Skyward and O’Loughlin concern the interpretation of Tower’s Provider House Policy. The judges dealing with the claims in the High Court largely agreed on the policy’s meaning (see our December 2013 update). The plaintiffs in O’Loughlin settled their claim with Tower; Skyward, however, was successfully appealed.
Skyward owned a rental property in the red zone comprised of a house and sleep-out. The pre-earthquake value of the land and buildings was around $492,000. CERA purchased the land for $291,000 and EQC paid the plaintiff the statutory limit for damage to the buildings. The litigation concerned the level of the top-up payment payable by Tower for the building damage.
Tower’s Provider House Policy included an option to purchase cover for the “full replacement value” of the insured house. “Full replacement value” meant “the costs actually incurred to rebuild, replace or repair your house to the same condition and extent as when new and up to the same area as shown in the certificate of insurance, plus any decks, undeveloped basements, carports and detached domestic outbuildings, with no limit to the sum insured.” Skyward had purchased full replacement cover.
Skyward’s house was damaged beyond economic repair. The policy provided that “full replacement” could accordingly be effected in one of three ways: by rebuilding the house at the original site, by building on another site chosen by the insured or by buying another house. The cost of the second two options could not exceed the cost of the first.
Tower claimed that it could settle Skyward’s claim by paying an amount equivalent to the cost of buying a comparable property. Tower estimated this cost at $365,000 (excluding the cost of land). It accordingly paid Skyward $165,000 on top of the $203,000 already paid by EQC. This meant that Skyward was paid a total of $659,000 for the land and buildings (the aggregate of the CERA, EQC and Tower payments).
The Court of Appeal held that:
1. The terms of policy, properly construed, gave the insured (not Tower) the right to chose whether or not to reinstate the property. If the property was damaged beyond economic repair, Skyward could chose between three reinstatement options (rebuilding on the original site, building on another site or buying another property).
2. If the insured decided to reinstate by purchasing another property, he or she was not obliged to purchase a property which was comparable with the existing property when new. The sole constraint was the price, which could not exceed the nominal cost of rebuilding the insured house on the original site.
In support of its judgment on the first issue, the Court referred to various policy terms which implied that the power to choose was held by the insured. The clause relied upon by Tower, which stated “In all cases… we [Tower] have the option whether to make payment, rebuild, replace or repair your house” meant only that Tower had the option of reinstating the property itself (rather than paying the insured’s costs in doing so). This interpretation does not fit comfortably with the inclusion of replacement in the list of options, unless replacement is read to mean only the option of building on another site.
The Court’s judgment on the second issue is perhaps more interesting for parties other than Tower and its policy holders. The widespread nature of the damage arising from the Canterbury earthquakes has had an adverse impact on the resources available to effect repairs, and construction costs can exceed the capital value of the rebuilt house. Those increased costs do not fall on insureds with full replacement cover, who are entitled to receive the equivalent of their houses when new. As the Court noted, that is fair enough: the insurer contracted to provide cover on a new for old basis. It is less evident, however, that inflated building costs caused by a natural disaster should be used to justify a claim for the purchase of a house which is significantly better than the insured property when new, in terms of its amenity and its capital value.
Tower’s estimate of the price to purchase the equivalent of the insured house when new was $365,000 (excluding the price of the land). The Court of Appeal’s decision that the only constraint on the plaintiff’s right to purchase a property was the cost of rebuilding the original house ($680,000) meant that Skyward could purchase a property worth an additional $315,000. As a result, the insured was not only entitled to upgrade its old house to a new one, it could also upgrade a modest house to a luxury home (depending on the state of the housing market at the time of purchase).
Fairness, of course, is not strictly relevant to contract interpretation: the question is what, from an objective standpoint, the parties intended their contract to mean. The Court of Appeal took the view that the terms of the policy meant that if Skyward elected to reinstate, Tower’s liability was set at the nominal cost of rebuilding the insured house on the original site. Tower had no ongoing interest in how the money was spent (provided it was spent). The alternative argument, that the intention of the policy was only to provide Skyward with a house equivalent to the insured house when new, was not favourably received.
It will be interesting to see whether Tower seeks leave to appeal the judgment to the Supreme Court. We will provide an update in due course.