Sadat v Tower Insurance & EQC  NZHC 1150
The Sadat family were refugees from Afghanistan who bought their dream home in Christchurch in 2006. The family did not commission a building report before buying the home. Instead they relied on the real estate agent who told them the house was in perfect condition and just needed a bit of paint. They did notice some cracks on the exterior of the house but believed “the cracks were small and only needed some plastering and painting.”
Before the 2010 earthquake, two reports had been provided in respect of the property. The first in 2008 had been commissioned by a potential purchaser of the property. As the report showed significance subsidence of the foundation resulting in cracks and sloping floors the sale did not go through.
A second report was done in 2010 after the Sadats made a claim on their house insurance due to a leak in the kitchen. This report also commented on extensive cracks in the foundations and interior and exterior walls. As the Sadat’s insurance policy with Tower insured the house for 'sudden and unforeseen accidental physical loss or damage,' the inspector had advised Tower to decline the claim on the basis the damage was gradual from subsidence and was therefore excluded.
After the September 2010 earthquake the Sadat family lodged claims with the EQC and Tower. The house was inspected by the EQC on two occasions. However neither inspector was aware of the 2008 and 2010 reports so incorrectly attributed the cracks and sloping floor to the earthquake. On that basis, by January 2013 the EQC had already paid the Sadats $43,621.41 in settlement of their claim arising out of the earthquake.
Proceedings were issued by the Sadats’ solicitors against Tower and the EQC in October 2013 based on an expert report by Earthquake Services that determined the total repair cost of the house would exceed $800,000. Due to the issues with the foundations the report recommended it would be more economical to rebuild the house.
Following a discussion of the geological reports, Justice Nation accepted that when the house was built (in the 1950’s) it had been built on land with poor ground bearing capacity and accepted that the house had been sinking long before 2010. As the foundations were also inadequate for the weight of the house, Justice Nation accepted that it was likely there would have been significant structural damage to the foundations before the September earthquake.
The structural engineers agreed that the majority of the damage to the property was caused by vertical settlement of the foundations pre-earthquake. Comparing the size of the cracks post-earthquake to photographs from the 2010 report, there was little difference. This supported the engineers’ determination that any exacerbation of the pre-existing settlement and damage was not substantial and that additional earthquake damage would not have made a material difference to the repairs that would have been required pre-earthquake. It was also significant that there were no diagonal cracks around openings, windows and corners which commonly result from the horizontal forces (shaking) present during an earthquake.
Tower and the EQC both denied liability on the basis the Sadat’s could not prove there was damage to their home materially different from the damage to their home that had already been sustained prior to the September earthquake.
Justice Nation did not accept the Sadats’ submission any new damage was material because it affected the value of the property, instead agreeing with the defendants the value of the property was irrelevant to the determination of material damage – and even if it had been relevant, a change in value would have been unlikely as the property was already damaged. As the Sadats occupied the house during the trial, an argument that damage caused by the September earthquake was material as it rendered the home uninhabitable was also rejected.
Justice Nation concluded “it would not be consistent with the intended meaning of the policy for the Court to find that any damage suffered in the September 2010 earthquake was material where such damage required no more to be done than would have been necessary before the 2010 earthquake.” As the Sadats were unable to prove material damage was caused by the earthquake, Tower’s obligation to meet the costs of a rebuild was not engaged.
As the Sadats could not prove material damage to the property that would have cost more to repair than the $43,586.72 the EQC had already paid out, their claim against the EQC also failed. The EQC did not seek recovery of the amount they have already paid out.
A further claim was made by the Sadat family against both the EQC and Tower for $50,000 in general damages for anxiety and emotional distress. Although it is possible to get general damages in the context of an insurance case (discussed in detail by Justice Gendall in Young v Tower Insurance Ltd  NZHC 2956) as the Sadats had failed in their claims against both Tower and the EQC, Justice Nation held they must also fail on their claim for general damages.
Fran Darlow, Associate at Fee Langstone says “this case provides a useful illustration of the principle that a material damage policy will not cover damage unless it materially adds to the damage that already existed. This is a principle that has broad application for insurers beyond the sphere of Christchurch earthquake claims.”