Tag Archives: Canterbury Earthquakes

1 minute case summary: Medical Assurance Society of New Zealand v East [2015] NZCA 250

Medical Assurance Society of New Zealand v East [2015] NZCA 250

(Unanimously by Harrison, Keane and Wylie JJ)

Nature of case: Insurance/ Canterbury earthquakes/ Appeal from the High Court, which made certain declarations sought by the insured based on construction of an insurance policy.

Facts: The Easts’ dwelling, insured by the Society, was damaged in the 2011 Christchurch earthquake. The insured elected to rebuild/restore the property, instead of opting for indemnity value. The parties agreed that the insurer was liable for the cost of rebuilding/restoring the property, but disagreed as to the nature and scope of the insurer’s liability.

The relevant provision in the insurance policy stated:

…the Society will cover the cost of rebuilding or restoring the dwelling to a condition substantially the same as new, so far as modern materials allow, and including any additional costs which may be necessary to comply with any statutory requirements or Territorial Authority by-laws…

Issues: (1) Whether the insurer’s liability is to cover cost actually or about to be incurred by the insured in rebuilding the property (which must be reasonable), or to pay a reasonable estimate of the cost of such rebuilding work before such cost is incurred by the insured. (2) Whether such cost is the cost of rebuilding the dwelling to the standard it was at when first built (in this case 2007), or to current Building Code standards (2015).

Decision: (1) Insurer’s liability is to cover cost actually or about to be incurred, not an estimate of such ([20]-[21]). (2) Restoring the dwelling to “a condition substantially the same as new” means to a standard which satisfies current Building Code requirements [38].

Reasons: in respect of holding (1) above: (i) the pragmatic difficulty in arriving at a satisfactory estimate. The insured’s own estimate of $3.096m here was seriously flawed ([22]-[23]); (ii) Contrary to the reasoning of the High Court, the interpretation of the clause given by the Court of Appeal does not impose a fetter on the insured’s entitlement under the policy ([25]); (iii) if any estimate proved to be in excess of the amount actually needed to rebuild/restore the property, there is no mechanism in the contract through which the insurer could claim back the surplus ([26]); (iv) the insurer is powerless in preventing any money, paid as an estimate of the cost, from being applied for other purposes ([27]). In respect of holding (2) above: (i) the phrase “as new” does not mean new at any particular time other than at the present ([38]); (ii) Council may not consent to restoration work based on an outdated Building Code. In that event the insurer cannot perform its obligation “to comply with any statutory requirements or Territorial Authority by-laws” [38].

Orders: The High Court’s declaration to the contrary on issue 1 is set aside. The High Court’s declaration on issue 2 is affirmed. Dismissed: cross-appeal by the insured against High Court’s reservation of leave to settle quantum (if the insured’s claim ultimately fell for measure on a different basis from that proposed) ([41]-[42]). Dismissed: insured’s application for leave to adduce further evidence ([43]-[44]).

Prepared with assistance from Ken Ng.

Steve Keall
Barrister
12 July 2015

 

High Court delivers ruling in EQ flood damage case

The full Court of the New Zealand High Court has delivered its decision in Earthquake Commission v Insurance Council of New Zealand & Ors [2014] NZHC 3138 (10 December 2014), finding that “natural disaster damage” includes increased flooding vulnerability and increased liquefaction vulnerability of residential land created by physical changes in the land caused by earthquakes (see paras [80, [93]).

You can read a description of the case here.

The Court’s conclusion is of interest because it it includes taking into account the probability of something occurring – or not occuring – in the future. “Vulnerability” is, afterall, just another way of describing risk, specifically, a heightened risk of something happening. Diligent readers will be asking themselves: is this a million miles from Kraal v EQC [2014] NZHC 919? In Kraal, the homeowners unsuccessfully contended that the risk that  rocks on a cliff face above the property would dislodge and cause injury/ death and property damage brought them within the scope of the relevant legislation.

The Court distinguished  Kraal on the basis that in Kraal the land was physically unchanged , whereas in the present case, the land was damaged (see [72], [73]). This is where, I say, the arguments become unsustainably metaphysical.  Does the fact that this thing we call land, not made by any person, has undergone some kind of change of state mean it is damaged? Counsel for the EQC submitted no, but the Court concluded yes, stating at [79]:

As a direct result of the earthquakes, there has been a disturbance to the physical integrity of the land, reducing it in volume and leaving the body of the land in a changed physical state. This changed physical state has resulted in the land being more vulnerable to flooding, thereby adversely affecting its use and amenity. The primary use of residential land is as a platform for building. Land that is materially more prone to flooding is plainly less suitable for this purpose and is less habitable. The criteria for physical loss or damage are satisfied.

The coupling of a “changed state” with increased vulnerability results in loss of use and amenity, the Court said, which is then equated to damage as it is understood by the legislation. This is not, I suggest, actual damage, but altered physicality, of some kind, which has increased the risk of something happening (and conversely  something not happening). It is the potential loss of amenity that permits the Court to conclude it amounts to damage. This is an elegant dance. If it is accepted that it is correct, then surely it follows that the homeowners in Kraal can be taken through the same waltz? Substitute the word “rock fall” for “flooding” in the penultimate sentence above and you will catch my drift. And I suggest it is not a continental sized drift, just a little one that would appear to serve the interests of justice for all affected homeowners.

I suggest that if the Court’s decision in this case is correct, then the High Court’s decision in Kraal should be treated as incorrect. The distinction between them is just too fine.

The Court of Appeal hearing for Kraal occurred a little while ago. It will be interesting to see if the Court is influenced by these kinds of arguments in its decision.

Steve Keall
14 December 2014