New Zealand: Judgment summary - judicial review - Michalik v Earthquake Commission (EGC)

2014] NZHC 2238

This decision is not an "earthquake judgment", but will have implications for a number of earthquake claims.

The facts

Mr Michalik owns a residential property in Highbury, Wellington. It suffered a small landslip following a significant rainfall in July 2012, and a small retaining wall collapsed.

It is common ground that the existing retaining wall was neither reinforced nor drained, and did not comply with modern Building Act 2004 requirements. The replacement of the existing retaining wall with a wall that complies with relevant regulatory requirements would result in a replacement wall that was not only new, but substantially better than its predecessor.

There is a dispute between Mr Michalik and the Earthquake Commission (EQC) regarding the valuation of Mr Michalik's claim. This proceeding was a judicial review of EQC's decision.

EQC's position

EQC obtained a report to assess the extent of the damage to the land and the retaining wall. It found that the total area of damaged land, or land that was at imminent risk of damage was 9m2. It also found that a 5.5m2 area of the face of the retaining wall was destroyed, and another 1m2 area of the surviving portion of the wall was at imminent risk of further collapse.

A solution for the reinstatement of the retaining wall was costed at $23,694.61.

EQC then also instructed a valuer to value the damaged land and retaining wall. The valuer produced a valuation for the damaged portion of land at $4,050, and an indemnity value for the damaged and imminent risk portions of the retaining wall at $3,130, giving a combined valuation of $7,180. The valuation for the retaining wall was determined as a "depreciated replacement cost". This was calculated by estimating the present day cost of building the same wall (not a modern version to comply with current building codes), and applying a straight line depreciation based on a useful life of 80 years.

EQC says that it is liable to Mr Michalik for $6,462, being $7,180 less the 10% excess.

Mr Michalik's claim

Mr Michalik says EQC is required to meet the full cost of replacing the retaining wall with a wall that complies with relevant regulatory requirements.

The High Court

In determining EQC's liability, Justice Williams began by looking at the Earthquake Commission Act 1993 (Act). He noted that sections 18 and 20 dealt with residential buildings and personal property respectively. These sections provide that the building or property is insured for their "replacement value", which is a defined term in the Act.

In contrast, retaining walls fall within the definition of residential land (in paragraph (e) of the definition in section 2(1)), so that the entire claim in this instance is under section 19 of the Act.

Section 19 states:

19 Residential land

Subject to any regulations made under this Act and to Schedule 3 to this Act, where a residential building is deemed to be insured under this Act against natural disaster damage, the residential land on which that building is situated shall, while that insurance of the residential building is in force, be deemed to be insured under this Act against natural disaster damage to the amount (exclusive of goods and services tax) which is the sum of, in the case of any particular damage:

  1. The value, at the site of the damage, of:
    1. If there is a district plan operative in respect of the residential land, an area of land equal to the minimum area allowable under the district plan for land used for the same purpose that the residential land was being used at the time of the damage; or
    2. An area of land of 4000 square metres; or
    3. The area of land that is actually lost or damaged
    4. whichever is the smallest; and

  1. The indemnity value of any property referred to in paragraphs (d) and (e) of the definition of the term "residential land" in section 2(1) of this Act that is lost or damaged.

Justice Williams noted that:

"the effect of s 19 in light of the small area of land involved in this case, is that EQC is liable to meet a claim for the actual area of land lost or damaged together with the "indemnity value" of the retaining wall".

There is no definition of "indemnity value" in the Act. Mr Michalik claimed that the circumstances of retaining walls are such that they are "permanent, passive structures with an indefinite life span", and that the indemnity value should be taken to mean replacement value. He provided no expert evidence in support of his contention that the life span of a retaining wall was indefinite, which was contrary to the views of EQC's two experts, both of whom said that 80 years is an appropriate estimate.

Justice Williams decided that:

"Sections 18 and 20, dealing with residential dwellings and personal property respectively, each provide for replacement cover calculated in accordance with the relevant formulas up to a stated cap. Residential land is calculated according to "value", subject to the restrictions contained in s 19(a). It is only bridges, culverts and retaining walls that are covered to indemnity value. Indemnity value and replacement value must necessarily be different things."

He went on to say that:

"indemnity value is the actual loss suffered, not the cost of new for old if that involves more than the actual loss. The relevant value can only be the value of the item immediately before loss or damage taking into account its age and condition and therefore its likely remaining life. Depreciation is a useful proxy for those factors."

Justice Williams therefore decided that the methodology used by EQC to determine the value of the damaged portion of the retaining wall was appropriate. The application for judicial review was dismissed.

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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Stephanie Grieve
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