The Court of Appeal has partly overturned one of the more unexpected decisions from the High Court Earthquake List. The appeal judgment considers: when the obligation to pay rebuilding costs is incurred; the meaning of “as new”; and the interplay between the policy terms and local authorities in relation to compliant repair methods.
The Easts own a two-storey house built in 2007 with a concrete slab floor and a timber frame on flat land. The house suffered damage from the Canterbury earthquakes.
Under their policy with MAS, the Easts had the option to either: (1) restore their house, in which case MAS would cover reasonable costs of this on a replacement value basis; or (2) take a cash settlement on an indemnity value basis. If the Easts elected restoration, the relevant policy provision said:
“[MAS] 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. There is no maximum sum insured but the liability of the Society shall not be greater than the reasonable cost to rebuild or restore the dwelling …” [Emphasis added]
The Easts elected to restore their house, and then sought payment up-front from MAS of the estimated costs of this (rather than have MAS pay the actual costs as they were incurred). The Easts also claimed that underpinning was required in order to restore the house to an “as new” condition, which MAS disputed in favour of a low mobility grout (LMG) method.
Payment of repair costs
In the High Court Whata J had determined that MAS was obliged to pay the Easts the estimated cost of repairing the earthquake damage irrespective of whether liability to incur those costs had been or would ever be incurred. This was rightly overturned on appeal.
The Court of Appeal held that, if the insured has elected to restore the property, MAS is only obliged to meet the actual restoration costs as they are incurred. This was consistent with the phrase “will cover”, which is shorthand for “indemnify the insured against”.
In allowing this part of the appeal, the Court returned to orthodox insurance obligations and practices regarding reinstatement cover, which reflect the fact that construction costs are paid incrementally up until completion. The Court also recognised that an up-front payment on a replacement basis would be tantamount to a cash settlement; yet the policy expressly contemplated that a cash settlement would only be paid on an indemnity basis if the homeowner did not elect to restore the house.
Concerns about the mechanics of an insured seeking payment from their insurer and the “fetter” this might place on the prima facie right to replacement value compensation, did not carry weight in the Court of Appeal. An insurer’s failure to indemnify actual restoration costs without proper justification would carry “serious legal and reputational costs”, there were no reported cases of this ever occurring, and the absence of any prescribed mechanism in the policy itself was irrelevant.
At the same time, the policy did not provide any mechanism for the insured to account to MAS for any surplus (if the payment was based on an over-estimate) and the High Court decision arguably would have left MAS without any contractual right to recover any surplus. Further, it would be difficult to prevent the insured from applying the funds to some other purpose or establishing that the claim had been made with a fraudulent intent.
This decision supports a long-standing approach to indemnifying restoration costs and it is likely to have wider application to other policies. Notwithstanding this, in order to put the matter beyond doubt, insurers should consider whether their policy wordings need revision to make it clear that restoration costs will not be paid until the costs are actually incurred.
“As New” / Building Code
The Court of Appeal upheld that “as new” meant restoring the Easts’ house in accordance with current building consent requirements, rather than those that existed in 2007 when the house was built. This was the ordinary meaning of the words “as new” and was supported by the reference in the policy wording to compliance with statutory and local requirements.
The standard of repair became relevant after the Easts claimed underpinning was necessary due to the particular ground conditions. MAS believed this to be “super conservative” and thought the house could instead be re-levelled using LMG or a similar method to the 2007 code requirements.
In the High Court, Whata J concluded that underpinning was necessary in order to meet the current Building Code, but recognised that the Council might reach a different view and approve LMG when granting building consent. In view of this, leave was reserved to determine quantum issues if that outcome eventuated. That reservation was unsuccessfully challenged by the Easts in a cross-appeal. The Court of Appeal said: 
“[Whata J] was simply meeting the contingency that, despite his own findings about the appropriate engineering solution, the Council may nevertheless approve the solution favoured by MAS. As the consenting authority, the Council has the ultimate word on this issue. It was appropriate for the Judge to reserve leave to settle quantum if the Easts’ claim ultimately fell for measure on a different basis from that proposed”.
Quantum – exaggerated claims
During the trial the plaintiffs’ QS conceded “significant errors” in his estimate, which resulted in a grossly exaggerated claim. This did not go unnoticed by the Court of Appeal. Considerable indulgence was granted to the plaintiffs’ QS to reconsider his costing, and with leave reserved to determine quantum if necessary.
 East v Medical Assurance Society  NZHC 3399
 Local authority building consent decisions may be re-heard by way of Ministry Determination.