Judge: Gendall J
Background: The Routs owned a property in Brooklands, a single storey dwelling. The property was damaged by the earthquakes and was red zoned in July 2011. They sold their land to the Crown. They brought proceedings against Southern Response for full replacement cost of the home. The dispute revolves around the severity of damage to the property. The property had sunk in places some 59 millimetres and there was evidence of lateral movement as well as cracking in the foundation (though a full inspection had not taken place because of floor coverings). Up until February 2013 Southern Response had deemed the house to be uneconomic to repair and that the house would be demolished and rebuilt. In July 2012 the Routs had their own expert value the rebuild at $548,000.00 (aprox.) Southern Response rejected this and offered to settle with them at $443,000.00 (aprox.) and then $453,000.00(aprox). Unsuccessful negotiations ensued and in March 2013 the Routs issued proceedings against Southern Response claiming rebuild costs of $760,000.000. At the hearing they indicated that the total rebuild costs were now in excess of $1.29 million.
a) does the fact that the Rout’s property is in the red zone give rise to a claim under their policy?
b) was their property repairable (either actually or notionally) under the policy and if so was the sum appropriate?
c) if the house was not repairable what are their policy options? and what is the appropriate final figure?
d) has a choice under the policy been made?
e) if Southern Response is in breach of its contractual obligations are the Routs entitled to general damages?
His Honour Gendall J found:
a) the creation of the red zone does not give rise to a claim under their policy. The designation ‘red zone’ does not automatically require that the house be physically altered or repaired. The house was habitable and had all major services functioning.
b)Southern Response’s position changed from stating that the house was uneconomic to repair to a case of ‘simple repair’. The Judge found that the house was uneconomic to repair and the insurers offer to repair the foundation using low mobility grout meant that they may have breached their obligations under the policy. Evidence presented indicated that the house may have been economically repairable but the proposed method of repair might likely present issues later on. (ie- a continuing contingent liability) He went on to state “it might be said that almost every house which has been the subject of damage in an earthquake can be ‘repaired’. But of course, this is at a certain cost, and does not answer the question whether it is ‘economic’ for that repair to be taken.”
The repair must be to an ‘as new’ condition which is to be measured ‘by size, functionality, relative quality, and reasonably addressing the re-creation of character and appearance‘. In addition to the ‘as new’ requirement consideration must also be taken to the fact that no detailed testing of services was carried out, because the house had been red zoned it was likely that they would incur additional costs for onsite water tanks and water disposal systems, no deep soil testing had been undertaken and a further contingency for undiscovered risk factors was required. The Judge stated that if the cost of repairs totalled more than about 80% of the actual assessed rebuild cost then the repairs would be considered uneconomic.
c) the Routs had not made an election as to whether to rebuild on the same site, accept a cash offer or rebuild on another site etc. due to the dispute over the quantum. Any payment made was to be on the basis of the cost of rebuilding on a good site, as the Routs had chosen not to repair or rebuild on their existing site. No specific replacement proposal was concluded. In light of that, an earlier estimate provided by a building firm was used as the benchmark for the costings and an addition sum of $5000 was added to account for engineering, architectural and other professional fees included as well as a 10% contingency.
d) the Judge stated that Southern Response was wrong in its insistence that their home was no longer a rebuild and their decision was ‘not properly established’ and that the insurers offer which was based on a repair using Low Mobility Grout may not have met its contractual obligations. The Rout’s were not however entitled to claim for the substantial extra foundation cost for a rebuild on another site. It was determined that the Rout’s were entitled to $673,000.00 minus their EQC over cap payment.
e) the Judge considered that the Routs’ house would require the lifting of the floor foundations and despite the expert for Southern Response claiming that raising the house was effectively repair of damage to the Routs’ land and not their home and therefore should be dealt with through the Land Damage claim and EQC. The Judge disputed this stating that ‘foundations are a vital and fundamental part of any house or structure. The “house” definition in the policy here clearly must included its foundations – it is nonsensical to suggest otherwise’ setting a precedent for homes to be lifted up to at least their original height – in this case the floor would have to be relevelled by 59mm and then raised by 148mm.
f) the Rout’s claim for general damages on the basis that Southern Response’s conduct has been unacceptable on them both personally, emotionally and mentally. While the Judge stated that there is no doubt that the Rout’s have suffered stress and anxiety as a result of events, the case for general damages is inappropriate as by persisting with their negotiations, both parties knowingly and willingly contributed to the length of time taken to process the claim. Southern Response’s actions ‘here in a number of ways invited some criticism‘ including the time taken to process the claim (nearly three years). Southern Response changed its position constantly, as well as its decision to instruct its experts to consider and report on only the capacity of the site for a foundation repair, the contention that Southern Response and/or Arrow were ‘deceptive to an extent in confirming their inclusion in their costings of some minor items in the Routs’ house which later proved not to be the case may well need further explanation‘. Likewise, the Routs’ advisors persisted on pursuing a quantum of $1.2 million and then withdrawing any possible supporting quantum evidence. In addition they failed to declare an earlier estimate from a building company. All these matters led to a claim for general damages being rejected.
g) Costs were reserved.
O’Loughlin v Tower Insurance Limited NZHC 670.
Avonside Holdings Limited v Southern Response Earthquake Services Limited  NZHC 1433.
So in conclusion in my opinion it would be wise to note that you must be able to absolutely justify everything you ask the Court for with good evidence and also that the ‘low mobility grout repairs to foundations’ are beginning to be seen by the Courts for what they are – a continuing contingent liability. So if you are going to sign ‘full and final settlement’ terms – this is one I would personally look out for.
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