"Highlighting the inadequacies of the way in which the earthquakes of 2010-2012 were handled by the insurance industry! "

McLean v IAG New Zealand Limited [2013] NZHC 1105 (16 May 2013) – Sarah’s Summary

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The Issue: Whether IAG’s obligations under the applicable policy wording to pay the “present value” of the home, includes an obligation to pay “professional” costs such as architects, engineers, surveyors, building consultants, legal and council fees.
The property damage suffered during the earthquakes was covered by an IAG policy. The property was determined not economic to repair and the plaintiffs did not wish to rebuild the property, either at its current location or at an alternative site. The plaintiffs were entitled to a cash payment under the policy is on a “present value” basis.

The plaintiff (McLean) contends that ‘present value’ means “the reasonable cost to replace…” which should include reasonable costs to design and build a replacement, including any applicable architectural, engineering and other fees normally associated with replacing the destroyed home.

The defendants (IAG) responded: the policy indemnifies the insured for physical loss – and unless clearly expressed otherwise, an insured is indemnified for loss, and is not entitled to make a profit from the insurance. If the insured rebuilds, the insurer will, as an added benefit, pay professional costs if such costs are reasonably and necessarily incurred. But because the plaintiffs will not rebuild the house those costs will not be incurred. Therefore payment of professional costs in those circumstances is illogical, and would result in a windfall. IAG also argued that the approach taken by the plaintiffs would introduce artificiality i.e. an assessment of hypothetical professional costs instead of a straightforward notional assessment of the costs of the physical replacement of the property less depreciation. Depreciation cannot be sensibly quantified when professional fees are included within the replacement cost quantum.

Judgment: IAG’s obligations under the applicable policy wording to pay the “present value” of the home, includes an obligation to pay “professional” costs such as architects, engineers, surveyors, building consultants, legal and council fees.

Reasoning: The “present value of the home” includes all reasonable costs to replace it, including relevant professional fees. Present value is defined as the reasonable cost to repair or replace, less an allowance for depreciation based on age, condition and deferred maintenance.
Replace has been defined elsewhere as “to put back in place, to take the place of, succeed, be substituted for or provide substitution”. The reasonable cost to replace a home would normally involve professional fees and other fees and there is nothing to expressly exclude them from “reasonable cost”. The words used strongly suggest that professional fees are covered for the purpose of the assessment of present value. Accounting only for the cost of physical works would not achieve that objective.
The cost to replace the home is the agreed measure of the present value. There is no unanticipated windfall to the insured by including professional fees, provided that they would be necessary to replace the home.

Cited Cases:
Anderson v James [1908] 28 NZLR 34 at 42;
Kerr & Kerr v The State Insurance General Manager [1987] NZHC 4; (1987) 4 ANZ Insurance Cases 60-781.
Turvey Trustee Limited v Southern Response Earthquake Services Limited [2012] NZHC 3344.
O’Loughlin v Tower Insurance Limited [2013] NZHC 670
Vector Gas Limited v Bay of Plenty Energy [2010] 2 NZLR 444 (SC), per Tipping J at [19]
Chemainus Properties Ltd v Continental Insurance Company [1990] ILR 1-2574, 43 CCLI 146 (BC SC) at [16]-[17], cited by Dobson J in Turvey at [15].
Spina & Spina v Mutual Acceptance (Insurance) Ltd (1984) 3 ANZ Insurance Cases 60-554 at 78,346.

Author: Sarah-Alice Miles

Love to write, create and watch the clouds move across the sky - these days in the Netherlands. 'Art allows us to find ourselves and lose ourselves at the same time'.

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