The Court of Appeal has recently drawn a line in the sand on the obligation to prove what is the appropriate repair strategy for natural disaster damage under an insurance policy and what a plaintiff must prove when asserting there has been a breach of an insurance contract. In Moorhouse Commercial Park v Vero Insurance the Court found in favour of the insurer, concluding that the case was resolved by the application of the burden of proof and other fundamental contract principles. 

The case underscores that the insured holds the usual burden of proof in insurance disputes, particularly if they allege that there is more extensive damage to a property or whether a particular repair strategy proposed by the insurer meets the policy standard. It also highlights the complexity in determining whether proposed repairs meet the standard of restoring the property to a condition substantially the same as ‘when new’. This case settled the law on a ‘greatest hits’ of earthquake-related issue such as:

• confirming the use of epoxy injection to repair concrete cracking; 
• proving the loss of ‘stiffness’ where it is alleged this ‘loss’ requires greater repair strategies than proposed by an insurer; 
• the application of the definition of damage including that not all changes from an earthquake will meet the legal definition of ‘earthquake damage’; 
• whether an inaccessible but damaged wall requires cosmetic finishing

Background

Moorhouse Commercial Park Limited v Vero Insurance New Zealand Limited¹ involved claims of earthquake damage sustained by Moorhouse's buildings during the 2010-2011 Canterbury earthquake sequence. Moorhouse was insured by Vero and Moorhouse lodged claims under its insurance policy for damage caused by the earthquakes. The claim was accepted by Vero, but litigation ensued when Moorhouse brought proceedings for breach of contract, claiming that Vero had breached the insurance policy in a number of ways.

The High Court dismissed Moorhouse’s claim. It found that there was no breach of the insurance policy². Moorhouse appealed that finding to the Court of Appeal, contesting the sufficiency of repairs proposed and arguing that more significant damage (namely bond loss in reinforced concrete structures) had occurred and required a more extensive repair strategy than the epoxy repairs proposed.

The main issue before the Court was whether Moorhouse had established that Vero’s epoxy repair method was insufficient to meet the repair standard under the insurance policy, and whether additional earthquake damage had occurred beyond what Vero had scoped.

Standard of repair under the insurance policy

The relevant insurance policy provided for reinstatement cover. ‘Reinstatement’ applies where a property is damaged but not destroyed. It requires the property to be repaired a condition substantially the same as, but not better or more extensive than, its condition when new. As is usual, there was a limitation that the insured was only entitled to recover the cost of reinstatement when costs had actually been incurred (i.e., if they did actually rebuild).

Under the terms of the policy, the insured would still be covered if they did not rebuild, but settlement would instead made on the indemnity value (being the reinstatement cost less a deduction for depreciation and deferred maintenance). Indemnity values are typically less than what the insured would receive if they repaired the damage to the building and received cover based on the reinstatement amount.

The Court accepted that there was a genuine dispute about the extent of the earthquake damage, and so Moorhouse did not know how to proceed until it knew what its entitlements were. This required the Court to analyse what the extent of the earthquake damage actually was, to decide what Moorhouse’s entitlements were.

Epoxy repair method

An epoxy repair solution essentially involves repairing cracks in buildings by epoxy resin injection. It is a well-established and widely used method of repair for earthquake-damaged concrete structures. Moorhouse argued that while epoxy repairs would fill the cracks in the structure, it would not address the underlying damage, which they said was a loss of stiffness of the building overall.

This loss of stiffness was said to have arisen by ‘bond loss’, which Moorhouse’s expert said occurred with steel reinforced concrete, particularly when the steel reinforcing it is not ‘ribbed’ but ‘smooth’ as smooth steel reinforcing rods are more likely to lose their connection with the concrete during an earthquake, causing bond loss and resulting in structural issues. Moorhouse argued that this had occurred and compromised the structural integrity of its buildings, requiring a more extensive repair strategy than epoxy repair.

Vero argued that epoxy injection was a sufficient and effective repair method, and that any bond loss was minimal and inconsequential to the overall stability of the buildings.

Burden of proof applicable

The Court acknowledged that the repair standard under the policy (i.e., ‘when new’) did not allow the insured to be left with diminished functionality through a reduced ability to resist future seismic forces. Moorhouse argued that the onus was on Vero to establish that the epoxy repair would meet the policy standard. The Court disagreed.

Accepting the case had factual challenges, the Court considered that the case could be resolved by the application of the usual principle of burden of proof. An insurance policy is a contract so normal contractual principles apply, and the onus to prove a breach is on the party alleging the contract has not been performed. In order to establish that Vero’s proposed epoxy repair solution would be insufficient to repair the damage, the onus was on Moorhouse to prove that the further damage had occurred. The fact that this was a dispute under a contract of insurance did not mean that the burden shifted to the insurer to prove that additional damage existed beyond what was accepted.

The Court’s conclusion is consistent with previous case law, including Myall v Tower Insurance Ltd ³and He v Earthquake Commission ⁴. These cases confirm the onus is on the insured to show (on the balance of probabilities) that earthquake damage has occurred. What was significant was that the Court was so decisive in its application of those existing tests, showing that the passage of time and development of opposing engineering theories does not affect the application of the basic principles of litigation.

Moorhouse had not met the onus of proof in respect of the appropriateness of the use of epoxy. While it had proved it was possible that bond loss had occurred to its buildings, the Court did not accept that that possibility meant the damage had probably occurred. This finding was despite the fact there was no real way of knowing whether the bond loss had actually occurred, and no evidence was provided to shine light on the issue.

Definition of damage

It was relevant to the Court’s decision that the trigger for cover under the policy was ‘physical damage’ to the buildings. The Court referred to the well-known principle that not all changes to a building after an earthquake amount to physical damage. Physical damage requires a detrimental physical change to the insured property which impairs the value, amenity, or usefulness of the property in a way that is material and not de minimis.⁵

On that basis, any bond loss occurring to Moorhouse’s buildings would only be relevant if it detrimentally affected the value, amenity or usefulness of the buildings. Crucially, bond loss was not alleged to have made the buildings any weaker in terms of their ability to resist future seismic events. Notwithstanding the fact that a loss of stiffness could lead to greater damage in future earthquakes, the onus was on Moorhouse to prove this had in fact occurred. This remained the position despite the fact there was no possible way of actually establishing this by testing. The impossibility of testing is an issue for the plaintiff who sought to prove the damage.

Repair strategy met the policy standard

Moorhouse also claimed for cracking repair on an outside wall that was inaccessible and not able to be viewed in the normal course. The insurer did not propose to finish the wall. Moorhouse said that the cracking repair would not be properly finished on the outside in the sense that it would not meet normal trade standards. While accepting this, the Court made two key points:

• this did not mean that the wall would not have fully restored functionality to an as new standard, which was required by the policy; and
• the aesthetic implications of the repair were not material because that part of the wall would not be seen.

Accordingly, while ‘finishing’ might normally be required, this did not mean that the repair strategy was inadequate under the ‘as new’ standard required by the policy. Neither did the Court accept Moorhouse’s argument that the lack of an applicator’s warranty meant the policy repair standard would not be met.

What does this all mean?

Insurance law can be complex with the mix of factual and expert evidence. But it is important always to begin from first principles to arrive at a measured view. In this case, Moorhouse was unsuccessful and the subject of a costs order for the appeal. This case confirms the burden of proof is solely on the plaintiff’s shoulders. It is likely to encourage more negotiated outcomes with insurers rather than litigation when these kinds of complex claims arise.