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The class action, which consisted of about 3000 home owners and was represented by Christchurch couple Brendan and Colleen Ross, alleged government insurer Southern Response misled them by giving incomplete information about the cost of remedying damage to their homes following the Christchurch earthquakes.
If successful, it was estimated the class action could cost the government hundreds of millions of dollars.
Yesterday's decision in the Supreme Court was the final chapter of a legal battle over whether the class action would proceed on an "opt-in" or "opt-out" basis.
An "opt-in" class action, currently the legal norm, was favoured by Southern Response. In this case, people would have to consciously "opt-in" to the class action.
Meanwhile, lawyers for the class action had argued it should proceed on an "opt-out" basis - where all policyholders would be included.
The Court of Appeal agreed last year that the class action could be "opt-out", which Southern Response appealed at the Supreme Court.
Yesterday that appeal was dismissed.
Grant Cameron, of GCA Lawyers, was representing the class action and said today's decision was "very significant" and would help ensure that "people get access to justice".
He said the decision in the Supreme Court was the right one.
"Instead of having 10 per cent [of a potential class] being paid out and recover what they are entitled to, everybody should be entitled to recover - in this case, the minister Megan Woods suggested the liability could be about $500m," he said.
"On an opt-in basis – which is what the government was arguing for – they could settle with the 10 per cent who came forward for $50m and keep $450m dollars."
Southern Response has not yet responded to a request for comment.