A court case related to the Christchurch earthquake highlights how government reponse can affect cover in natural disasters
Government cordons raised after catastrophes which effectively ‘write off’ damaged properties within them are beomcing increasingly common across the globe.
Now, a recent decision in New Zealand (O’Loughlin v Tower Insurance) concerning the recoverability of losses to a property as a result of it being within the Christchurch earthquake ‘red zone’, provides helpful guidance as to how the impact of government actions might affect coverage under (re)insurance policies.
In this case, the claimants’ home was damaged in both earthquakes (September 2010 and February 2011) and the major aftershock in June 2011. Their property was within the red zone created by the government in response to the earthquakes, and the claimants argued that their house should be replaced because of the red zone designation, even though the property was repairable.
They sought the cost of replacement as a recoverable loss under the policy with Tower. The second, alternative, strand of their argument (in the event of the first claim failing) was that Tower had not fulfilled its policy obligations by electing to pay the cost of theoretical repairs.
In his judgment, Justice Asher said that it was widely agreed that the physical damage caused by the earthquakes to the claimant’s house was covered by the policy. The first issue was whether the declaration of the red zone that followed the earthquakes engaged the full replacement cover under the policy, irrespective of the physical damage to the house.
The policy insured against ‘physical loss or damage’ and the judge concluded that the red zoning of the house did not, in and of itself, cause physical damage. He clarified that, under the policy, there would need to be some physical event in relation to the building in order for there to be an insured loss.
There was also a natural disaster special benefit clause in the policy that extended cover to direct loss arising from measures by proper authorities after earthquakes to reduce their consequences. The judge held that claims under this clause were limited to physical loss or damage to the property, not purely economic consequences of the designation of the land within the red zone, although, no economic loss had been suffered in this case as Canterbury Earthquake Recovery Authority had offered to buy the property at the correct market value.
The judge also stated that even possible future physical losses, such as services being cut to the property or lack of infrastructure in the red zone, was not enough to qualify as an economic loss recoverable under the policy.
The claimants succeeded, however, on the second issue relating to whether Tower had fulfilled its policy obligations by electing to pay for repairs to the property. The judge held that Tower had not calculated the repair costs correctly and quantum is to be decided at a later date.
This decision is the latest in a series of disputes concerning property coverage afforded by policies that provide indemnity by meeting the cost of repair, reinstatement or replacement when that cost is incurred. Other cases have been decided over the past year or so, such as Turvey Trustee Ltd v Southern Response Earthquake Services (concerning a ‘new for old’ reinstatement), TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd (about whether an insured could receive an interim payment, only recovering the balance from insurers if he did in fact reinstate) and Ridgecrest NZ Ltd v IAG New Zealand Ltd (where insurers ultimately succeeded on the doctrine of frustration, in a controversial decision).
While O’Loughlin v Tower Insurance turned on specific policy wording, the wider guidance on red zones and the implications of the judgment, both to this and comparable natural disasters, seem clear.
As also seen from policies covering damage caused by Superstorm Sandy, many contain provisions covering damage caused by natural disasters and “as a direct result of measures taken under proper authority to avoid the spreading of, or otherwise reduce the consequences”, as did the policy in question here.
The judge’s finding that red zones do not of themselves cause physical damage to a property within them such as to allow recovery under a policy may provide encouragement to insurers worldwide faced with similar issues.
The main moral of the story for insurers in the light of these cases is that there is sense in revisiting policy language and testing some of the assumptions that have thus far been made by adjusters as to how these basis of indemnification provisions work. That said, it is probably impossible to cater for every eventuality in necessarily standardised wordings, with the result that disputes are likely to recur, particularly in unusual cases such as applied in New Zealand during the earthquakes. The need for good, common sense, adjusting has never been more acute.