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 in the Christchurch earthquake “red zone” – an area where the land has been designated as being so damaged by the earthquakes in 2010 and 2011 that all houses in the zone are effectively written off – provides useful guidance as to how the impact of government actions might affect coverage under re/insurance policies.

Background

The claimants’ home was damaged in both earthquakes (September 2010 and February 2011) and the major aftershock in June 2011. The property was within the red zone created by the government in response to the earthquakes. The claimants claimed that their house should be replaced because of the red zone designation, even though the property was repairable, and 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.

Decision

In his judgment, Mr Justice Asher stated that it was widely agreed that the physical damage caused by the earthquakes to the claimants’ house was covered by the policy. The first issue was whether the declaration of the red zone which 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 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 which 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, in any event, 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.

Comment

Whilst this particular case turned on specific policy wording, the wider implications of the judgment, both to this and comparable natural disasters, seem clear. As we have 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.

We are advising clients on the insurance and reinsurance issues arising from the Christchurch earthquakes, Thai floods and Superstorm Sandy, in particular on the impact of government actions (such as the evacuation of areas before Sandy hit) on the operation of business interruption clauses. Should you require any further information on these issues, please do not hesitate to contact us.

Further reading: O’Loughlin v Tower Insurance [2013] NZHC 670