If a homeowner wishes to settle their insurance claim by buying another house (and the insurance policy provides this option), how much does the insurer have to pay?
This question was considered in the case of Skyward Aviation 2008 Ltd v Tower Insurance Ltd.
The Court held that, if the homeowner buys another home, the homeowner was entitled to receive the cost of that house, capped at the cost which the insured would have notionally incurred in repairing its existing house on site to the same condition and extent as and when new and up to the same area as shown in the certificate of insurance.
The case concerned a Christchurch property located in the “Red Zone”. The property had been deemed “uneconomic to repair” by Tower. 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.
The homeowner wanted to settle its claim by buying another home elsewhere.
Tower argued that it was liable to pay the cost of buying a comparable replacement home (excluding land) elsewhere.
The insured homeowner argued that it was entitled to receive the cost of reinstating its home on site to be put towards the cost of buying elsewhere.
The Policy wording
The key policy wording provided:
We will pay:
- 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.
The Court held:
- the policyholder is not obliged to choose a house of comparable size, construction, condition and style as its existing house once it is agreed that its existing house is damaged beyond economic repair.
- the only limitation is that the cost must not be greater than the cost of “rebuilding your house on its present site”. There is no other control or limit on the size, style or quality of the other house. It is implicit on the basis of the policy wording that if the insured buys a house at a greater cost, Tower’s contribution will be capped at the agreed level with the homeowner meeting the difference from its own resources.
- In other words, if the insured buys another house, Tower is bound to pay the cost of that house up to the cost which the insured would notionally incur in repairing its existing house to the same condition and extent as and when new and up to the same area as shown in the certificate of insurance.
What if the insured customer does not intend to buy elsewhere or has not yet found a replacement home?
The Court indicated that, on Tower’s policy wording, Tower was only liable to pay the “present day value”of the existing home until the insured incurred the cost of buying 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 (without buying elsewhere), Tower was not liable to pay more than “present day value”.
This decision was appealed by Tower to the Supreme Court and heard in November 2014. The Supreme Court dismissed the appeal, confirming that, if an insured elects to buy another home to settle its insurance claim, Tower’s liability is the lower of the cost of rebuilding the insured’s house at its present site or the cost of the other house. There is no requirement that the other home be “comparable” to the existing insured house.