Following is an article written by Duncan Webb, a partner of Lane Neave Lawyers published in The Press press.co.nz on 27/4/2012 presenting a legal opinion on the insurance situation in the red zone -

When is a loss not a loss? Lawyer DUNCAN WEBB looks at the situation facing some homeowners in the residential red zone.

MP Lianne Dalziel has released a legal opinion I provided to her. It states my view that there is a good argument that some insurance policies require insurers to replace a property that would have been repairable had it not been located in the red zone.

Many red-zoned properties are not particularly badly damaged. Owners of those properties can either accept the Government offer of the rateable value of the property (option one) or they can sell the land to the Government for its rateable value and negotiate an additional payment from their insurer for the loss in respect of the building.

The conundrum for many homeowners in the red zone is that, even though their home may appear to be largely undamaged, they have in effect lost their home. Under “option two”, however, insurers appear to be paying out only on the basis of the actual physical damage to the property.

The question to be asked is whether insurers are obliged under the policies to pay for only the amount of physical damage to the property or whether they should pay for what is in effect the total loss of the home.

The key term of an insurance policy is its insuring clause – that clause sets out what must happen before the insurer has to pay. However, the clauses differ across insurers. One example from Vero provides that it will pay in the event of “accidental loss or damage to your home”.

What, then, is “loss” or “damage”?

Those words are presumed to mean two different things (otherwise one would be redundant). The question therefore is whether a house on red-zoned land is “lost” or “damaged” beyond simply the physical damage it has suffered.

In this regard, insurers appear to want to have their cake and eat it too. On one hand, they say that the Government offer is just that – an offer which is open to be accepted or not (and therefore the home is not lost).

However, the insurers are not repairing any properties in the red zone on the basis that the property must be vacated. It also appears that insurers will not continue to insure properties in the red zone.

The several arms of government confirm the fact that there is little option for homeowners in the red zone other than to accept one or other of the offers. Christchurch City Council has made clear that it will not continue to provide basic services.

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While, technically, building consents could be granted for properties in the red zone, the reality is that the barriers to this are insurmountable. Even the Building and Housing Department has indicated that Red is a “no-go zone” and it is not issuing standards for building on that land.

Against this background, there is a very good argument that a property on red-zoned land is lost, even though the actual physical damage to it is small. By virtue of the earthquake, owners have, in substance, been deprived of the use of their homes and they are, for all intents and purposes, lost.

The law terms a situation where, although the property may still exist, it cannot be repaired or recovered and enjoyed as a “constructive loss”. Where such a constructive total loss occurs the insurer must provide the benefit under the policy to the insured.

General insurers do not insure land. However, the damage to the land is not of itself what triggers the obligation of the insurer to pay (in fact, many red-zoned properties stand on land that is not significantly damaged).

Rather it is the fact that the chain of events which started with one or other of the Christchurch earthquakes has resulted in the owners of homes being effectively deprived of those homes. One of the main cases in this area is Raincar v Frigmobile.

Their export-quality scallops had not been kept at the right temperature (though no change in their quality was perceptible) and they therefore were rejected for export. The question was whether the scallops had been “damaged”.

The court found that there was a physical change in them which mean that “that the usefulness was impaired and the value reduced”. The principle is the same here. The houses in question have clearly suffered damage which has meant that their “usefulness was impaired and the value reduced”.

The damage to the houses cannot be remedied by repair by the insurers for all of the reasons set out above. However, this does not relieve the insurer of their obligations to compensate fully under the terms of the applicable policy.

While the insurer cannot be repairing or rebuilding the home on the land, most policies provide for rebuilding on other land or, in some cases, a cash settlement. It may also be open to insurers to move the buildings on to new land (owned by the insured) and to reinstate them. However, the cost of such an endeavour is likely to be prohibitive.

This approach is radically different from that adopted by the insurers to date. A real concern is that the problem is spread thinly across many homeowners and no individual homeowner has the resources or wherewithal to take on their insurer. Insurers are large (and well funded) bureaucracies that by necessity adopt a particular stance in respect of any given issue.

Insurers do not seek to deprive homeowners of their entitlements under the policy. However, they are geared to provide the benefits under the policy as construed by the insurer, and no more. There is no motivation to explore arguments (legal or otherwise) that might lead to greater benefits for the insured.

In respect of the red-zone offers, that stance is also affected by the agreement that exists with Government. While the amount of money at stake for an insured may be significant, it may not be enough to embark on an arduous course of litigation against an insurer.

A lack of advocacy is a fundamental stumbling block for a robust argument about the proper obligations of insurers in respect of red- zoned properties.

When the parties in dispute were the insurance industry and EQC (over whether EQC insurance reset after each event) the parties were able to seek a declaration from the High Court. In the present case there is no entity able to take such an action on behalf of the red-zoned insured.

The Insurance and Savings Ombudsman can consider complaints from homeowners against insurers up to a value of $200,000. But, given the importance of this question, it may be that if it were put before the ombudsman the insurer would remove it to the High Court as a test case (as it is permitted to do). If this were to happen, the insurer would have to pay the legal costs of the insured.

In the absence of some intervention, it does not appear that this question is likely to come before the courts soon. It is also the case that time is running out on the red-zone offers (even with the recent extension given by the Government).

The best advice to owners of red-zoned properties is to read your insurance policy carefully and look for the insuring clause.

If the clause refers to simply “loss” or “damage”, there is a strong argument that this relates to the entire value of the home where it is unable to be repaired by the insurer. Predictably, if you think that you are in such a position, speak to your lawyer.

The legal opinion can be found at: img.scoop.co.nz/media/pdfs/ 1204/Lane-Neave-Legal- Opinion.pdf.

I am experiencing a significant increase in workload which is creating the opportunity for employment for two positions in the very near future. These will be for people who can identify with and understand the type of work that I do and have a strong focus on delivery for the client.

One position will be for a highly experienced senior technician with a solid understanding of construction using both timber frame construction and also alternative materials. This person will be open to the idea of new and developing building systems and technologies but able to appraise them with a critical eye to determine their suitability for use with the aim of continuing to develop better ways of building to create increasingly better quality living environments for our clients.

They will be capable of taking a project from the initial concept through to completed CAD documentation, obtaining consents, and also undertaking site observation and dealing with contractors. A moderate amount of client contact will be involved, and supervision of technical staff plus dealing with outside contract staff and consultants.

The second position is for a part time person capable of combining interior design with some office management and a small amount of general administration. This might at first seem like an odd combination of roles but I have found from experience that a person with an understanding of the creative process and having experience in the industry makes for a much better office manager.

The interior design will be design for kitchens, bathrooms and interior spaces for the houses designed within DBA, selecting finishing materials and colours. It is important that there is a strong link between the original design brief and concept that flows through to the internal spaces so I have a very strong preference for these areas to be developed early in the design phase.

The office management will involve programming of work and keeping projects on schedule, co-ordination of outside consultants, and monitoring the progress of building consent applications.

Please contact me regarding these positions if you are interested. Time frames are open as I believe it is better to find the right people than rush into things.

The rebuild work for homes appears to be finally under way, and I while I have been experiencing a lot of enquiry over the last 6 months insurance companies are starting to give the go ahead for work to proceed. In order to be able to service a larger number of clients I have formed an alliance with another firm from out of town to give me greater capacity. This will allow me to start taking on additional work from 1st July of this year.

If you are considering using our services in the future please contact Dean for a preliminary discussion on your project and time frames at dean@dbarc.co.nz or (03) 337-1713.