Tower said the damaged home could be repaired for $337,000 - but the O'Loughlins felt short-changed.
Now, after the two-week High Court hearing, Justice Asher has released an interim judgment which says the insurers are obligated to make a payment based on a rebuild or replacement for a comparable house to the O'Loughlins' home.
He said it must be at a site outside the red zone, and it should be left to Tower to decide whether to pay out on the basis of a rebuild or replacement.
If it was a payment based on the costs of rebuilding the O'Loughlins' home, that payment must be on the basis of the costs of rebuilding on a good site ($540,000), not on the present weakened and vulnerable section ($620,000).
"This is because the O'Loughlins have chosen not to rebuild on the existing damaged site, and both parties have proceeded on the basis of a cash payment which will enable them to purchase elsewhere in Christchurch out of the red zone," Justice Asher said.
"They are not entitled to a payment in excess of the cost of replacing the house."
Justice Asher said both parties needed to provide further submissions before he could make a final ruling on what the pay-out should be.
He also needed more submissions before he could decide what, if any, general damages should be awarded.