The Christchurch earthquakes of 2010 and 2011 continue to produce litigation and insurance case law. Some of these cases have considered the meaning of “physical loss or damage” to property.

These cases confirm, as a matter of New Zealand law, that there is no basis to follow US authorities supporting a broader interpretation of physical loss or damage than that taken in the Commonwealth jurisdictions. “Physical loss or damage” to property requires that the property has itself undergone a physical change and not simply that it has become less valuable (or even unusable).


In O’Loughlin v Tower Insurance Limited1, the New Zealand High Court (The Honourable Justice Asher) held that the creation of the “red zone” in Christchurch did not constitute or cause “physical loss or damage” to the claimants’ house. The red zone designation affected significantly the economics and practicalities of property ownership (for example, the government could decide to acquire compulsorily, and the council could decide not to continue providing services to, properties in the red zone), but there was no prohibition on the occupation of houses in the red zone. It was important to the decision in O’Loughlin that 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.

By way of comparison, the Full Court of the High Court in Earthquake Commission v Insurance Council of New Zealand Inc.2 held that a change in land levels constituted “physical loss or damage” to the property on the basis that, as a direct result of the earthquakes, there had been a disturbance to the physical integrity of the land and a change to its physical state which affected adversely its use and amenity.

Similar issues, involving the meaning of “physical loss or damage” to property, have been considered in more recent 2015 cases.

Kraal v The Earthquake Commission

In Kraal v The Earthquake Commission3, the New Zealand Court of Appeal considered a claim where the claimants (and appellants in the Court of Appeal) argued that they were entitled to insurance cover of their house under the Earthquake Commission Act 1993 (EQC Act). The EQC Act provided cover for “natural disaster damage”, defined as meaning “any physical loss or damage to the property occurring as the direct result of a natural disaster”, and also “any physical loss or damage to the property that … is imminent as the direct result of a natural disaster”.

It was argued by the claimants that there had been actual “physical loss or damage to the property” not that loss or damage was “imminent”. The claim resulted from the Christchurch City Council prohibiting any occupation of the property due to a significant and ongoing risk from rock fall. Accordingly, a potentially significant difference from the facts in O’Loughlin was that, in Kraal, the claimants were prohibited from occupying their house. It was argued that the fact that the claimants were unable to have access to and enjoyment of their house was an event that was a “physical deprivation of use” and, therefore, a “physical loss”.

Nonetheless, the Court of Appeal upheld the earlier High Court decision that the definition of “natural disaster damage” in the EQC Act, which required “physical loss or damage to the property”, did not extend to claims for losses (such as loss of the right to occupy) which did not arise from physical disturbance to the property.

The Court of Appeal considered the ordinary meaning of the EQC Act definition of “natural disaster damage”“... any physical loss or damage to the property occurring as the direct result of a natural disaster...” and held that:

  • The word “physical” qualified both “loss” and “damage” and applied to the property rather than to the claimants. The use of the qualifying word “physical” indicated that something material or tangible as opposed to mental or spiritual had happened to the property.
  • The ordinary meaning of the word “damage” is harm done to something which impairs its value or usefulness. The word “damage” taken alone often meant physical harm, and although it could mean“emotional or reputational or other non-physical harm”. In ordinary parlance it would not be said that a statutory notice prohibiting occupation caused damage to a property.
  • The word “loss” has a broader meaning than the word “damage” and is broad enough to cover conceptually what happened to the claimants, in the sense that they had suffered a loss, namely the ability to use their property, and other associated losses. However, the loss in Kraal was not “physical”and had happened to the claimants and not to the property. By way of comparison, the court stated that“if a house or land is swept away in a tsunami or lahar flow it is physically “lost””.

C&S Kelly Properties Ltd v Earthquake Commission and Southern Response Earthquake Services Ltd

The case of C&S Kelly Properties Ltd v Earthquake Commission and Southern Response Earthquake Services Ltd4, also considered the application of the EQC Act definition of “natural disaster damage”. Whilst the High Court in this case was also concerned with multiple other issues, it had to consider whether floor dislevelment (in circumstances where there was evidence of historical floor dislevelment which was present before the earthquakes) constituted “natural disaster damage” on the basis that there was a “physical change or loss [to the property] which affects the use or amenity of the property.”

The defendants argued that there had not been any “physical loss or damage to the property”, because: (a) there had been no physical change to the floor levels as a result of the earthquakes; or (b) the claimants could not establish some impact on the utility of the floor in terms of its structural integrity, functionality, aesthetic quality or value, in comparison with the floor’s pre-earthquake utility, and a minor or slight change to the existing floor dislevelment as a result of the earthquakes was of itself insufficient to meet the test of “physical damage”.

On the evidence, the High Court held that the floor dislevelment did constitute “physical damage”; finding that the dislevelment of the floor system caused by the earthquake was considerably more than de minimis and did have an impact on the amenity and utility of the house, and therefore on its value.