Where your policy provides that the insurer will repair your home to a condition “substantially the same as new” what does it mean? The case of East v Medical Assurance New Zealand Limited recently considered this question.

The insurer argued that the standard of repair was that in existence when the home was first built. The homeowner argued that the standard was when the home was repaired or rebuilt (i.e. modern standards).

The Court agreed with the homeowner, holding that “as new” contemplates a restoration to a condition as new at the time of the rebuild or restoration and in accordance with contemporary building standards.

The Policy

The policy stated:

the insurer will “cover the cost of rebuilding or restoring the dwelling to a condition substantially the same as new, so far as modern materials allow, and including any additional costs which may be necessary to comply with any statutory requirements or Territorial Authority by-laws”.

The Decision

The Court held that the policy wording meant that the insurer was required to restore the home to a condition as new at the time of the rebuild/repair and in line with current building requirements. This was because:

The policy had been changed prior to the earthquakes to refer to “as new” rather than “when new”. This change clearly contemplated restoration to a condition as new at the time of the restoration.
“As new” also naturally implies rebuild or restoration in accordance with contemporary standards. This was also reinforced by the policy wording requiring the insurer to meet current statutory requirements.

However, as the word “substantially (the same as new) was used, the policy did not mean completely new. Nonetheless, it did require that modern materials be used and that the restoration meet minimum building requirements.

As a result of the Court’s interpretation, in the context of the specific foundation works being considered, it was held that the Court must be satisfied on the balance of probabilities (more likely to be true than not true) that the foundation works proposed by the homeowner were necessary to meet current Building Code standards.

Section 112 of the Building Act

The Court also expressly considered section 112 of the Building Act, a section which is often misinterpreted as allowing a lower standard of repair.

In short, section 112 provides that, when a building is altered (e.g. repaired), a Council in granting a building consent for the repairs must be satisfied that, after the repairs, the building will continue to comply with the Building Code to at least the same extent as before the repairs.

The insurer’s expert argued that this meant any repair only had to comply with the Building Code to at least the same extent as it had done before the repairs. In other words, if the damaged area did not meet the current Building Code at the time of the earthquakes, the insurer was not required to pay to upgrade the damaged area to ensure that it now met the relevant requirements.

The Court disagreed, recognising that s112 does not negate the requirement that any repair must still comply with the current Building Code. Instead, s112 simply means that there is no additional obligation to upgrade other undamaged areas to meet the current Building Code (except in certain limited aspects, such as fire safety).

Discussion

This case was appealed by the insurer to the Court of Appeal which agreed with the homeowner that the standard is when the home was repaired or rebuilt (i.e. modern standards). The Court specifically noted that there was no rational basis for limiting the homeowner’s right to compliance costs to those in existence when the house was built rather than in 2015 when restoration work was likely to be carried out.

The Court of Appeal also found that it was irrelevant that the foundations themselves were not damaged in the earthquake (most damage was caused by post earthquake settlement). The Court held it would be artificial to separate damage to the house from the foundations when they are “part of an integrated whole”. It was particularly relevant that unless the foundation were addressed as part of the repairs, the house would not be restored to a condition substantially the same as new in accordance with current Building Code requirements.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. If we can assist in any way please do not hesitate to contact Paul Cowey at Parry Field Lawyers (348-8480), paulcowey@parryfield.com

In the case of East v Medical Assurance New Zealand Limited, the question of when an insurer has to make full payment to a homeowner to settle their earthquake damage claim was considered.

The insurer argued that it did not have to make payment until the homeowner actually incurred the cost of repairs/rebuilding. The homeowner argued that the insurer had to make payment in advance of the works. Read more

In two earlier articles – Insurance Policy Intepretation – Ramifications of the Ridgecrest Decision and Combining Earthquake Losses – Ramifications of the Ridgecrest Decision, we looked at some of the significant findings of the Supreme Court in that case in respect to policy interpretation and “merger” of multiple losses.

In this article, we considere the ramifications of the decision in respect to whether the insurance principle of “indemnity” automatically prevents an insured claiming for multiple losses.

