O'Loughlin v Tower Insurance Ltd Hc Chch

JurisdictionNew Zealand
JudgeAsher J
Judgment Date05 April 2013
Neutral Citation[2013] NZHC 670
Docket NumberCIV-2012-409-002385
CourtHigh Court
Date05 April 2013
Matthew John O'Loughlin and Valerie Jean O'Loughlin
Tower Insurance Limited

[2013] NZHC 670



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.


GDR Shand and KP Sullivan for Plaintiffs

AR Galbraith QC and MC Harris for Defendant


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


General damages









Christchurch suffered two earthquakes on 4 September 2010 and 22 February 2011 and a particularly significant aftershock on 13 June 2011. All three of these events damaged the property of the plaintiffs, Matthew and Valerie O'Loughlin. They have sold the land on which their house was built to the Crown, and will move elsewhere.


The O'Loughlins have brought these proceedings against their insurer, Tower Insurance Ltd (Tower) under their house policy. The policy was taken out on 25 September 2009 and was in force at the time of the three events (the earthquakes). It insures their house but not their land. Tower accepts that there is a valid contract of insurance, there has been an accident in terms of the policy, and the O'Loughlins have suffered loss. Both parties accept that payments made by the Earthquake Commission (EQC) for damage to the house of $203,886.50 must be deducted. Tower has made an offer based on the costs of repair of the O'Loughlins' house, and have now made a payment of net $197,179.15 to them on that basis. Consequently, the O'Loughlins have received a total of $401,065.65 for house damage.


The issue in the proceedings is whether the payment of $197,179.15 has met Tower'obligations under the policy, or whether Tower must pay a larger amount as claimed by the O'Loughlins based on the cost of rebuilding a new house. The O'Loughlins say they should have been paid a net $416,113.50 rather than

$197,179.15, which would mean they would have received a total of $620,000 for house damage.

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. 1

  • (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. 2

  • (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. 3

  • (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. 4

  • (e) It is explicit in the policy that it is Tower'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. 5

  • (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. 6

  • (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. 7

  • (h) The O'Loughlins have succeeded in proving that the offer and payment based on the LMG repair did not meet Tower'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. 8

  • (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. 9

  • (j) This judgment is, therefore, an interim judgment.

Events leading to the claim

In 1999-2000, the O'Loughlins owned a property at Gayhurst Road, Dallington. They built an architecturally designed home for themselves on part of the section. The site is approximately 320 square metres, and the floor area of the house is 219 square metres. The foundation is a concrete base slab. The building is timber framed, although there are some supporting steel beams. The external walls are part concrete block, part brick veneer, with plaster over polystyrene in the upper areas. Upstairs there are three double bedrooms, a study and two bathrooms. Downstairs there is a living area, dining room and kitchen, together with a bathroom. There is also a large double garage. It is a comfortable two-storey home, purpose built on a relatively small site.


The value of a replacement property with a similar house and section in a suburb on sound land in Christchurch has been assessed by Tower'valuer Mark Shalders at $500,000 to $525,000 based on existing information. However, he accepted that if the O'Loughlins went out to buy a replacement property on the day he was giving evidence, they would have to pay more, given a rising market.


The property suffered from liquefaction in the earthquakes. It has dropped between 300 and 620 millimetres. The most significant damage is a warping of the concrete base slab, which occurred as the soil beneath liquefied, moved and sank. The level now varies through the slab up to 106 millimetres. Some cracking in the ground floor slab can be observed in two locations, one crack being one to two

millimetres wide and the other less than one...

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