In the recent case of Avonside Holdings Ltd v Southern Response (SR), the Supreme Court agreed with the Court of Appeal’s earlier decision that SR was liable to include a contingency sum and professional fees when settling Avonside’s insurance claim on the basis of the notional cost to rebuild Avonside’s existing property.
Avonside owned a rental property in Christchurch which was damaged in the Canterbury earthquakes. The property was eventually “red zoned” and the home deemed “uneconomic to repair”. Under its policy with SR, Avonside had two settlement options in the circumstances – to buy elsewhere or to accept a cash settlement at “market value” (which is generally less than replacement value). Avonside elected to buy elsewhere.
The policy provided that, where the insured was buying elsewhere, SR would “…pay the cost of buying another house, including necessary legal and associated fees. The cost must not be greater than rebuilding your rental house on its present site.”
The High Court decision – contingency sum
Avonside’s independent costings included a contingency sum (essentially an amount for contractual items/events which are uncertain and which may or may not be incurred as part of a construction project), being 10% of the total rebuild price. SR made no allowance for contingencies.
The High Court agreed with SR that it was not liable to include a contingency sum in any settlement calculations. This was on the basis that, as this was a “notional” rebuild (i.e. it was hypothetical as it would not actually be taking place), there could by definition be no unexpected items for which a contingency allowance would be provided in a contract. There was, therefore, no need to add a contingency sum to reflect possible contingencies which would never be encountered.
The High Court decision – professional fees
Avonside’s independent costings included an allowance for the cost of a structural engineer, design fees, geotechnical input, land survey and project manager/quantity surveying assistance.
SR included only some professional fees – geotechnical, consent, engineering and drafting.
The High Court again agreed with SR’s approach, holding that it was not necessary to include professional fees which were not essential to rebuilding in the context of a notional rebuild. This included architectural design.
The Court of Appeal decision
SR argued that the policy wording meant a notional rebuild costing must be prepared on the basis of the cost of rebuilding what had originally been built. In other words, the cost of repeating the original exercise of constructing the existing home, albeit using current building techniques and materials. Costs that would only be incurred if the house was actually rebuilt on the same site – such as architectural plans, new engineering/geotechnical advice and an allowance for unforeseen risks – were not required to be factored in.
The Court of Appeal disagreed with SR’s interpretation of the policy:
- It noted that the clause of the policy – “what we will pay” did not refer to “full replacement cost” (defined elsewhere as the cost of replacing with a new item). Instead it said “we will pay the cost of buying another house, including necessary legal and associated fees. This cost must not be greater that rebuilding your rental house on its present site.”
- The cost of rebuilding the rental house on its present site involves both the full replacement cost and additional costs, encompassing contingencies and professional fees. That is the amount the insurer would be liable for where the insured chose the “to rebuild on the same site” option. The Court of Appeal was therefore satisfied that it is an amount equivalent to the sum of both of replacement and additional costs, and not the lesser amount of solely “the full replacement cost”, that is to be paid by SR to the insured when the insured elects the “to buy another house” option. In the Court of Appeal’s view, if the Policy had intended any limit to “the full replacement cost” to apply to “what we will pay” (in the context of the buy another house option) it would have said so.
- It was irrelevant that rebuilding would not take place in the context. Instead, what was required was an assessment of the costs that would be incurred if rebuilding were actually to occur. Costs cannot be excluded merely because the rebuild was not going to happen and costs would not be incurred.
- As a result, the Court did not think “safe ground” could be assumed. Similarly, a reasonable estimate for professional fees and contingencies prepared on the basis that the Property is actually being rebuilt on the site should be included. This is so even though the exercise was necessarily a notional one. Where the Building Code has changed, or there was – as would be the case here – a different assessment of ground risks that would need to be addressed if a property were to be rebuilt on the site, those costs were properly within the cost of rebuilding.
- In summary therefore, the cost that was payable as part of the required notional exercise when the insured was buying another home was the cost that would actually be incurred (whether as a component of full replacement cost or in terms of matters covered by additional costs, such as professional fees) to rebuild on the existing site.
The Supreme Court
The Supreme Court agreed with the Court of Appeal, holding:
- Contingency fee – the fact that Avonside’s settlement was based on a notional, rather than an actual rebuild, did not affect the inclusion of an allowance for risks generally encountered in an actual rebuild. Those risks were relevant to estimating the cost of an actual rebuild which was the exercise required under the policy wording.
- Professional fees – A different approach was not require simply because the rebuild was notional only. Professional fees which would be incurred in an actual rebuild, as calculated by Avonside’s quantity surveyor, should be included. This included a structural engineer, design fees (allowing for an architectural draftsperson, rather than an architect to redraw the plans), geotechnical fee, land surveyor and project manager or quantity surveyor.
For those customers with Southern Response who have not yet settled their insurance claim, this decision may be of considerable benefit to them, expanding what they may be entitled to be paid towards the cost of buying or building elsewhere.
For customers with other insurance companies, the applicability of this decision will largely depend on the similarity of their own policy wording to Southern Response’s.
If we can assist in any way with your insurance claim, please don’t hesitate to contact Paul Cowey at email@example.com.