The Indemnity Principle

Insurance policies are policies of indemnity. They are an agreement between an insurer and an insured person to protect/compensate the insured for particular defined risks. The principle of indemnity is that an insured person cannot recover more than the loss under the insurance policy.

The words of Brett LJ in Castellain v Preston 1883 11QBD 380 (CA) at 386 have been frequently quoted as the starting point of the argument:

“… the contract of insurance contained in a marine or fire policy is a contract of indemnity, and indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong”.

When this case was decided, recovery under insurance policies could only be made on an old for old basis. A building could not be insured for more than its depreciated value at the time of loss.

This resulted in a practical problem however. A building owner with no additional funds would be unable to rebuild a destroyed building if the insurance proceeds were limited to the building’s depreciated value.

In response to this problem, replacement cost insurance cover developed, which was offered as a separate policy and later as an optional endorsement. Such insurance went beyond the old notion of indemnity, and insured the difference between actual cash value and the full replacement cost – depreciation that has already occurred.

Such policies allow recovery on a new for old basis. A new for old insurance policy clearly will place the insured in a better position following an insured loss than they were in before.

There was recognised however that there might be a potential moral hazard caused by an insured being able to obtain more than a mere indemnity for damaged property, and the risk of intentional damage so an insured could profit from their “loss”.

Frequently, policies provided for the payment of the indemnity value as a cash payment, with the obligation to pay the full replacement cost being postponed until the insured completed the rebuilding or repairs. The Supreme Court in Ridgecrest accepted that this was the scheme of the Ridgecrest policies.

Many commercial policies now separately identify the indemnity value and the replacement value, with replacement value cover provided as an optional endorsement. Presumably because of consumer demand, in residential policies they are rarely, if ever, separated. New for old policies are well accepted in New Zealand, for chattels, motor vehicles etc. In these cases an insured is entitled to what is known as “betterment” (receiving new for old).

Although not referred to in the decision, the Court did hear argument about whether an insured is under an obligation to spend insurance payments on the repair of damage. It has long been the position that an insured may do as they please with sums paid by the insurer, and there is no implied term requiring monies to be spent in any particular manner (unless contractually bound to do so).

This being the case, an insured cannot be seen as obtaining a windfall just because repairs were not and will never be carried out.

The Supreme Court was not attracted to use the principle of “indemnity” to whittle away policy entitlements. The Court instead endorsed “…An approach based firmly on the policy wording as to the resetting of liability limits”.

Having decided that the Ridgecrest policy reset after each earthquake, the Court held that recovery of loss caused by successive earthquakes did not offend the principle of indemnity. This is subject to three restrictions:

No double counting (i.e. an insured cannot recover for the same damage twice)
The loss from each event, i.e. earthquake, will be subject to the contractual limit (in this case $1.984m); and
The total of all claims cannot exceed the cost of replacing the building.

The Court of Appeal in the post Ridgecrest decision of QBE Insurance (International) Limited v Wildsouth Holdings Limited [2014] NZCA 447 noted that the Supreme Court did not consider the principle of indemnity to rest on the doctrine of merger, but to stand alone. In applying the principle, the importance of factual detail was highlighted. Where the cost of a repair is reduced by subsequent loss, the value of the first claim must also reduce. This was contrasted with the facts in Ridgecrest where the damage from each earthquake was separate and distinct, and the cost to repair was therefore unaffected by subsequent happenings.

Although there will undoubtedly be further occasion for the Courts to consider the full ambit of the principle of indemnity, the Supreme Court have made it clear the starting point is to be the entitlements set out in the policy. It would appear that the Highest Court has little enthusiasm to use the principle of indemnity as a launching point to rewrite liability provisions in insurance policies.

If you would like any insurance advice please do not hesitate to contact Paul Cowey at paulcowey@parryfield.com.

In the case of Earthquake Commission v Insurance Council of New Zealand Inc (delivered in December 2014), the High Court considered the question of how EQC’s obligations under the EQC Act may be enforced against it.

