Medical Assurance Society of New Zealand Ltd v Michael Charles East, Jane Louise East and Ingrid Robyn Taylor  NZCA 250
This is an appeal from the High Court's judgment in East v Medical Assurance Society New Zealand Ltd  NZHC 3399. The Easts own a home in Merivale, Christchurch, which was damaged in the earthquakes. They have advised MAS that they wish to restore their home.
The High Court
In the High Court, the Easts sought a number of declarations relating to the timing of when MAS needed to make payment to the Easts, and the extent of work required to restore their home.
The policy provides that MAS:
"will cover the cost of rebuilding or restoring the dwelling to a condition substantially the same as new, so far as modern materials allow, and including any additional costs which may be necessary to comply with any statutory requirements or Territorial Authority by-laws
if you elect not to rebuild or restore the building we will make a cash settlement not exceeding the indemnity value as assessed by a qualified valuer."
MAS claimed that it was only obliged to make payment to the insured when the costs are actually incurred. However Justice Whata decided that:
"if the Easts elect replacement value cover, MAS is obliged to pay compensation provided the amount claimed is necessary to cover the reasonable cost to rebuild or restore the dwelling... Liability to make payment is not conditional on the costs actually having been incurred."
Justice Whata also decided that the insurer's obligation to rebuild or restore the house to a condition "substantially the same as new" means that it must be rebuilt or restored to the standard of a new dwelling built today, not to the standards of 2007, when the house was built.
The final decision on the quantum of the claim was reserved, because there were problems with the calculations for the repair estimates, and also because a building consent needed to be obtained to determine the repair methodology for the foundations. In the meantime, MAS appealed Whata J's declarations.
The Court of Appeal
The issues on the appeal are:
- whether the words "cover the cost of" rebuilding or restoring a dwelling oblige the insurer to pay to the insured the cost of repairing damage irrespective of whether liability to incur those costs has been or will ever be incurred; and
- whether the insurer's obligation to rebuild or restore the dwelling to a condition "substantially the same as new" requires that the dwelling be rebuilt or restored to the standard of a new dwelling built today.
Timing of payment
Justice Harrison, giving the judgment for the Court of Appeal, noted that the policy gave the Easts the right to elect between two distinct courses, and that these resulted in different obligations for MAS. If the Easts choose not the restore the house, MAS must "make a cash settlement", whereas if they do restore, MAS must "cover the reasonable cost". He decided that:
"The composite phrase 'will cover' expresses MAS' undertaking to provide sufficient funds to secure or indemnify the Easts against liability to pay the rebuilding costs when they are incurred. It is simply shorthand for the longer phrase: 'indemnify the insured against'."
Justice Harrison went on to say that:
"MAS' reinstatement clause reflects an insurer's orthodox obligation to indemnify against a liability where the insured party elects to rebuild, not to pay out money where the insured has not incurred and may never incur a liability to meet the cost of restoration. It agrees to cover the cost, not an estimate of it, and the cost is not and will not be known until, at the least, liability to pay for the work is incurred."
He also noted that on a general basis this was the appropriate course of action. He said that:
"if MAS was bound to pay the Easts the amount of a reinstatement estimate before incurring any liability, it would be powerless to prevent them from applying the funds for some other purpose. For example, the Easts may never rebuild or restore but obtain by this means payment of an amount equal to replacement value contrary to the policy limitation to indemnity value."
The declaration made in the High Court was therefore set aside. When the house is being rebuilt or restored, MAS is not required to make payments until liability to pay for the work is incurred.
What is "substantially the same as new"?
In the High Court, Whata J decided that a house which is rebuilt or restored to "substantially the same as new" must be in accordance with the current building consents. The Court of Appeal agreed with this, saying:
"in ordinary language the phrase 'as new' where used to require the rebuilt or restored condition of the house is a quality standard, not a temporal standard."
Justice Harrison also noted that:
"There is no rational basis for reading down the Easts' right to limit it to the compliance costs with local authority requirements in 2007, not 2015 when the restoration work is to be carried out."
The Court of Appeal therefore upheld the High Court declaration.
A copy of the decision is available here.
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