Who pays for unseen quake damage?

Last updated 12:55 14/07/2014

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Christchurch Earthquake 2011

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Do you have a legal question arising from how the earthquakes have affected you? Lane Neave partner Dr DUNCAN WEBB has agreed to be an "agony uncle" on how the law applies to certain situations.

We have a house on the hill which has suffered quite a lot of visible earthquake damage. It is made from concrete block and cracks are visible on most of the exposed walls as well as on the garage floor. The insurer is saying that they will fix some of those cracks with an epoxy and simply seal and paint others. We are worried that this will not be good enough, and also that there is other damage to concrete floors under the carpet, or in block walls covered by gib on one side, and against the hill on the other.

Hidden damage was not much of a problem before the earthquakes. In normal circumstances the fact that there has been damage to a home will be obvious. The homeowner will inform the insurer who will then take steps to determine the extent of the damage and arrange to fix it. Things appear to work a little differently in Christchurch.

Insurers are increasingly relying on a requirement that a homeowner claiming under a policy has the responsibility (onus) of proving loss or damage.

Legally this is correct. However, it does not tell the whole story. The fact that loss or damage has been suffered is usually beyond doubt. The homeowner will be able to point to physical changes in the property which adversely affect it in one way or another - which amounts to damage in insurance law. This triggers the obligation of the insurer to meet and settle the claim.

In settling the claim it is more or less universal insurance practice in homeowner claims to appoint a professional (such as an assessor or loss adjuster) to determine the extent of the damage and how it is to be repaired. It is inconceivable that it is the homeowner's obligation to identify each and every item of damage. In any event, the identification of damage merges into the role of costing and repair as in many cases the true extent of damage is only known when repairs commence and parts of the building are removed.

Once the homeowner has shown that there is some damage which is covered by insurance it is the insurer's role to act reasonably and in good faith to determine the extent of that damage. Of course a homeowner would like the insurer to turn over every stone in a search for damage; however this will be asking too much. Where there is some evidence of damage (for example toilets are not flushing well and this may indicate sewer damage) further investigations will be appropriate. Where it is clear from other damage that there is damage to a hidden element it is likely investigation should be undertaken. Thus if a garage floor is badly cracked, then it is likely that similar floors are also cracked and should be inspected.

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However, where there is no evidence of damage, and a low likelihood of finding it, it will not be reasonable to expect an insurer to do expensive (and sometimes destructive) investigations because there is a small possibility that damage may exist. Obviously homeowners and insurers will disagree about when that point is reached. It may also be that the best time to investigate for hidden damage is when the repairs are being undertaken and the kind of destructive work necessary is being undertaken. While this may be frustrating for a homeowner, it is probably reasonable as a cost-effective and efficient way of investigating.

Where a cash settlement is being considered the prospect of hidden damage is problematic. If an insurer is insisting on a cash settlement they are liable for all damage - including damage that is discovered in the repair process. In that case the homeowner should be careful not to accept a payment in full and final settlement. However if the homeowner is choosing to take cash they will almost certainly also have to take the risk that further hidden damage is discovered.

When the damage is repaired, the repairs that are undertaken must restore the amenity of the damaged part of the home. How that ought to be done will depend on the purpose of that part of the home - so "gluing" a concrete floor that sits under a carpet will probably be sufficient on the basis that it restores its strength. However it would not do for an exposed decorative concrete floor.

Similarly, some changes are difficult to consider as damage if they do not affect the strength, durability, functionality and aesthetic of the house. One example is the crack in your block wall. If it does not affect the strength or durability of the wall (which are key aspects of a structural element) then a repair which addresses only the aesthetic issue (sealing and painting) will most likely suffice.

The real problem here is that insurers are understandably motivated to meet the repair obligations at the lowest cost possible. On the other hand homeowners want to get their full repair entitlement under the policy. Theoretically both of these things can be achieved. Reality is a little different.

Duncan Webb is a partner at Lane Neave lawyers. Email questions for him to legal.questions@laneneave.co.nz

- The Press

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