thechristchurchfiasco

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Avonside Holdings v Southern Response [2013] NZHC 1433 – Summary by Sarah

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Background: this case considered a dispute in respect of  a rental property in Avondale, Christchurch, insured with AMI/Southern Response. Both the plaintiff and defendant agreed that the property was damaged beyond economic repair. The homeowner wished to buy another house and the maximum amount to be paid by the insurer was the cost of rebuilding the damaged house on the present site. The property owner had accepted an offer to sell their land to the Crown  so a new house would never actually be built on the site. The parties had agreed a figure between them, however there were differences between the two estimates.  Arrow International was the project manager appointed by the insurer. Because of the different approaches taken by the parties it was difficult to make comparison between the figures. After further discussion they narrowed their differences and what was left in dispute was  the value of the builder’s margin; contingency, professional fees, demolition costs and external works.

Builders Margin: was the sum to be calculated and determined to be the notional cost of rebuilding the house on the site. This was calculated by using estimated rates for each unit of work and accepting that on top of that figure,  a contractor would be likely to add a margin over its actual costs to allow for such matters as overhead costs not reflected in the unit rates, profit and other items.   MacKenzie J. found that this rate was likely to be 10%  on the assessed cost of the rebuild including  preliminary and general items.

He did not consider that a distinction should be made between preliminary items and other items in calculating the builder’s margin and that a large project management group such as Arrow with its ‘ability to negotiate special terms in Christchurch should not affect the true calculation of the cost of a notional rebuild’.

Contingencies: both parties agreed to use the definition in New Zealand Standards 4212, which contains a glossary of building terms in which defined contingency sums ‘are for items, the nature or extent of which cannot be defined otherwise in the contract documents. Such sums are wholly under the control of the architect, engineer or client’s representative administering the works and may be expended or deducted in part or in whole under his/her authority‘.

MacKenzie J. did not consider it appropriate to include a contingency allowance in calculating a notional rebuild cost and stated that there can by definition be no unexpected items as the house will never actually be built. Instead, what was required was the best assessment of the cost of rebuilding, based on all known circumstances.  In essence there is no need to add contingencies to reflect possible contingencies which will never be encountered.  So no allowance for contingencies was made for this ‘notional’ rebuild.

Professional Fees: this sum includes the fees which are likely to be incurred in professional services which are required in the designing of a replacement house, obtaining consents and supervising construction. The Judge considered that the amount to be calculated should reflect the ‘likely cost of those fees which will be necessarily incurred’. He did not consider that this should include other professional fees that the homeowner may choose to incur, making the distinction that not every home is architecturally designed. He noted that in some cases the insurance policy deals with some professional fees differently.  He awarded ”an appropriate estimate of the fees for items which would be necessarily incurred in the notional rebuild”.

Demolition Costs: The question arose as to whether the cost of demolishing a house should be allowed for a notional rebuild to allow for rebuilding on the site.

The property owner had accepted an offer to sell their land to the Crown  which meant that the property owner no longer has responsibility for demolition costs – and the policy obligations of insurers to demolish buildings would continue to be subject to discussion between CERA and insurers. Consequently demolition costs were not awarded by the Judge as the site was no longer in the ownership of the property owner.

The costs of a notional rebuild fix the maximum sum to be paid by the defendant towards the cost of buying another house.  Costs ‘must not be greater than rebuilding your rental house on its present site’.

External works: while both parties accepted that the house is a total loss they agreed that some of the external work items could be repaired or incorporated into a new house if it were  built to the same design on that site e.g. fences, walls and driveways.  The external works often form part of the insurance policy definition of  the property and are covered by the policy so that damage to those items is to be taken into account in deciding whether the house is damaged beyond economic repair – it must be assessed on a ‘global basis’ and an item by item assessment is not necessary.

However, if an owner chooses the cost of repairing external works which are repairable and reusable, then the cost of rebuilding the house on its present site can require an item by item assessment.  The Judge considered the appropriate analysis was that rebuilding the house could include incorporating into the rebuilt house external works which are capable of repair to an ‘as new condition’ and therefore the assessment of the cost of a notional rebuild can similarly take into account their possible reuse.

I think that this is a useful case for assisting with decisions concerning the reimbursement for ruined properties in the red zone and possibly beyond.

Author: Sarah Miles

Trained as a lawyer, psychotherapist and mediator. My goal is to make my voice heard for the causes in which I believe so as to improve and contribute to a more sustainable and equitable society. I believe in the enormous power of the human spirit and the power within each of us to effect major change. "The only triumph over evil is for good men [and women] to do nothing". https://thechristchurchfiasco.wordpress.com/

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