A couple insure their house in Dallington. The house is materially damaged, but not destroyed in the Canterbury earthquakes. Following emergency repairs, the house is safe to live in and essential services are eventually restored.
The house is on land which is declared to be part of the “red zone”. It appears essential services will not be maintained in the long term. Can the insured claim on their insurance policy for a reduction in value of their house as a result of it being in the red zone?
In O’Loughlin v Tower, the High Court clarified, among other things, the legal nature of the red zone. The court held that the creation of the red zone was not an insured event for the purposes of the relevant Tower insurance policy. Here I briefly review the 61 page decision and discuss possible implications for others.
The insuring clauses
The Court emphasised the starting point is the terms of the relevant insurance policy. The primary clause insured against sudden and unforeseen accidental physical loss or damage, unless excluded by the policy. The policy also contained an extension for natural disaster damage, defined as “loss or damage as a direct result of earthquake...”
The question was whether the creation of the redzone fell within the term “physical loss or damage” or “loss or damage”.
The court considered each part of the term. In essence, it held that, in terms of the primary clause, there must be a physical event in relation to the insured building before there can be damage or loss to the building. Damage means a change in physical state short of total destruction. Loss, for this particular, policy meant the total destruction of the building.
The court considered the context of the policy when interpreting the extension. The initial definition of “physical loss or damage” set the scene, such that later references to loss or damage were assumed to mean “physical” loss or damage.
The red zone
The creation of the redzone was part of the Government’s response to the Canterbury earthquakes. It created an area in which the Canterbury Earthquake Recovery Authority (CERA) would make offers to buy properties of insured residents. It signalled, among other things, that the land had suffered significant damage and was at risk of further damage. It did not prohibit building consents or people living in the red zone.
The court noted that this did not cause the O’Loughlin’s house to suffer damage or loss in the relevant sense. The house was not only physically unaffected, but was not indirectly affected in the sense of being deprived of water or electricity or other services. The house remains exactly the same, has its services and can be inhabited.
Some insured in the red zone may view O’Loughlin as an unwelcomed development. We consider, however, the decision is likely to be correct for the red zone issue and there is some value in the decision for insured.
First, O’Loughlin provides some clarity as to the legal nature of the red zone, which is likely to help in interpreting and applying other insurance policies. The decision may not trouble those in the red zone who sold their entire property to CERA and transferred their insurance policy to the Crown. For those who accepted CERA’s offer for the land only or did not accept either offer however, O’Loughlin may remove one hurdle to reaching a settlement with their insurer.
Secondly, as part of its reasoning about the meaning of “damage” in the Tower policy, the court discussed whether certain United States cases were relevant in New Zealand. In particular, it ruled that the United States case which suggested a building may be treated as physically damaged when it becomes subject to a potential threat, such as falling rocks or landslides, was not of assistance in the New Zealand context. While this development is not favourable to insured, it may narrow the sticking points between insured and insurer going forward.
In sum, while insured may have seen red at the outcome of O’Loughlin, we consider the decision should help clear a way through the proverbial mist.
Please note that this article is not a substitute for legal advice about your specific situation.