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.
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.
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.