Southern Response has been found to have behaved deceptively in a potentially precedent-setting High Court case that could cost taxpayers hundreds of millions of dollars.
Justice David Gendall found the Crown-owned earthquake claims company engaged in misleading and deceptive conducts and misrepresented Karl and Alison Dodds' entitlements during a Christchurch earthquake claim for their damaged Huntsbury house.
The case is about Southern Response's policy of producing two differing detailed repair/rebuild assessments, or DRAs, which outlined the costs of rebuilding or repairing a customer's home.
The first, known as the abridged DRA, was given to the customer and showed lower costs than the office DRA, which contained extra items and was not given to the customer. The DRAs were worked out by project manager Arrow.
The Dodds' reached a settlement with Southern Response in December 2013, based on the abridged DRA they were presented, which showed rebuilding their house would cost about $895,000. This figure was repeatedly given to them as the full cost of rebuilding their home.
They were not aware of the office DRA at the time, which was about $200,000 more.
The Dodds' chose to buy a replacement house up to the value of the abridged DRA, rather than having their damaged house rebuilt on its existing site or somewhere else.
Years later, the couple discovered the existence of the office DRA. They said they felt deceived and misled.
The High Court found that by providing an abridged DRA that led the Dodds' to think this was the complete rebuild cost, Southern Response had engaged in misleading and deceptive conduct. It was ordered to pay $178,894, plus interest and costs.
Southern Response had argued that as the Dodds' had chosen not to rebuild their house, they were not entitled to some costs that appeared on the office DRA (administration, design, demolition costs, project management costs and contingency).
It was decided those costs would not be given to claimants as "they were confusing".
In his judgment, Gendall said Southern Response "created a false impression" by providing the abridged DRA in a way indicating it was the complete and only estimate received from Arrow.
He said it was reasonable for the Dodds' to assume Arrow would produce an accurate costing, and a document claiming to be a complete rebuild estimate must include all costs foreseen by its authors.
"Editing or redacting parts of such an important assessment document, and then suggesting it is the complete and only assessment of total rebuild cost as occurred here, is misleading and deceptive."
The Dodds' were represented by Peter Woods and Tim Grimwood, of law firm Anthony Harper.
Woods said the judgment was a "great result" for the Dodds' and others who had been short-changed, but was it disappointing it had taken this long to bring Southern Response to account.
The Dodds' had been told they had $895,000 to buy a house, so that was what they spent, but if they were told they could have spent $1.1m, they would have spent that, Woods said.
There were a lot of cases waiting for this result, which would be precedent-setting, Woods said.
Southern Response chairman Alister James said Southern Response would be "taking some time to assess the information" and would not comment further.
A spokeswoman for EQC Minister Grant Robertson, who has oversight of Southern Response, said the case was "an operational matter for Southern Response".
Southern Response has 20 working days to appeal the decision.
In court, representatives of Southern Response said there were 1630 other customers who settled under the same option as the Dodds' (buying a replacement house).
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Several other similar cases are going through the court system, including a class action being represented by Grant Cameron, of GCA Associates.
The representatives for the case are Brendan and Colleen Ross, whose abridged DRA was more than $100,000 lower than Southern Response's office version.
Previously, Colleen Ross said the couple were "gobsmacked" when they got their withheld DRA under the Privacy Act and saw the difference in costs.
Cameron said the judgment in the Dodds' case was advantageous because it was clear and well written and would provide excellent advice for practitioners, insurers and the courts.
There were strong parallels between the Dodds' case and the class action GCA was running, he said.
Cameron has estimated there are about 3700 people who have settled based on abridged DRAs. If they are all paid the difference between their abridged and office DRAs, it would cost the Government hundreds of millions of dollars.
Last year, Finance Minister Grant Robertson gave Southern Response indemnity "in respect to certain litigation".
"The indemnity enables Southern Response to continue to focus on its core purpose of settling the remaining outstanding claims of its policyholders," Robertson said at the time.