EQC argued that a claimant could only file judicial review proceedings (essentially a review by the High Court as to whether a decision made by a public body has been made lawfully) against EQC. The Insurance Council of New Zealand argued that this was incorrect and that such proceedings would be inadequate and insufficient (as there are limitations on the types of issues which can be covered and the relief/compensation which can be awarded).

The High Court agreed with the Insurance Council holding that claimants were not limited to filing judicial review proceedings against EQC. Instead, claimants may also file ordinary legal proceedings against EQC, whether in the District Court or the High Court (depending on quantum).

This was on the basis that:

EQC’s obligations under the EQC Act provide claimants with definite entitlements and rights (and, conversely, place definite obligations on EQC).
Based on modern civil procedure, an ordinary action for payment is and should be available where the factual basis for payment is in dispute.
The Act does not exclude claimants filing ordinary proceedings against EQC/require proceedings to only be commenced by judicial review. If that was intended, Parliament would need to have expressly said so.
New Zealand civil procedure has historically resisted limiting judicial review proceedings, as some other jurisdictions have done.
Judicial review is not generally an appropriate way to determine entitlement to payment under a statute where the obligation is definite in nature (as EQC’s obligations are).
The remedies available for breach should be direct and definite, and not discretionary (as is the case with judicial review).

This is a positive development, clarifying uncertainty as to how to enforce EQC’s obligations against it.

If we can assist in any way with your insurance claim, please do not hesitate to contact Paul Cowey at paulcowey@parryfield.com.

In the recent case of Skyward Aviation 2008 Ltd v Tower Insurance Ltd, the Court of Appeal considered whether, on the basis of Tower Insurance’s policy wording, the insurer or the insured customer had the right to decide between settling the insurance claim by rebuilding on site, rebuilding elsewhere, or buying elsewhere where the property had been deemed not “economically repairable”.

The Court held that, on the policy wording, the insured customer had the right, not the insurer.

Background

The case concerned a Christchurch property located in the “Red Zone”. The owner had accepted CERA’s offer to buy the land. It had settled with EQC and had attempted to settle its insurance claim with Tower.

Tower maintained it had the right to decide how the insurance claim was settled, the insured argued otherwise.

The Policy wording

The key policy wording provided:

HOW WE WILL SETTLE YOUR CLAIM

We will arrange for the repair, replacement or payment for the loss, once your claim has been accepted.

We will pay:

the full replacement value of your house at the situation; or
the full replacement value of your house on another site you choose. This cost must not be greater than rebuilding your house at the situation; or
the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your house on its present site; or
the present day value;

as shown in the certificate of insurance.

We will only allow you to rebuild on another site or buy a house if your house is damaged beyond economic repair

In all cases:

we will use building materials and construction methods commonly used at the time of loss or damage.

We are not bound to:

pay more than the present day value if you have full replacement value until the cost of replacement or repair is actually incurred. If you choose not to rebuild or repair your house or buy another house we will only pay the present day value and the reasonable costs of demolition and removal of debris including contents;
pay the cost of replacement or repair beyond what is reasonable, practical or comparable with the original;
repair or reinstate your house exactly to its previous condition.

The Decision

In holding that the insured customer had the right to decide how the claim was settled, the Court noted the following aspects of the policy in support (emphasis ours):

Tower reserves the right to pay only present day value “if you [the insured] choose not to build or repair your house or buy another house …
Tower reserves the right to disallow the insured from either building on another site or buying a house if the existing house is not damaged beyond economic repair. This right of veto could only be exercisedonce the insured had made the underlying choice. In other words, it assumes that the insured is generally at liberty to make the choice, then restricts the insured’s ability to choose options two (build elsewhere) or three (buy elsewhere) to the case where the existing house is not economically repairable
The second alternative provides for full replacement value of the house “on another site you [the insured] choose” – that is, it is the insured’s right to choose.

Will this decision apply to other insurers?

Yes, if the relevant parts of the policy wording is the same or very similar. The Court held that “An insurer cannot rely on a general statement of economic desirability to override the express or clearly implied provisions of its policy.”

