less than the market value at the time of the earthquakes. The claim to loss or damage arising from the creation of the Red Zone failed.

Electing 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, was problematic as the amount Tower had chosen to pay had not been shown to be the replacement value, and did not equate to the actual cost of bringing the house back “to the same condition and extent as when new” under the insurance contract. It was not clear on the evidence that the proposed building consent would be forthcoming for a LMG repair, or, even if it was, that there might not be unforeseen problems and extra work to be done which would lead to the estimate of repairs being considerably exceeded. It was not reasonable for Tower to provide a cheque on the basis of a cost of a repair that was untested, and came with apparent risks of failure or complications that could lead to significant cost overruns.

The Os, as the insured, had brought this claim and had the insured'onus of proving loss. If the Os had sought to do the repair themselves they would have had the onus of proving the reasonable cost of those repairs if they claimed them from Tower, but the insurance policy provided that it was Tower'option as to how it provided the replacement value. Tower had by its actions assumed the onus of proof on the balance of probabilities but had failed on the evidence adduced to establish that the LMG repair could be carried out for $390,000. If the onus was on the Os to prove contractual breach by Tower including in adequacy of the repairs payment, on the information available, no reasonable insured or insurer would commit to carry out actual repairs in the way proposed and the Os had shown that Tower was in breach by attempting to fulfill its obligations under the contract through provision of a payment that did not meet the contractual standard of full replacement value.

The cost of rebuilding the house on the existing site was $620,000 and on a sound site in a comparable position elsewhere was $540,000. It was explicit in the policy that it was Tower'option whether it made a payment, rebuilt, replaced or repaired. As Tower had not elected to rebuild, it was not bound to pay based on a rebuild, and could pay on another basis such as replacement. However, the calculation of that payment had to be reasonable and in accordance with Tower'contractual obligations.

If there was a payment based on the costs of rebuilding, that payment had to be on the basis of the costs of rebuilding on a good site, not on the present weakened and vulnerable section. This was because the Os had chosen not to rebuild on the existing damaged site, and both parties had proceeded on the basis of a cash payment which would enable them to purchase elsewhere in Christchurch and out of the Red Zone. The Os were not entitled to a payment in excess of the cost of replacing the house as that would amount to a windfall. The terms of the policy required Tower to pay for a house for the Os that was comparable to the Os house as when new but did not obligate Tower to pay for a replacement property that was identical in terms of the position, dimensions, building design and finish to the previous house.

Entry of judgment declined for both parties. Court would have been willing to make declarations but these had not been sought by other party and therefore judgment to be treated as an interim judgment. Parties to make submissions on appropriate relief.


Table of Contents

Para No



Summary of findings


Events leading to the claim


Pleadings and issues


Did the creation of the red zone engage the policy?

The red zone


Approach to interpreting the policy




Claim under the primary insurance clause of the policy


Claim under the natural disaster damage special benefit clause


Is the natural disaster cover limited to physical damage?




In any event, is there economic loss?


Is payment based on the repair estimate using LMG calculated in compliance with Tower'contractual obligations?



Context of the disagreement


The engineers


Where the engineers agree


Where the engineers disagree


Mr Hutt'evidence


The guidance document


My assessment of the LMG proposed repair


Questions of onus


Is the offer of $390,000 calculated in compliance with Tower'contractual obligations?


What then is Tower'obligation?


$620,000 or $540,000?


The extent of the drop suffered by the O'Loughlins' home



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