Legal Update March 2014
2
F oreword
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inelands Motor Hotel P - Arson Finding For Insurer
7
utomatic Reinstatement A Of Insurance Clauses
10 M erger Trumps Automatic Reinstatement (At L east For Now) 13 H ealth and safety reforms bring increased obligations 17 R out v Southern Response Earthquake Services L td
Foreword
Perhaps not surprisingly, this issue is once again dominated by the case law coming out of Christchurch. This year promises to be a very important period for the development of insurance law related to the Christchurch earthquakes. Many of the basic points have been laid down in O’Loughlin and the more ‘whacky’ arguments have been put to bed, some of the more technical and legally tricky points arising in other cases are likely to percolate to the Court of Appeal and IAG LEGAL UPDATE | PAGE 2
beyond this year. We have had a flurry of important High Court decisions delivered in the last few months, including the Wild South and Marriott. Those cases and Crystal Imports, cover the effect notice by insurers on automatic reinstatement clauses. As I understand Wild South and Marriott are both going to the Court of Appeal this year. The Crystal Imports decision also dealt with the doctrine of merger in non marine insurance. In that regard, at the time I am writing this we are only a few weeks away from the Supreme Court hearing of Ridgecrest v IAG. This is the first earthquake case to reach the Supreme Court and there is considerable international interest in how they will deal with the question of merger in the context of successive losses during one policy period. As Professor Merkin put it to us – the whole common law world – is watching how our courts are resolving insurance law issues that have never before been dealt with. I am extremely pleased that Professor Merkin is now on our team, in his role as a consultant at DLA Phillips Fox. We now have one of the world’s leading Insurance Law specialists at IAG’s disposal and we’ll be putting that to best use! Professor Merkin is a co-author of a new book on New Zealand Insurance Law coming out later this year. He is also lecturing the Masters Degree level insurance law course at Auckland University. It was a real pleasure having Professor Merkin participate in our panel discussions on difficult legal issues arising from IAG’s current cases. He will also be available to give talks and offer advice across all our business.
It is also the first legal update which includes material from Duncan Cotterill, the new firm on the Panel. With their inclusion we now have two firms operating in each of our main centres, they add real strength to our panel. They have put forward a very impressive team to act for us. Those of you in claims will have opportunities to get to know them well over the coming months. I hope you will all get a lot out of this legal update, the first for 2014.
Seamus Donegan Litigation Manager
IAG LEGAL UPDATE | PAGE 3
Pinelands Motor Hotel - Arson Finding For Insurer
The High Court has found in favour of insurers on an arson-fraud dispute, Angus & Anor v ACE Insurance Ltd1. After a four week trial in November 2013, Cooper J found that the plaintiff, Mr Angus, set fire to the Pinelands Motor Hotel in Kawerau which entitled the insurers to refuse to pay his claim. IAG LEGAL UPDATE | PAGE 4
Background The Pinelands Motor Hotel was owned and run by Dennis and Sheryl Angus. On the night of 2 July 2010, the main building of the hotel was destroyed by fire. There was no dispute that the fire was caused by arson. The plaintiffs alleged that there was a robbery in which Mr Angus was doused in petrol and ordered to hand over money from two safes prior to the property being set alight. The defendants denied that a robbery ever took place and argued that Mr Angus deliberately set the fire.
Mr Angus’s story Mr Angus testified that, at some time after closing the hotel bar and setting the alarm, he was preparing for bed when he heard a knock at the door. The man standing there was carrying a bag that he said he was dropping off for collection the next day. When Mr Angus bent down to pick up the bag he was doused in liquid smelling strongly of petrol by a second man and was threatened with a lighter if he did not hand over the money in the safes. Although his hands were bound together with tape after the office safe was emptied, he was still able to use his keys to open the door and to deactivate the alarm. Once up the stairs to the second safe, the robbers were surprised and distracted by the shelves of alcohol and started filling bags with the bottles. Mr Angus slipped the bag containing the money from the first safe down the front of his shorts without the robbers noticing and told them that there was no money in the second safe. The robbers took him back down the stairs and demanded the key to the back 1
[2014] NZHC 258
gate prior to hitting him on the head with a length of wood. Initially he denied being knocked out by this blow but later changed his story. He claimed to have then crawled out the door and, once outside, heard a loud explosion. The building then went up in flames. At that stage, he tried to use his mobile phone but one of the robbers grabbed it and threw it away, together with his glasses. The robbers then left.
