NZCA 483, (2014) 18 ANZ Insurance Cases 62-040
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 costs:
- builder's margin;
- demolition costs;
- professional fees; and
- external works.
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 that:
"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 current site.
In the High Court, MacKenzie J said that since the existing external works could have been re-used, that should be taken into account.
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.
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