To what extent are insurers liable for the costs of rebuilding and repairing buildings damaged by the Canterbury earthquakes? Three new decisions this month – including two from the Supreme Court – shed new light on insurers’ obligations.
Are insurers responsible for increased flooding vulnerability?
In a case brought by the Earthquake Commission, three judges in the High Court considered the change in land levels caused by the Canterbury earthquakes.
If the change in land levels caused an immediate flooding problem, it was accepted that there was land damage and EQC was liable.
But what is the position if the change in land levels only made the land more susceptible to flooding in the future? In
EQC v ICNZ, the Court ruled that this was
current land damage, even if the land had yet to suffer any flooding.1 As a result, affected owners can claim compensation for land damage from EQC.
However, in a significant decision for private insurers, the Court ruled that the same reasoning does
not apply to buildings. In many cases a building sits on land that has dropped in height as a result of the earthquakes, making the building more vulnerable to flooding in the future. If the materials and structure of the house are undamaged, is there physical damage if the building has dropped in height relative to sea level? And if so, are EQC and private insurers required to restore buildings to their pre-earthquake height relative to sea level?
The Court ruled in favour of the insurers. It held that a drop in a building’s height compared to sea level resulting in an increased flooding vulnerability is
not a form of physical damage. As a result, insurers are not required to raise thousands of houses, at a likely cost of hundreds of millions of dollars.
How to calculate rebuilding and repair costs?
In a second decision released this month,
Tower v Skyward, the Supreme Court considered the meaning and calculation of rebuilding and repair costs under an insurance policy issued by Tower.2
The case concerned a house owned by Skyward that was worth $291,000 before the earthquakes. Skyward claimed that the cost to repair or rebuild the house on the same site was $683,000, and that the policy allowed it to spend up to $683,000 towards buying a new house (as an alternative to rebuilding or repairing). Tower claimed that this was an unjustifiable windfall to Skyward, and that Skyward could only buy a house that was comparable to the original.
The Supreme Court rejected Tower’s argument. The Court ruled that when a policy provides for “new for old” reinstatement cover, an insured may well recover more than the building’s market value, given the impact of depreciation and increased building costs. The Court said that there is no windfall – this is simply what the policy provides for.
The Court also ruled that under the policy, Skyward was entitled to choose to buy a new house, and that the only cap was the cost of rebuilding on the same site. This was because Tower should be “indifferent” as to whether the $683,000 cost of rebuilding and repairing the house is in fact used to rebuild or repair the house on the same site, or whether it is used to buy another house. The Court also observed that a further requirement of “comparability” when buying a new house would be impracticable, given that there might not be a comparable house in market, and that it would be uncertain, resulting in debate as to whether a particular house is in fact comparable.
What cover is there under an automatic reinstatement clause?
Finally, the Supreme Court this week declined leave to appeal in
Lloyds v Crystal Imports.3The case concerned commercial material damage policies that automatically reinstated cover following loss. The
Court of Appeal rejected the insurers’ argument that cover was only reinstated following payment of a claim by the insurer.4 And although the policies allowed the insurer to give a notice that cover was not automatically reinstated, the Court of Appeal rejected the insurers’ argument that the notice could operate retrospectively.
In its reasons declining leave, the Supreme Court said that the High Court and Court of Appeal had both reached the same conclusion, and that the Courts’ interpretation “appears to be an orthodox reading” of the automatic reinstatement of cover clause.
This means that if a building suffers damage in two separate events during the policy period, with cover being reinstated between events, the total amount that an insured can claim for both events may be
more than the total aggregate sum insured.
The result this month was 2:1 in favour of insureds. Insurers will be pleased that they are not required to raise buildings to deal with increased flooding vulnerability. However, as a result of
Skyward, insurers may face additional potential liability in calculating rebuild and repair costs, and as a result of
Crystal Imports they may become liable for more than the sum insured in the policy.
Finally, the run of insurance cases is unlikely to slow down in the new year. Next off the rank is likely to be the Supreme Court’s decision in the fire service levy litigation, which the Supreme Court heard earlier this week.
* Bell Gully acted for Southern Response in the increased flooding vulnerability litigation and for the insurance brokers and Vero in the fire service levy litigation.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.