Kraal Appeal Fails

Background

Kraal v EQC & Allianz New Zealand Ltd involved a property located at 190 Wakefield Avenue, Sumner, owned by Helen Kraal and Bruce Irvine.  The property was damaged as a result of the Christchurch earthquakes, but was deemed repairable by the insurer Allianz.  In addition to the physical damage to the structure of the house, the earthquakes also impacted the neighbouring terrain resulting in a rock fall risk to the property.  As a result, the Christchurch City Council placed a notice on the property under section 124 of the Building Act 2004 prohibiting the house from being occupied.  That notice is due to expire on 18 April 2016.  However, because the risk from rockfall is not anticipated to decline to pre earthquake levels until 2021, there is potential for a further section 124 notice to be issued.  It was accepted by the parties that occupation of the property would not be permitted for the foreseeable future.

Earthquake Commission Act 1993

The key issue to be determined by the Court of Appeal was whether Ms Kraal’s loss of the use of the house and its resulting unsaleablility are “natural disaster damage” for the purposes of the Earthquake Commission Act 1993 (“ECA”).  The Court found “natural disaster damage” under the ECA can be of three different types:

1. Physical loss or damage to the property occurring as a direct result of a natural disaster;

2. Physical loss or damage to the property occurring (whether accidentally or not) as a direct result of measures taken under proper authority to avoid the spreading of or otherwise to mitigate the consequences of any natural disaster; or

3. Physical loss or damage to property that (in the opinion of the EQC) is imminent as the direct result of a natural disaster which has occurred.

Ms Kraal mainly relied on the definition at point 1 above.  She argued that the loss of possession of the property was “physical loss to the property occurring as the direct result of a natural disaster”.  Ms Kraal accepted that the rockfall risk in her situation was not “imminent” and therefore could not fall within the definition of “natural disaster damage” at point 3 above.

While the word “loss” might encompass the deprivation of use of property the Court noted that the noun “loss” is qualified by the adjective “physical” in the definition of “natural disaster damage” in the ECA.  In the Court’s view this limited the definition of “loss”.  The Court stated that “physical” “indicates something material or tangible as opposed to mental or spiritual, and ordinarily means “of or concerning the body”.  The “body” in the context of [point 1] is the “property”.  The property is not defined, but must be the building or land that has suffered the loss or damage.  In this case it would be the structure and materials of the house.” 

The Court stated that while the section 124 notice stopped Ms Kraal and her family from occupying the property, neither the earthquakes nor the notice had changed the property itself in any material or tangible way.  The Court noted that the word “loss” is broad enough to cover conceptually what had happened to Ms Kraal, in that she had suffered a loss as a result of being unable to use her property.  However, the Court placed significant emphasis on the preposition “to” in the phrase “physical loss or damage to the property”.  In the Court’s view the ECA required that loss must be “to the property” and not “to the insured”.

The Court then examined the definition of natural disaster at point 2 above.  It found that the 124 notice placed on the property prohibiting it from being occupied was a measure taken under proper authority to mitigate the consequences of the earthquake.  However, again, it found that it did not result in “physical loss or damage to the property”, as required by that provision.

The Allianz Policy

The Court briefly examined the private insurance policy with Allianz to see whether or not Allianz had any direct liability to Ms Kraal despite the fact that they found there was no cover under the ECA.  On examining the Allianz policy the Court noted that the policy did not cover loss caused by or arising from earthquake.  Instead, the policy would only cover earthquake damage by paying the difference between the cost for repairing or rebuilding the house and the amount received by Ms Kraal from the EQC “provided that the Earthquake Commission has accepted liability under the Earthquake Commission Act 1993”.  As the Earthquake Commission had not accepted liability under the ECA, cover was not triggered under the Allianz policy.

Despite this, the Court did go on to examine whether or not there would be cover under the Allianz policy if the EQC had accepted there was a liability under the ECA.  The policy provided “we will cover Your House against Accidental physical loss or damage” which is a common, although not universal, insuring clause found in domestic property insurance policies.  After examining a number of other cases that had gone before courts of varying jurisdictions, the Court came to the conclusion that “physical loss or damage to the property” is envisaged by such an insuring clause.  It is important to note that this comment by the Court of Appeal did not relate to the decision at hand and therefore did not form part of the binding judgment.  The comment will, however, be influential on any subsequent case to go before the courts.  Additionally, some policies do use the preposition “of” in the insuring clause (i.e. “loss of or damage to the property”).  In such a case, it is likely deprivation of use of the property would be covered by the insurance policy.

Conclusion 

While the outcome of the appeal will be disappointing for policy holders in a similar situation to Ms Kraal, it is important that you seek legal advice in relation to your specific circumstances.  Policy wording does differ from insurer to insurer and the Court’s decision was in the context of the Allianz policy wording only.  In addition, the Court’s decision does not address the situation where earthquake repairs to a house trigger a building consent and the local authority requires a rock fall mitigation strategy be implemented in order for code compliance to be granted.   

The above article is general in nature.  If you have any queries or concerns in respect of your own situation please contact a member of our insurance team on 03 377 4470.

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