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This decision clarifies what an insured is entitled to receive when an election is made under a policy to acquire another property and the insurer is liable to pay no more than the cost of rebuilding the insured property on its present site. Unless the actual policy wording provides otherwise, rebuilding costs should allow for both contingencies and professional fees.
Background
The appellant, Avonside Holdings Ltd, owned a rental house that was insured with AMI. The property suffered damage in the 4 September 2010 and 22 February 2011 earthquakes and was damaged beyond economic repair. EQC paid out to its cap in relation to each event. The land on which the property was situated was red-zoned. Avonside sold the land to the Crown and retained its rights against Southern Response, which had assumed AMI’s obligations under the policy.
As permitted by the policy, Avonside had elected to buy another house. The case concerned whether, and to what extent, an allowance for contingencies, the costs of professional fees and the cost of replacing external works should be included in the calculation of the cost of rebuilding the property.
Calculating the rebuilding costs
A hypothetical assessment of the rebuilding costs was required. Avonside disagreed with Southern Response that contingencies and professional fees should be excluded. Avonside also argued that its entitlement should be assessed on the basis of rebuilding each part of the property, including items that were repairable.
Evidence given on behalf of Southern Response distinguished between the cost derived for an actual rebuild and a notional rebuild. In a notional rebuild various costs would not be incurred, and therefore Southern Response reasoned that those sums should not be included in the sum calculated to be the cost of rebuilding the property. The Court considered that approach was wrong. It agreed with Avonside that the costs could not be excluded merely because the rebuild was not going to happen and the costs would not be incurred. The Court focused on the policy wording which provided the costs “must not be greater than rebuilding your rental house on its present site”. The Court considered this phrase covered both the full replacement cost and additional costs, such as contingencies and professional fees. Justice Clifford, who delivered the judgment of the Court, noted that the phrase “the full replacement cost” was more limited than the wording used in the policy.
In relation to external works (such as fences, walls and the driveway) the Court found that there was nothing in the policy that precluded the reuse of any part of the house or its associated works that were not themselves damaged beyond repair. Accordingly, if an “as new” property could be produced by repairing or reinstating external works rather than rebuilding those items from new, the rebuild costs were to be calculated on the basis of the repair work being carried out.