The Court indicated however that the position may be otherwise if the policy expressly states that the insurer has the right to choose between the alternative bases for payment.

What if the insured customer does not intend to rebuild or buy elsewhere?

The Court agreed that, on Tower’s policy wording, Tower was only liable to pay the “present day value” of the home until the insured incurred the cost of buying or rebuilding elsewhere. “Present day value” included an allowance for depreciation and deferred maintenance and was limited to the market value of the property less the value of the land.

In other words, if the insured wanted a cash settlement, Tower was not liable to pay more than “present day value”.

What if the property is “economically repairable”?

The Court indicated that, if the property was “economically repairable”, Tower was entitled to insist on repairing or rebuilding on the same site.

In addition, Tower was entitled to control the repair work for the reason that the cost of repair was at Tower’s risk (so it would want to control the cost) and to decide whether repairing or rebuilding is ultimately the better option.

This decision was appealed by Tower to the Supreme Court and heard in November 2014. The Supreme Court dismissed Tower’s appeal holding that, where Tower has decided not to rebuild or replace a house, Tower’s payment obligation is determined by the choice the homeowner makes as to whether to rebuild the house, replace it on another site or buy another house.

If we can assist in any way with your insurance claim, please don’t hesitate to contact Paul Cowey at paulcowey@parryfield.com.

In Part I of our series on EQC and Land Damage Settlements, we looked at what the EQC Act provides in general in respect of “land damage” and what it is. In this Part we examine what EQC’s obligations/rights are under the Act in respect of settling land claims. Read more

In April 2013, EQC released two guides for settlement of earthquake land claims (flat land and hill properties), together with sample Land Settlement Packs. The Guides note that they are a summary of EQC’s obligations and that the provisions of the EQC Act 1993 will be “applied by EQC at all times.”

This article looks at what cover the EQC Act actually provides for “land damage” and what qualifies as “land damage”. In Part II to come, we will look at what are EQC’s obligations/rights in respect of settling land claims.

1. What general cover is provided under the EQC Act for earthquake related land damage?

2. Is EQC responsible for covering all areas of a property where there is land damage?

3. What level of “insurance” cover does EQC provide for land damage?

4. What qualifies as “physical loss or damage”?

5. What types of “physical loss or damage” does EQC cover?

1. What general cover is provided under the EQC Act for earthquake related land damage?

The EQC Act provides that, where a home is insured against “natural disaster damage”, the land on which the home is situated is insured against:

any “physical loss or damage” to the land occurring as a direct result of a natural disaster (such as an earthquake); and
Any “physical loss or damage” to the land occurring as a direct result of measures taken under property authority to avoid the spreading of, or otherwise reduce the consequences of, any natural disaster (e.g. land works necessary to redirect flood run-off).

2. Is EQC responsible for covering all areas of a property where there is land damage?

No, EQC only covers damage to the following areas of land:

a) the land under the house;

b) all land within 8m (extending outwards) of the house or outbuildings such as any garage (but excluding artificial surfaces such as asphalt or concrete);

c) the main access way to the house (excluding coverings such as asphalt or concrete) from the boundary of the land (so long as that access way is situated within 60m of the house);

d) the land supporting the main access way;

e) bridges and culverts situated within the above areas; and

f) retaining walls and their support systems within 60m of the house which are necessary for the support or protection of certain specified areas of land (e.g. the house or garage).

EQC does not cover certain things that are on the land, such as trees, plants, lawn, paving and driveways.

3. What level of “insurance” cover does EQC provide for land damage?

Qualifying properties are insured for an amount equal to the lowest of the value of:

a) a parcel of land that is the minimum lot size under your district plan.

i. In Christchurch, if your property is zoned as Living Zone 1, the minimum lot size is 450m2.

ii. If your property is in Christchurch’s Living Zone 2, the minimum lot size is 330m2.

b) An area of land of 4000 m2; or

c) The area of land that is actually physically lost or damaged.

These values are the maximum amounts EQC could be liable to pay, rather than what you will automatically receive from EQC.

