This recent earthquake judgment considers three issues:
- do the specified building materials and construction methods comply with the policy, particularly given the heritage qualities of this home;
- are the cost allowances for matters such as contractor's margins and professional fees appropriate in terms of a high-value house; and
- how should an entitlement be altered by a significant under insurance on the size of the house.
Mr Myall owned a house called Riverlaw, a recently renovated and refurbished eight bedroom and six bathroom home, registered with the Historic Places Trust as a historic place. The house was significantly damaged in the September 2010 earthquake, and further damage in the February 2011 earthquake left the house not feasible to repair and unsafe to enter. Riverlaw was demolished in 2012.
Mr Myall had insured Riverlaw with Tower Insurance, under the Super Maxi Protection Policy. He had advised Tower that the floor area of the house was 650m2, and it was this floor area that Tower used to calculate the premiums. However, the quantity surveyors have now found that Riverlaw was 799m2.
Building materials and construction methods
Mr Myall and Tower disagreed over the methods that would be used to rebuild the house, with Tower planning to substitute modern, and cheaper, specifications for certain aspects of the rebuild, while Mr Myall considered that Tower's primary obligation was to rebuild the home as far as possible to the original specifications.
Justice Dunningham confirmed that:
"the primary obligation is to meet the cost of rebuilding the house 'to the same condition and extent as when new'. Despite the plaintiff's submissions, I consider that on a plain reading, these words allow some tolerance from a requirement to build the house to the exact specifications as when new. The word 'extent' clearly means a house built to the same size, and providing the same facilities, as the original. The word 'condition' imports both the state of being 'as new', and the quality of the building at the time it was new. In my view, the primary obligation allows some tolerance from building something which is identical to the original building, because it only requires Tower to achieve the 'extent and condition' of the house when new, rather than to rebuild to 'as when new'. As a consequence, the wording of the primary obligation in the policy imports the notion of rebuilding something which is equal to, but not necessarily identical to, the original building."
Justice Dunningham decided that certain elements which could not be substituted, such as the pressed zinc ceilings, must be installed, despite the much higher cost that standard plaster ceilings. However, elements which can be replaced with a more modern system can be constructed in that way. This included the construction methods for both internal and external walls, and timber surfaces which could be polyurethaned rather than waxed. In respect of the chimneys, which could no longer be used because of the prohibition on open fires, Dunningham J said that:
"I do not consider it reasonable to require the insurer to recreate an entirely redundant chimney system at significantly greater cost than a lightweight replica chimney structure. I consider that the policy allows the insurer to make such a judgment."
Margin and professional fees
While margin and professional fees have been canvassed in previous earthquake judgments, in this case the expert evidence differed in some respects because of the high value of the property.
Mr Myall's expert suggested that the contractor's margin should be 12 per cent because the rebuild of a heritage home would require a higher level of skills. Justice Dunningham however agreed with Tower's expert who said that the standard rate of 10 per cent would still be suitably attractive for a suitably qualified and experienced contractor.
For professional fees, while both experts initially used a rate of 15 per cent, Tower's expert later moved away from a flat percentage, and assessed an allowance for the architectural, engineering, surveying and landscaping fees, noting that "once the costs reach into seven figures, particularly above $2 million, using 'rule of thumb' percentages is not appropriate. The amount of work... does not simply increase in lockstep with construction costs". Justice Dunningham decided that Tower's expert was not shown to be wrong or unreasonable, and therefore those figures would be accepted.
Mr Myall was underinsured for Riverlaw, as the insurance policy was based on a floor area of approximately 80 per cent of the actual area. Tower's position was that the rebuild amount should simply be adjusted on a pro rata basis to account for this.
Mr Myall claimed that the costs should not be adjusted on that basis, because "it does not reflect the fact that Tower understood it was insuring an eight bedroom, six bathroom home. Many of the costs will remain fixed whether the house is 650 square metres or 799 square metres and Tower should take this into account."
Justice Dunningham noted that:
"The starting point for determining how the adjustment is to be made is to consider what the policy was insuring. Each renewal certificate clearly stated that what was being insured was an owner occupier house, built in 1885, based on 'area square metre 650'. Details such as the number of rooms, including service rooms such as bathrooms and kitchens, were not specified in the policy and I do not consider Tower was contractually bound to rebuild the same number of rooms despite the under-insurance. The primary descriptor of the property was its square area and the premium was calculated on that basis.
Consequently, I do not agree, as Mr Myall's quantity surveyor suggests, that Tower must put to one side costs that are 'not affected by the floor area, such as the number of toilets, showers and doors or the kitchen, vanity units and the like'. To do so suggests that the floor plan must be artificially shrunk, by approximately 20 per cent to accommodate the same number and size of doors, windows, walls, joinery, appliances, bathroom fittings and the like."
Justice Dunningham went on to say that a pro rata reduction may not always be appropriate:
"I accept there will be many other situations where a pro rata adjustment for under-insurance would not be appropriate. For example, it would likely be inappropriate to pro rata the costs of building a 120 square metre house to reflect that the insurance policy provided for replacement of an 80 square metre house. In that situation significantly more of the costs would be for items that were not affected by floor area, such as provision of a bathroom and kitchen. More careful scrutiny of the costs would have to be made in adjusting for errors in insured floor area."
The amount payable for the rebuild of Riverlaw is therefore to be reduced on a pro rata basis.
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.