New Zealand: Does the insurer, Tower, really hold all the cards for earthquake damaged houses?

Skyward Aviation 2008 Limited v Tower Insurance Limited

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 Gendall found:

  1. The policy expressly provides that Tower can choose whether to make payment, rebuild, replace or repair the house. "Unquestionably the choice lies with Tower."
  2. 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 incurred.
  3. 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.
  4. 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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