"Highlighting the inadequacies of the way in which the earthquakes of 2010-2012 were handled by the insurance industry! "

O’Loughlin’s v Tower Insurance Limited – Summary of Findings relating to the Red Zone

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As way of background – the Canterbury Earthquake Recovery Authority (CERA) was established by Order in Council on 28 March 2011 and the Canterbury Earthquake Recovery Act 2011 was enacted on April 12, 2011. Its purpose was to outline CERA’s role in the recovery from the earthquakes.  In June 2011, the Government’s response to the earthquakes was to create zones in the Christchurch area – green, orange, white and red. The red zone represents the worst affected parts of the city. The Government, via CERA ‘offered’ to buy these properties.  In the red zone rebuilding is said to ‘”not occur in the “short-to-medium SAM_1850term” (though this is not defined) because the land is considered to be “damaged beyond practical and timely repair… these areas are at high risk of further damage to land and buildings from low-levels of shaking (e.g. aftershocks), flooding or spring tides; and infrastructure needs to be rebuilt“.

The Cabinet paper suggests that the reasoning behind nominating an area red zoned allows the landowners in those areas to move on and make decisions about their future“. “The Government has determined that it is neither practical nor reasonable for these communities to stay in the Red Zone areas during the extensive time required to fully design remediation solutions”. Home owners in these areas were forwarded a document which stated that:

  • The council will not be installing new services in the residential red zone.
  •  If only a few people remain in a street and/or area, the Council and other utility providers may reach the view that it is no longer feasible or practical to continue to maintain services to the remaining properties.
  • Insurers may cancel or refuse to renew insurance policies for properties in the residential red zones.
  • While no decisions have been made on the ultimate future of the land in the residential red zones, CERA does have powers under the Canterbury Earthquake Recovery Act 2011 to require you to sell your property to CERA for its market value at that time. If a decision is made in the future to use these powers to acquire your property, the market value could be substantially lower than the amount that you would receive under the Crown’s offer.

The Judge in the case we are discussing stated that “The  red zone measures do not render the O’Loughlins’ home valueless; to the contrary, it gave their house a value that….could have been the same as its value at the time of the earthquake.”

Did the declaration of the red zone engage the full replacement cover under the policy, irrespective of the physical damage to the house? The Judge considered this issue to be a contractual one, stating that the terms of the policy would have to lead the way and that insurance contracts are no different from other New Zealand contracts – the focus being on the words and their plain meaning. The insurance policy relates to damage to the house and not the land.

The question arises: does the creation of the red zone fall within the definition of sudden and unforeseen accidental loss or damage? The conclusion reached was that it was not the red zone that was the cause of the damage to the O’Loughlins’ house?  It did not physically affect the house but only the way in which the land and houses may be regarded in a particular area. “The house is not only physically unaffected, but it is 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“.

The question then becomes whether the O’Loughlins’ through the creation of the red zone, distinct from the earthquakes, have suffered loss or damage “as a direct result of earthquake…occurring whether accidentally or not,  as a direct result of measures taken under proper authority to avoid the spreading of, or to otherwise reduce the consequences of, an earthquake…” The Judge held that the value is the cost at the time of the loss or damage, of rebuilding, replacing or repairing the house back to market value and not for compensation for economic losses unrelated to physical damage. He went onto say that “Looking at the wider commercial context, it would be surprising if a public measure that caused no direct physical consequences to a house could be accepted as causing loss or damage to the house in an insurance context“. And given that the red zone does not in of itself require that the O’Loughlin’s do anything to their house, “the loss or damage arising from its creation must be economic loss that has to be proved.” No evidence was provided to suggest that the creation of the red zone had caused economic loss or damage to the value of the O’Loughlin’s home.

The Government provided two options: the first to buy the property entirely for a fixed price (at 2007 valuations) and the second option was to purchase just the land. The O’Loughlins’ chose the second option and sold their land to the Crown.

The O’Loughlins’ assert that their home is a total loss and therefore the insurers must pay the rebuild price on the current site to the same condition and extent as when their house was new. Tower Insurance refused to do so stating that in order to meet its obligations under the policy it need only pay a figure which represents in their view the original repair calculated by Tower Insurance.

The Judge went on to make the following declarations:

“(a) The creation of the red zone did not constitute or cause physical loss or damage to natural disaster damage to the O’Loughlins’ house.

(b) The cost of repair calculations, which was the basis of Tower’s offer and its payment, was not in accordance with Tower’s obligations under the policy.

(c) Tower is bound to make a payment for the full replacement value of the O’Loughlins’ house on another site, calculated at its option on a rebuild or replacement basis.

(d) If the basis of calculation is a rebuild, the costings should be on the basis of a rebuild on another site, and not a rebuild on the existing site.

Note that I have deliberately highlighted the word public in the above text.  The decision to create the red zones was a CERA/Government decision taken without any clarification to the people of what this would mean, or how it would be compensated in financial terms – just a ‘take it or leave it’ offer, though later reframed as not being compulsory.

The question then arises- does this particular Court decision provide the certainty of outcome for other home owners in the red zone? Does the decision provide the confidence required for people to be able to move forward with their lives?  If it needs further clarification is a ‘class action’ by the remaining ‘unsettled’ red-zoners against CERA, a method to obtain fair compensation??  The answers to those questions can only be provided by the red zoners.  So what are your thoughts?


Author: Sarah-Alice Miles

Love to write, create and watch the clouds move across the sky - these days in the Netherlands. 'Art allows us to find ourselves and lose ourselves at the same time'.

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