The inconsistencies There were a number of key factual issues that were inconsistent with Mr Angus’s alleged version of events. The most significant findings were: - Evidence demonstrating that Mr Angus did not set the alarm on shutting the hotel bar as he claimed. The insurers called evidence of what sounds Mr Angus would have heard when setting the alarm and that, combined with the unlikely coincidence that the alarm malfunctioned on the night of the robbery, led Cooper J to conclude that Mr Angus failed to set the alarm. - No credible suggestion as to the identity of the robbers or their motive for burning the hotel after committing the robbery. Additionally, they came with the apparent intention of stealing money and were distracted by the alcohol but happened to have suitable bags to carry the bottles. - The alleged ability of Mr Angus to perform various acts with his hands taped together, including unlocking doors and putting the money down his shorts. - A trail of items that were along the path of one of the robbers, including bottles of alcohol, was too contrived. The Court noted that Mr Angus had been keen for the area to be searched by the police prior to the trail being discovered. - No clear explanation as to the presence of accelerant in areas of the hotel that were locked when Mr Angus retained the keys and with no indication as to the sequence of events for when the accelerant was poured. Additionally, petrol/ kerosene mix was found on Mr Angus’s clothing but petrol only was in the hotel building and petrol only was on Mr Angus’s shoes, indicating that he was present when the petrol was poured through the hotel, which he denied. This scientific evidence in particular was fatal to the plaintiffs’ case. - Finally, the timing of the events leading up to the fire allowed Mr Angus time to prepare for the set up but did not fit with his story of the robbery. When attempting to resolve the issues of fact brought before the Court, Cooper J referred to the Australian High Court case of Fox v Percy2 where it was decided that the ‘logic of events’ evidenced by objectively established facts resulted in occasions where the credibility of witnesses was critical were greatly reduced. Cooper J did not see that the financial situation of Mr and Mrs Angus was strong enough motive for such drastic action. However, the judge preferred not to dwell 2
(2003) 214 CLR 118
IAG LEGAL UPDATE | PAGE 5
on the reasons behind the fire but focus more on the actual evidence of the night the fire took place and the likelihood that it was Mr Angus who set it.
Balance of probabilities A police investigation had concluded that the evidence against Mr Angus did not meet the threshold of ‘beyond all reasonable doubt’. Criminal charges against Mr Angus were dropped. The judgment reflected the lower standard applying to this civil case. The judgment affirmed the decision in AMI Insurance v Devcich3 as a basis for determining these factual issues before the Court. This case rejected the idea that there is any intermediate test between the criminal and civil standards even where the allegations are more serious. Instead Cooper J found that these cases merely require stronger evidence for the balance of probabilities to be satisfied. At paragraph 18, he stated ‘there are considerations which mean that there needs to be strong evidence that supports the defendant’s allegations in order to meet the balance of probabilities standard’. IAG LEGAL UPDATE | PAGE 6
Insurers will be pleased to take from this case that, although strong evidence is required to meet the balance of probabilities burden of proof, the threshold is not increased due to the seriousness of the allegations and in such cases this threshold can be met. DLA Phillips Fox acted for ACE.
