This is an appeal from the High Court's decision
Avonside Holdings Ltd v Southern Response Earthquake Services
Ltd  NZHC 1433, which we have previously summarised.
This decision concerned whether certain amounts should be
included in the calculation of an amount for the nominal
(hypothetical) rebuild of a house.
The plaintiff's rental property at 1146 Avonside Drive was
damaged beyond economic repair in the earthquakes. It was also
red-zoned, effectively preventing the plaintiff from rebuilding the
house on its existing site. The plaintiff elected, under its
insurance policy, to purchase another house. The policy provided
that Southern Response would:
"pay the cost of buying another house, including necessary
legal and associated fees. This cost must not be greater than
rebuilding your rental house on its present site."
The issue between the parties is whether certain costs are
included in the cost of rebuilding.
The High Court judgment considered five different categories of
professional fees; and
The decisions in relation to the last three of these categories
are the subject of this appeal.
Contingencies and professional fees
The Court of Appeal noted that the rationale for excluding
contingencies is that because the house will not actually be
rebuilt, contingencies will not be incurred, and so should not be
included in the notional cost of rebuilding. However, they decided
"it is irrelevant in the present context that rebuilding
will not take place: what is required is an assessment of the costs
that would be incurred if rebuilding were actually to occur...
costs cannot be excluded merely because the rebuild is not going to
happen and costs will not be incurred."
They went on to say that:
"the cost that is payable as part of the required notional
exercise – here under cl 1(c)(ii) – is the cost that
would actually be incurred (whether as a component of full
replacement cost or in terms of matters covered by additional
costs) to rebuild the house on the existing site. Thus items such
as contingencies and professional fees cannot be excluded on the
basis that they will not, in fact, be incurred because it is a
notional cost that is being calculated."
Contingency sums and professional fees should therefore be
included when calculating the cost of rebuilding a house.
The property also had fences, walls and a driveway which were
all damaged, but which would have been repairable rather than
requiring complete replacement if the house was to rebuilt on the
In the High Court, MacKenzie J said that since the existing
external works could have been re-used, that should be taken into
The Court of Appeal agreed, and said:
"The cap on Southern Response's liability is the full
replacement cost approach to rebuilding the Property. If in that
rebuilding process, an "as new" property can be produced
by repairing or reinstating external works rather than rebuilding
those items from new, then we consider that is the way the cap is
to be calculated.
We acknowledge that, where an insured chooses the option of
buying another house, he or she will receive a lesser benefit in
respect of external works that could be repaired and reinstated. In
the normal course, that would no doubt be a matter the insured
would take into account when deciding which option to take. The
fact that, as a matter of practicability, the option of rebuilding
on the site was not available to Avonside does not, in our view,
call for a different interpretation of the Policy."
The cost of repairing the external works (where that is
possible) may therefore be used in determining the cost to rebuild,
rather than the higher cost of replacing those external works.
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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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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