New Zealand: Judgment summary - Tower Insurance Limited v Skyward Aviation 2008 Limited

[2014] NZSC 185

Skyward Aviation 2008 Limited owned a property in Burwood, Christchurch (the property) with a 207m2 early 1900s villa home (the house) and a 64m2 free-standing sleep-out built in 2009 (the sleep-out). Both the house and the sleep-out were damaged in the earthquakes, and the property is within the residential red zone.

Skyward and Tower were unable to reach agreement on how to calculate the amount to be paid to Skyward for the house.

The policy provided for four alternative options for settlement. There are:

  1. the full replacement value of the house at the situation; or
  2. the full replacement value of the house on another site chosen by Skyward. This cost must not be greater than rebuilding the house at the situation; or
  3. the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding the house on its present site; or
  4. the present day value.

High Court decision

In the High Court, David Gendall J decided that it was Tower's choice whether to make payment, rebuild, replace or repair the house. He also decided that where the choice is to buy another house, the maximum amount payable is calculated on the cost of purchasing a house which is comparable in size, construction, style, and condition.

Skyward appealed this decision.

Court of Appeal decision

The Court of Appeal reversed the High Court's judgment, making three observations:

"First, only to the extent that the policy restricts its options should the policyholder be deprived of its control over repair, rebuilding or sale of its property. Second, once it is established that the insurer must pay the full measure of loss, it should be indifferent to the policyholder's decision about how to reinstate the property. Third, until that point the insurer has a direct interest in how the claim is settled, since that decision will determine how much it will pay."

The Court of Appeal therefore decided that the homeowner has the ultimate right to decide what to do with the property, and that if the house is not economically repairable it is not up to Tower to choose the basis of settlement. The insured is the one who can chose whether to rebuild on that site, rebuild on another site, or buy another house.

The Court of Appeal then considered the correct way to calculate the amount payable for the purchase of another house. The High Court had said that if the insured was going to purchase a new house, then it should be comparable to the one being replaced. The Court of Appeal disagreed, and said that:

"The amount payable by Tower if Skyward buys another house is not subject to any other limitation. In essence, the policyholder is not obliged to choose a house of comparable size, construction, condition and style as its existing house once it is agreed that its existing house is damaged beyond economic repair."

The only limitation in the policy was that the cost of buying another house must not be greater than the cost of rebuilding the house on its present site.

Tower then appealed this decision.

Supreme Court decision

The Supreme Court noted that Tower had, pursuant to the policy, the option to make payment, rebuild, replace or repair the house, and in this case it was common ground that Tower has elected to make payment. They also recorded that:

"We note in passing that the assumption of the parties is that under option (c), 'the cost of buying another house' refers not to the price paid by the insured for the land and house but rather only that portion of the price which is referable to the house. We have not been asked to determine whether this assumption is correct."

The Supreme Court then went on to consider the main issue before it, how the amount payable by Tower is to be calculated. They noted that the insurance policy is for full replacement, on a new for old basis. They remarked that:

"The availability of such policies reflects a recognition that a traditional indemnity value policy may not provide sufficient funds to enable a damaged building to be repaired or rebuilt given that such exercises will require new materials and compliance with current building standards which may be more stringent than those in place when the building was constructed."

The Supreme Court then stated that these full replacement policies create a "heightened moral hazard", because an insured may obtain more than indemnity value for the damaged property and may therefore profit from the loss, and that as a result the "incentive for carelessness and fraudulent claims is thus greater than in the case of an indemnity value policy". They went on to say that the insurance policy generally mitigates the risk of the moral hazard, through mechanisms such as allowing the insurer the option of reinstating the house.

In this case, the Supreme Court decided that Tower had used its policy to manage the moral hazard using the mechanisms available, and:

"These come down to its entitlement to reinstate the house or, where it is not prepared to do so, to pay no more than indemnity value except by way of reimbursement for expenditure actually incurred. Once Tower has opted to make payment, its obligations are solely monetary in character and, providing the insured actually incurs the expenditure for which it is entitled to reimbursement, Tower should be indifferent to the mechanism by which Skyward triggers its right to replacement value recovery."

The Supreme Court therefore confirmed the decision of the Court of Appeal, saying that:

"we are satisfied that in a case where a house is damaged beyond economic repair and where Tower has decided not to rebuild or replace the house, Tower's payment obligations... are determined by the choice which the insured makes as to whether to rebuild the house or replace it on another site or buy another house."

The Supreme Court also rejected any suggestion that any house purchased as a replacement must be comparable to the existing house. They noted that if that was a requirement, Skyward would need to find a comparable villa build in 1900, and:

"The practical implications for Skyward (and indeed any insured) of such an approach are obvious. It may be that a house which is comparable to the insured house may not exist. If this is so, Skyward can be denied replacement value recovery during a vain search for such a comparable house. As well, given the impressionistic nature of the envisaged exercise, there would be scope for much debate as to whether a house identified by Skyward did in fact satisfy the test. Such debate could no doubt ultimately be resolved by the courts but this would be a time consuming process which might not be able to be concluded before the house in question was sold to someone else."

They therefore said that:

"we are of the view that if the insured chooses to buy another house, the only cap on the cost that Tower must meet is that it will not exceed the cost of rebuilding the insured house at its present site and there is no requirement that the house which is bought be "comparable" to the insured house."


In the Court of Appeal it was noted, in discussions regarding the cost of constructing special foundations for a house in the red zone, that:

"Mr Campbell QC accepts, following the judgment of Asher J in O'Loughlin v Tower, that Skyward is not entitled to claim that cost in circumstances where it will not in fact rebuild in the red zone."

The Court of Appeal therefore decided that Skyward is entitled to purchase a new house, up to the value of the cost of rebuilding the existing house, but excluding the cost of the special foundations that would have been required for a red zoned property.

There was no similar proviso included in the Supreme Court's decision. Instead, they have specified that "if Skyward buys another house, Tower must pay the lesser of the cost of the house or the cost of rebuilding the insured house on its present site", with no reference to foundations.

Counsel in the Supreme Court raised the fact that the O'Loughlin decision referred to above does not sit well with the Court of Appeal's more recent judgment in Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2014] NZCA 483, which decided that it is irrelevant whether the rebuilding will take place, and that what is required is an assessment of the costs that would be incurred if the rebuild were to occur.

The issue was raised in passing before the Supreme Court, but was not a specific issue that was open for them to determine, or on which they heard detailed argument. Whether the cost of special foundations is claimable, even where repairs will not actually take place, therefore appears to be a live issue.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Stephanie Grieve
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.