Peter Leman Partner DDI:
(+64 4) 474 3240
Email: peter.leman@dlapf.com
Sophie Merkin Solicitor DDI:
(+64 9) 300 3893
Email: sophie.merkin@dlapf.com
3
[2011] NZCA 266
Automatic Reinstatement Of Insurance Clauses
In the last quarter of 2013, the High Court delivered three judgments which addressed the operation of the automatic reinstatement clauses which are common in many IAG policies. The clauses provide for the automatic reinstatement of cover following loss or damage, unless the insurer or the insured gives notice to the contrary. The decisions are in Wild South Holdings Limited v QBE Insurance (International) Limited, Marriott & Marriott v Vero Insurance New Zealand Limited and Crystal Imports Limited v Certain Underwriters at Lloyds of London. In all three cases the questions were determined on a preliminary basis upon agreed facts. In all three cases, the policies contained clauses which reinstate the amount of insurance cancelled by a loss, as long as neither party gives notice to the contrary. The reinstatement is effective from the date of the loss, but the question is when is the amount of insurance “cancelled� so that reinstatement is necessary? This then determines when the parties should give notice. The decisions all reached differing views about when such notice must be given in order to be effective. This article considers the first two cases. Crystal Imports is the subject of a separate article in this issue of legal update.
Wild South The plaintiffs were the owners of commercial properties which suffered earthquake damage. All damage occurred within one policy period, and there was a significant element of underinsurance. The key issue for determination was when did automatic reinstatement occur? Was it on the date of loss or damage, or when the amount of insurance arising out of the loss or damage is paid? That determined the last date by which an effective notice could be given by the insurer.
IAG LEGAL UPDATE | PAGE 7
The insured argued that the automatic reinstatement clause provided continuous cover up to the sum insured, i.e. cover reinstated at the time of the damage. The insurer argued that until payment was made, the amount of cover available under the policy did not reduce, and there was nothing to reinstate until that occurs. Fogarty J rejected both arguments. He concluded that in order to give the automatic reinstatement clauses business efficacy, there needed to be a reasonable period of time for both parties to consider their position and examine the scale of the fiscal cost of the damage or loss. He found that the reinstatement clause carries with it a necessary implication that both the insured and the insurers will exercise their powers to give notice and adjust the premium within a reasonable time. He did not determine whether that reasonable period of time had expired.
Marriott The same issue was subsequently considered by Dobson J in Marriott. IAG LEGAL UPDATE | PAGE 8
The arguments presented to the Judge were similar to those presented in Wild South. The insurers argued that cancellation and reinstatement does not occur until the insurer pays the claim. Accordingly, the insurer has until that point to give written notice that reinstatement is not going to occur. The insured objected to that proposition, arguing that it gave the insurer an option not to reinstate cover, even after a second occurrence giving rise to a claim which would otherwise have been covered by the policy. In other words, if the claim for the first loss is not settled until after a second loss occurs, the insurer would be able to give notice, so that cover would not reinstate and the amount of cover available for the second loss would be less than the insured expected. Dobson J did not agree with the analysis of Justice Fogarty in Wild South, and did not imply a requirement of “reasonable time�. Instead, he held that the reinstatement clause meant that the date of occurrence was the trigger for a claim against the policy, and cancellation and reinstatement occurred then. He held that notice, if it were to be given, must be given prospectively. In other words, the giving of notice could only affect the amount of cover available for events occurring after the notice was given. The issue was considered again by the High Court in Crystal Imports. Cooper J essentially came to the same conclusion as did Dobson J in Marriott for similar reasons. The decision is covered in more detail elsewhere in this issue of legal update.
Comment All three decisions have been appealed and the Court of Appeal has ordered that all three appeals be heard together. A hearing date is shortly to be allocated. It is clear from the conflicting decisions discussed here, and the appeals from them, that the law is not finally settled as to when cancellation and reinstatement of insurance under an automatic reinstatement clause takes place, and when notice must be given to be effective. The concept that the amount of insurance is not cancelled or reduced until the claim has been paid seems logical. It results in the sum insured being the maximum that the insured can recover for damage in any policy period until the damage has been repaired. It is not until the damage has been repaired that the insured should need reinstatement of the sum insured. Where there is under insurance, the insured may not be fully indemnified where the sum insured is not reinstated and there is a subsequent event causing additional damage. However, that is a result of the underinsurance. Against that, it appears that the Court is reluctant to allow a retrospective withdrawal of reinstatement after a subsequent event has caused additional damage, because it leaves the insured in a state of uncertainty in the intervening period. The Court’s concern about that appears to underpin the judgments in both Marriott and Crystal Imports. As the law stands, the best course for an insurer to take would be to make a decision about reinstatement, and communicate it to the insured, as quickly as possible. It is to be hoped that the Court of Appeal will provide some clarity around this issue in the near future.
