The New Zealand Supreme Court has delivered its decision in Southern Response Earthquake Services Ltd v Avonside Holdings Ltd  NZSC 110.
The policyholder’s property was damaged in the Canterbury earthquakes. It is in the residential red zone. The policyholder accepted the Crown’s offer to buy the land but retained its rights against Southern in relation to the improvements. The parties agreed that the house is beyond economic repair. The policyholder elected to buy another house as it was entitled to under the terms of the insurance policy. The policy provided that the cost of the other house can be no more than “rebuilding your rental house on its present site”. The policy provided for the insurer to pay the “full replacement cost” when rebuilding on the same site.
The appeal concerned whether there should be a sum for contingencies and the extent of an allowance for certain professional fees when calculating the amount payable under the policy, in light of the fact that the rebuilding was never going to happen.
The Supreme Court has essentially confirmed the decision of the Court of Appeal below, which itself reversed the decision in the High Court. In essence the Supreme Court has held that contingency costs are payable where the insurer is liable to pay to the policyholder the full replacement cost.
The gist of the insurer’s position, reflected in the underlying costing analysis of its quantity surveyor, was that if the rebuilding works were never going to happen there was no risk of expenditure going over budget. A contingency sum deals with risk, and, in fact, there was no risk because the entire exercise was notional. So it was appropriate for a zero sum to be attributed to contingencies.
I wrote about the Court of Appeal’s decision here. In that article I expressed the view that the insurer’s argument had logical appeal, but the Court of Appeal’s reasoning, substantially adopted in the Supreme Court’s judgment, was defensible as a matter of contract interpretation. Further, it is more understandable if you accept that a commitment to pay full replacement costs is not really indemnity insurance at all, it is something altogether more economically advantageous to the policyholder. It is something that, by its nature, may include a “windfall” element in certain cases. In this particular case, the policyholder will be receiving an additional sum of $143,200 towards the purchase of its new dwelling. This was the amount calculated for contingent events that never happened and will never happen.
It is completely understandable that the insurer wished to take the point because, presumably, it is an issue that affects many outstanding settlements. This insurer and indeed all of the others will have received welcome clarity on this issue, even if they do not agree with it.
As an aside, it is noteworthy to see that insurers are now offering full replacement insurance for property but in relation to specific perils (fire mainly) and not natural disaster. This is interesting because it is a partial return to the days of specified perils rather than “all risks” style material damage wordings.
23 July 2015