In the case of bridges and culvert and retaining walls, EQC is only liable to pay up to the “indemnity value”of that property (e.g. this is often described as the property’s “market value” at the date of the loss or the property’s value allowing for its age and condition immediately before the loss or damage happened).

EQC advises that payment of claims for land (where EQC considers its maximum liability has been reached) will be based on a professional valuation.

In each case, EQC’s excess is deducted off each land claim (if the claim is $5,000 or less, EQC will deduct an excess of $500. If the claim is more than $5,000, EQC will deduct 10% of the claim up to a maximum of $5,000 per claim).

4. What qualifies as “physical loss or damage” in the context of “natural disaster damage”?

This is not defined in the EQC Act.

In the case of Earthquake Commission v Insurance Council of New Zealand Incorporated & Orrs [2014] NZHC 3138, the Court held that, for land damage to qualify as “natural disaster damage” for the purposes of the EQC Act, there must be:

a physical change or loss to the land that has occurred or is imminent as a direct result of the earthquake. Put another way, some type of disturbance or loss to the physical integrity of the land; and
which adversely affects the uses or amenities that could otherwise be associated with the land (i.e. building on it/habitating on it).

5. What types of “physical loss or damage” does EQC cover?

This is again not specified in the Act. EQC has however identified nine types of land damage on the flat residential land in Canterbury. Seven are said to be apparent from looking at the land:

Cracking caused by the sideways movement of land, often towards water;
Cracking caused by backwards and forwards ground movement;
Undulating land (e.g. uneven settlement of the land, often as a result of sand and silt being pushed up or settlement of liquefied soils below the ground);
Ponding (due to lowering of the land in areas which results in water “ponding” in places where previously it did not);
Localised settlement resulting in drainage issues (e.g. drains flowing the wrong way due to land settlement;
Groundwater springs (new springs flowing over the ground where previously they did not); and
Pushed up sand and silt, either under a house or over a large area.

Two further types are not necessarily visible but have increased the future vulnerability of the land to liquefaction or flooding:

increased liquefaction risk (the ground surface has subsided closer to the water table than previously, reducing the ground crust thickness and therefore increasing the risk of liquefaction occurring); and
increased flooding vulnerability (the ground surface has again subsided making it more at risk of flooding if the land is situated near a water way).

In the case of Earthquake Commission v Insurance Council of New Zealand (referred to above) however the Court held that “circumstances where one or more earthquakes have caused physical changes to the land only and such changes have caused the residential building to reduce in height and adversely affected the uses and amenities that could otherwise be associated with the residential building by increasing its vulnerability to flooding events does not include “Natural disaster damage” (emphasis ours).

EQC advises that it assesses Increased RIsk of Flood/Liquefaction utilising drilling data, aerial laser levels taken after each major earthquake/aftershock which record changes in land elevation, and Water Table Levels.

In the Port Hills, EQC has identified other types of damage such as:

- Debris material (e.g. rock fall and cliff collapse) being deposited on the land where this materially affects the physical use of the land;
- Land cracking/bulging/undulations and loss of land as a result of land moving vertically and/or horizontally downslope where the land no longer occupies the space it did before the earthquakes, where this materially affects the physical use of the land.
- Land damage as a result of impacts from rock fall and cliff collapse.

This post provides a general outline of what the EQC Act provides for “land damage” and what qualifies as“land damage”. In Part II to come, we will look at what are EQC’s obligations/rights in respect of settling land claims.

If we can assist in any way with your land claim, please don’t hesitate to contact Paul Cowey at paulcowey@parryfield.com.

Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.

1. What is the extent of EQC’s obligations?

If you are insured with EQC, your home is secured against damage caused by natural disaster for its “replacement value” (generally up to a maximum of $100,000 plus GST).

The Policy

The Decision

Section 112 of the Building Act

Discussion

Background

The Policy wording

The Decision

Will this decision apply to other insurers?

What if the insured customer does not intend to rebuild or buy elsewhere?

What if the property is “economically repairable”?

1. What is the extent of EQC’s obligations?

Christchurch CBD

Christchurch – Riccarton

Rolleston

Hokitika

Auckland