Ross Armstrong Associate DDI:
(+64 9) 379 3880
Email: ara@younghunter.co.nz
Daniel Weatherley Solicitor DDI:
(+64 9) 379 3880
Email: drw@younghunter.co.nz
IAG LEGAL UPDATE | PAGE 9
Merger Trumps Automatic Reinstatement (At Least For Now)
Crystal Imports Ltd v Certain Underwriters At Lloyds Of London & Anor [2013] NZHC 3513, Cooper J, (19 December 2013) 1. This case dealt with a common situation concerning a commercial property affected by the Canterbury earthquakes. In it, Justice Cooper had to decide IAG LEGAL UPDATE | PAGE 10
whether Crystal Imports could make a claim for damage sustained across multiple events or whether the circumstances of the case meant that only one sum insured needed to be paid. 2. The Judge held that merger did apply with the effect that the insured was not entitled to separate sums for the damage occasioned by each earthquake.
The facts 3. Crystal Imports had a Material Damage policy with the defendants in respect of five Christchurch properties. All five properties were damaged in September 2010, and then again in the February 2011 earthquake. As a result, three of the properties had to be demolished. 4. A dispute arose as to the extent of the insurer’s obligations for the damage caused. One of the major areas of contention was over the operation of the Reinstatement of Sum Insured clause (“the RSI clause”), which said: “Reinstatement of Sum Insured In the event of loss for which a claim is payable under the certificate and in the absence of written notice by the company or the insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The insured undertakes to pay such pro-rata premium at the date applicable to the item or items concerned as may be required for the reinstatement.” 5. A separate but interrelated point was whether the doctrine of merger applied so that the initial damage caused by the September earthquake merged into the damage caused in February. If so, then Crystal Imports would only get payment of one sum insured.
The decision Automatic reinstatement clause 6. The plaintiff contended that the effect of the RSI clause was that separate sums insured were available for each event that caused earthquake damage. 7. A key issue was when the automatic reinstatement took effect. The plaintiffs argued that the “date of loss” was the date of the event causing the loss (i.e. the September earthquake), whereas the defendants argued that the date of loss was the date of payment by the insurer in respect of that event. 8. The Court said that the loss or damage occurs when the earthquake strikes. So, the reinstatement occurs immediately following the event, and not upon payment in respect of the damage. Cooper J noted: “If it were otherwise, the underwriter could effectively limit the ambit of the RSI clause, and therefore its liability under the policy, by simply delaying the payment of a valid claim”. 9. As an aside, although the policy wording in this case did tie the automatic reinstatement to the date of loss, other policies (such as in NZI’s standard MD wording) make automatic reinstatement contingent upon payment of the first claim (e.g. “After we have paid a claim under this policy, we will reinstate your sum insured...”). So, like most Court decisions, the usefulness of this judgment depends upon the specific policy wording in each case. 10. A related point of contention was at what point, if any, the insurer had the opportunity to give notice to the insured that the RSI clause did not apply. This question is particularly relevant where, as in this case, the automatic reinstatement occurs immediately following the loss. 11. The Court held that the insurer had an opportunity to give notice after the first loss causing event, but before the second. As the insurer can only notify the insured after the first event, this necessarily means that such notice will be retrospective. The Court did not have an issue with this; see paragraph 63 of the judgment where it was said: “I see no reason why an effective notice could not be given under the RSI clause after the first loss causing event, and before a second such event. The fact that reinstatement occurs automatically does not in my view mean that the “notice to the contrary” provided for by the clause needs to be given prior to the automatic reinstatement. I consider the notice can still be effective if given after the reinstatement, and once given would mean that the reinstatement would not be effective. In such circumstances there would have been notice to the contrary at the time of any subsequent covered loss.” 12. Of course, in most cases in Canterbury, insurers did not give notice after September but before buildings were later destroyed in February or June 2011.
