Skyward Aviation 2008 Limited v Tower Insurance
Skyward Aviation's house and sleepout at 108 Kingsford
Street, Burwood were damaged in the 2010/2011 Canterbury
earthquakes. They were insured by Tower under a "Provider
House (Maxi Protection) Policy." The property is within
CERA's residential red zone and the land has been sold to the
Crown for $291,000, so it is no longer an option for the house to
be repaired or rebuilt on site.
Tower estimated the cost of repairs onsite at $368,000.
Skyward's repair estimate was $682,000. Tower estimated the
cost of rebuilding on good ground elsewhere at $712,000.
Skyward's estimate to rebuild elsewhere came in at $770,000.
Tower also adduced valuation evidence that the cost of buying a
comparable replacement house was $365,000 excluding land costs.
For obvious financial reasons, replacing the house with an
existing house was Tower's preference. Skyward resisted,
arguing that Tower was trying to force it to buy another house,
which Skyward said Tower cannot do.
In response to specific questions posed by the parties, Justice
The policy expressly provides that Tower can choose whether to
make payment, rebuild, replace or repair the house.
"Unquestionably the choice lies with
Tower can also choose whether the cash settlement payment will
be calculated on the cost of repairing or rebuilding or replacing
the house. Tower is not obliged to pay anything more than the
present day value (indemnity value) unless and until the costs of
repairing, rebuilding or replacing the house are actually
If Tower elects to settle the claim by paying the cost of
buying another house, the amount payable is a fair price for the
replacement house which is a reasonable and practical extent
comparable, of the same size and construction (as far as may be
possible), in the same condition, and of the same style and extent
(more or less) as the Kingsford Street house was when new.
Despite Tower's offers to cash settle the claim by paying
the full replacement value, this was not an irrevocable election
under the policy. The entitlement to the actual costs of repair or
reinstatement have to be incurred before payment above the present
day value or indemnity value is due. Tower's offer was a
settlement offer made outside of the contract as a result of the
house being red zoned.
Justice Gendall also observed that features that might be
present in a comparable replacement house included the size, age
and style of home, type and style of exterior cladding, joinery and
roofing materials, high roof studs, exposed solid timber floors,
plasterboard walls and decorative plaster ceilings, and reasonable
quality replica type internal fittings.
Tower electing the option of replacing the insured house with an
existing house cannot, Justice Gendall found, be said to force the
customer to buy that house. It simply means that if the insured
chooses not to accept settlement on this basis, Tower's payment
will be limited to the pre-quake value of the house, until the
actual cost of replacing the house is incurred by Skyward.
The decision raises a number of issues:
Can Tower elect to replace the house with an existing house
when the damaged house was green zone and can be repaired or
rebuilt on site?
How can an existing house be "in the same condition"
more or less, as the damaged house was when new?
If finding a comparable replacement proves elusive, how long
can Tower retain the difference between the present day value of
the damaged house and the cost of a replacement house?
How does this sit with Tower's implied obligation to
resolve claims within a reasonable time?
Is Justice Gendall's analysis of the principle of indemnity
correct in light of the generally understood principle that
replacement policies are "new for old" policies.
Does Tower's ability to elect to replace, or pay to
replace, the damaged property with an existing house effectively
turn the replacement policy into a market value policy contrary to
the overall scheme and intention of the policy?
If Tower notifies you of its intention to replace your
earthquake damaged house by buying an existing house, or paying you
the reasonable cost of a replacement house, take some advice. The
decision in Skyward does not automatically apply to every
case, for Tower's options are not, we believe, unfettered.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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