IAG LEGAL UPDATE | PAGE 11
Merger 13. On this point, the Court held that the doctrine of merger, (a standard feature of marine insurance), should apply also in this non-marine setting. According to the Judge, there was nothing about the doctrine that made it applicable only in marine settings. It was also held that the question of when the insurer’s liability for damage arises is irrelevant to the applicability of the doctrine in non-marine settings. 14. Commenting on what he regarded as the applicability of the doctrine to indemnity contracts, Cooper J stated at paragraph [117]: “.... there is an inherent logic in the proposition that the insured can no longer assert that indemnity involves both payment for the destroyed building and the same building in its previously damaged state ....it is illogical to characterise as an indemnity, payment for the cost of repairs that will never be carried out because the building has been destroyed.” 15. This decision is at odds with Justice Dobson’s decision in Ridgecrest v IAG. In the High Court in Ridgecrest, it was said that merger did not apply outside of IAG LEGAL UPDATE | PAGE 12
marine cases. The Court of Appeal in Ridgecrest declined to comment on the matter but Ridgecrest has appealed again and this issue of merger will be discussed in the Supreme Court on 10 March. In addition, Crystal Imports has itself appealed to the Court of Appeal, which argument is also to be heard shortly. 16. So, it is hoped that clear guidance will shortly be available from our superior Courts so that both insureds and insurers can have certainty on this aspect of insurance law.
Paul Smith Partner DDI:
(+64 9) 915 2415
Email: paul.smith@fortunemanning.co.nz
Simon Connolly Senior Solicitor DDI:
(+64 9) 915 2963
Email: simon.connolly@fortunemanning.co.nz
Health and safety reforms bring increased obligations
This year the Government will introduce new legislation as part of its long term commitment to introduce major health and safety reforms. Its target is to achieve a 25% reduction in serious workplace fatalities and injuries by 2020. The Health and Safety in Employment Act 1992 will be replaced by the Health and Safety at Work Act. An important focus of the new Act will be making it easier for both business and workers to understand their roles and responsibilities by setting out clear obligations for duty holders. The Act will be backed up by regulations, Approved Codes of Practice, standards and guidance documents for each industry against which to benchmark compliance. A new government agency, WorkSafe New Zealand has already been established as the new health and safety regulator.
New primary duty holder and clearer statement of duty The new Act will do away with particular categories of duty holder. In their place is the concept of a single inclusive primary duty holder, or PCBU. A PCBU is simply a “person conducting a business or undertaking.� The intention is to allocate duties to those people best placed to control health and safety risks in the workplace. The PCBU covers all relationships between those in control and those affected. This means that upstream participants in the supply chain (such as suppliers, manufacturers, designers and so on) also owe a duty of care in relation to workers under their control or influence. Practically, this means upstream PCBUs will have duties to manage and monitor the health and safety performance of those beneath them in the supply chain. A PCBU will be required to take all reasonably practicable steps to eliminate or minimise a specific risk. What that requires will depend on the knowledge and
IAG LEGAL UPDATE | PAGE 13
seriousness of the risk and what can be done to avoid it. Cost will rarely be a reason for not taking a particular step, unless it is prohibitive.
New positive due diligence obligation on “Officers” The new Act will establish a positive duty of due diligence on those with governance roles in organisations to actively manage workplace health and safety. This duty will extend to those who make or participate in making decisions that affect the strategy and resourcing decisions in a business. Company directors, partners, General Managers, CEOs, corporate counsel, CFOs and senior advisors will all come within the definition if they are involved in such decisions. People performing those functions will have to: • Understand how the PCBU operates and the hazards and risks associated with those operations; and • Ensure the PCBU has, and implements, proper processes for complying with its duties. IAG LEGAL UPDATE | PAGE 14
Increased penalties and improved compliance tools The Act will introduce a three-tiered penalty regime with an increase in maximum penalties. For the most serious offending, involving reckless conduct, the penalty will be up to five years imprisonment and a fine of up to $3 million for a company and $600,000 for an individual. Lower level compliance tools will also be strengthened. For example, the requirement for prior warning for infringement notices will be removed, meaning that an infringement notice can be issued on the first visit if necessary. Enforceable undertakings from duty holders in relation to contraventions will also be introduced.
A better regulator – WorkSafe New Zealand A major focus in the reform package is improving health and safety delivery through better regulatory leadership. Increased resources have been provided to enable WorkSafe New Zealand to develop a Workplace Health and Safety strategy and to be more actively engage with industry, particularly in high risk sectors. There is an increased focus on prevention and support for business. Employers, particularly in high risk industries, can expect that inspectors will visit them more often. The Christchurch Rebuild will be a specific focus for WorkSafe, including an inspectorate skilled in construction to focus on enforcement and high risk activities, such as asbestos.
Earthquake related razards – workplace buildings New Zealand’s recent earthquake history has heightened awareness of the risk of harm from buildings and associated failures in the event of earthquakes. Under the new legislation, there will be an onus on PCBUs and their officers to ensure that they are aware of, understand and manage any risks associated with any buildings they own, lease and/or occupy. WorkSafe New Zealand has issued information for employers and owners of workplace buildings. This information will continue to be relevant under the new Act. In short, if organisations comply with their obligations under the Building Act, WorkSafe New Zealand will not impose a higher standard in relation to the building’s earthquake relisilience under health and safety legislation. If the requirements of the Building Act are not met, and someone is seriously harmed following an earthquake, duty holders could face enforcement action under health and safety legislation.
Conclusion
IAG LEGAL UPDATE | PAGE 15
The focus is still, as it always has been, on ensuring that people are safe when they are at work. But, there appears to now be a greater recognition of the importance of health and safety and the penalties that will flow if businesses do not get it right. Certain industries are definitely under the spotlight. For example, the forestry industry has had numerous fatalities meaning that a greater focus is likely to be placed on workplace safety there. The construction industry is another key player. Although WorkSafe New Zealand has already engaged with the the construction industry over ensuring workplace safety, the level of construction (current and expected) in Canterbury means that despite that focus, claims will flow. Those working in other sectors cannot simply rest on their laurels. Health and Safety is also under the spotlight more generally. Given the significance of these changes and the focus on health and safety, it is likely insurers will see greater inquiry about the level of cover and, particularly, the extent to which “officers” will have cover if they are individually prosecuted under the new legislation, either in conjunction with or separate from a prosecution against the PCBU.
Duncan McGill Partner, Auckland d +64 9 374 7151 m +64 21 226 3530 duncan.mcgill@duncancotterill.com Helen Smith Partner, Christchurch d +64 3 372 6437 m +64 21 905 502 helen.smith@duncancotterill.com
Jonathan Scragg Partner, Wellington d +64 4 471 9422 m +64 21 878 972 jonathan.scragg@duncancotterill.com Scott Wilson Partner, Christchurch d +64 3 372 6511 m +64 21 960 244 scott.wilson@duncancotterill.com
IAG LEGAL UPDATE | PAGE 16
Rout v Southern Response Earthquake Services Ltd [2013] NZHC 3262
Mr and Mrs Rout were the owners of a single storey 241m2 house in Brooklands, Christchurch, built for them in around 2005. The house sustained damage to the unreinforced concrete floor slab as a result of the 4 September 2010 and 22 February 2011 earthquakes. The Brooklands area was red zoned in November 2011 and the Routs elected to sell their land to CERA and to claim under their insurance policy with AMI for the damage to the house. Mr and Mrs Rout continued to live in the house until the sale to CERA took effect.
Policy Under the terms of the AMI policy: a. If the house was damaged but could be repaired then Southern Response had the choice of either repairing the house to an ‘as new’ condition or paying the cash equivalent of the cost of repairs. b. If the house was damaged beyond economic repair, the Routs could elect one of four options: a. rebuild on the same site to an ‘as new’ condition; b. rebuild on another site up to the amount to rebuild on the same site; c. buy another house up to the amount to rebuild on the same site; d. receive a cash payment comprising the market value of the house at the time of the loss.
Consent notice and floor levels The house was subject to a consent notice attaching to the title requiring the level of the house to be at least RL 11.4 metres. That notice had been applied at the stage of sub-divisional consent. As a consequence of the earthquakes, the floor
IAG LEGAL UPDATE | PAGE 17
level of the house was at between RL 11.19m and 11.25m. The differential settlement across the house was 59mm, just over the MBIE Guidelines threshold of 50mm. Southern Response initially considered the house was beyond repair. After the December 2012 revision of the MBIE Guidelines, however, it revisited the issue and concluded the house could be repaired by mechanically lifting the concrete perimeter foundation and filling the voids under the concrete slab floor. Those repairs would re-level the house. Southern Response denied it was obliged to return the house to its original floor level, though there was engineering evidence that that was easily achievable. The Routs argued the house was a total loss as (1) it was in the Red Zone and (2) it could not safely be repaired. They argued it had to be returned to at least the pre-earthquake level of RL 11.4m and, arguably, to the Flood Management Area level of 11.8m.
Findings IAG LEGAL UPDATE | PAGE 18
Gendall J dismissed the Routs’ argument that the red-zoning of the house constituted ‘loss’ or ‘damage’ to the house and confirmed the Court’s decision in O’Loughlin v Tower Insurance Ltd that some physical change was required for the red zoning to amount to insured damage. As a result of the consent notice on the title, Gendall J held that any repair to the house to bring it to an ‘as new’ condition, as the policy required, required the floor level of the repaired house to be at RL 11.4m. As the house was not being rebuilt, the FMA level of 11.8m did not apply. Helpfully, there was no finding that insurers are always liable to restore houses to their original floor level. The decision is limited to cases where there is a consent notice on the title. In analysing whether the house could be repaired or whether the house was beyond economic repair, Gendall J adopted as a “rule of thumb” that if the expected cost of repairs were more than 80% of the rebuild cost, then the repairs were uneconomic. The Judge then compared Southern Response’s estimated repair costs (including the cost to repair the foundations to 11.4m) with its estimate of rebuild costs. As the repair costs were more than 80% of the rebuild costs, Gendall J found that the 80% threshold was met and therefore the house was uneconomic to repair. As they had sold the land to CERA, the Routs could not rebuild on their own site. They argued they should be entitled to the additional foundation costs of building on their site, even if they did not incur those costs on the site they did build on. That was firmly rejected as amounting to a windfall in their hands. Although the Judge had used Southern Response’s evidence on rebuild costs as the basis for his calculation on whether repair was economic, he did not use that figure as the basis of his award to the Routs. Instead, he adopted a cost estimate by Fowler Homes, who had given the Routs an estimate to build on a site they had
bought. Significantly, the Fowler Homes’ estimate was around $120,000 higher than Southern Response’s figure. So if Gendall J had used the Fowler Homes’ rebuild costs when applying his 80% rule of thumb, the repair costs would have been much less than 80% and it would not have been uneconomic to repair. The Routs sought judgment for the rebuild costs. The Court held that, as the policy only entitled the Routs to rebuild costs if they incurred those costs, Southern Response did not have to pay anything until the work was done. Finally, Gendall J held that the Routs were not entitled to general damages for breach of the duty of utmost good faith in handling the claim. He was highly critical of them for persisting in claiming nearly $1.3m when they knew, from Fowler Homes, that they could rebuild for less than half that sum.
Comment The evidence in this case largely concerned whether the house could be repaired by mechanical lifting. The Court avoided having to reach a view on that by deciding it was not economic to repair. It is a matter of speculation what the outcome would have been if the Court had found that the repair was economic. The Judge accepted the authority of the MBIE Guidelines and the engineers for both parties agreed that repair was at least theoretically possible. There is no doubt, however, that the Court was troubled by the proposition that a homeowner could be restricted to the cost of repair for a Red Zone house, especially where that might result in them not being paid enough to build a replacement house. DLA Phillips Fox acted for Southern Response.
Peter Leman Partner DDI:
(+64 4) 474 3240
Email: peter.leman@dlapf.com
Misha Henaghan Partner DDI:
(+64 ) 916 3721
Email: misha.henaghan@dlapf.com
IAG LEGAL UPDATE | PAGE 19