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

East v Medical Assurance Society New Zealand Limited [2014] NZHC 3399 [22 December 2014]

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The East’s home, a two storey dwelling, was damaged in the earthquakes, they had full replacement cover,  and they wished to repair seeking payment in advance of the works. However MAS would not pay until costs were incurred or about to be incurred. The notion of  to  an “as new” condition also arose. The East’s experts considered that re-levelling the home should be considered. MAS experts recommended grout injection which is a considerably less expensive option.

Unfortunately there was also a dispute about which if the MAS policies applied. The Judge accepted MAS’s evidence in this respect.


At common law the obligation to indemnify arises when the loss is suffered and the policy provided that it would ‘compensate’ the insured for their loss. “It is not logical for the policy to expose the insured to significant liability (including for the works and any borrowing if needed) when the obligation to pay replacement value is not disputed. MAS’s approach amounted to a ‘wait and see’ approach in relation to the low mobility grout (LMG) working as a repair and being acceptable to the Council – if it is then incur the costs with payment to follow.

The Court held that the objective of the policy is to compensate the East’s for their loss or costs; that is to hold them free from harm including the cost of repair and that the liability arises once the qualifying damage event has taken place. And the quantum of the replacement value is not based on the incurred costs of the rebuild or restoration but is objectively assessed and be no greater than the reasonable cost to rebuild. There was no mechanism in the policy for an incremental assessment and approval of costs by MAS e.g. approving invoices before they were paid. There was also held to be nothing in the policy to allow MAS to fetter their compensation in any way.


The Judge stated “I also accept that a condition of replacement value compensation is that the Easts must elect to rebuild or restore their home. That is a strict pre-condition of the replacement value compensation.” However he did not see that MSA’s obligation to pay is only triggered when the costs are actually incurred or just about to be incurred. Nor should MAS have the right to approve every invoice. The easts should be in a position to pay for the cost of a rebuild before it takes place. He goes on to state that he does not see that paying the replacement value of the property to the homeowners is a windfall to them because the agreement to compensate for loss and replacement value is the measure of the compensation. The Easts paid a premium commensurate with the replacement value and so are in no better position in money terms until the rebuild or restoration has occurred. If the insurer had wanted to guard against this then it should have done so in clear terms in its policy. Liability to make payment is subject to the Easts election which is enforceable and actionable for breach. So liability to make payment by MAS is not conditional on the costs having been incurred.


The policy states that the home is to be restored to “a condition substantially the same as new so far as modern material allow and including any additional costs which may be necessary to comply with any statutory requirements”. MAS argued that the standard to which the property was to be repaired was “as new in 2007” but the Court disagreed, saying that “as new” naturally implies rebuild or restoration of the home in accordance with contemporary  and statutory standards accepting though that this does not mean completely new but an approximate standard.  The Judge also held that a specific engineering solution would be required to restore the house to a “substantially the same as new’ condition must comply with the Building Code requirements.


The foundation repair was assessed in terms of the MBIE Guidelines which the Judge adopted, despite the fact that these are Guidelines only. There was debate between the experts relating to the significance of the outputs from the MBIE evaluations. The site was subject two several reports and the experts were unable to agree on the repair methodology or the soil properties used to assess the capacity of the existing foundation system and bearing capacity. Evidence was heard from geotechnical engineers, civil and structural engineers and evidence as to the cost of repairs by quantity surveyors.

The differences in quantum between the parties was considerable arising from differences in annum increase in costs, deconstruction and reconstruction costs, labour rates for painters, P&G margins and the percentages allowed for professional services. There were significant errors found in the costings and consequently the quantum would have to be revisited.

B1/VM4 of the Code states that “foundation design should limit the maximum probable differential settlement over a horizontal distance to 6m to no more than 25mm under serviceability limit state load combinations”. Owners are statutorily required to ensure that “building work carried out by the owner complies with the building consent or if there is no building consent with the building code”. The Judge held that “substantially the same as new” means that on the balance of probabilities that the foundation works proposed are necessary to restore the building to meet the Building Code standards, including B1/VM4 maximum probable differential standard and AS/NZS1170 Structural Design Actions deflection less than 1 in 300. He concludes that underpinning of the property is necessary because of differential settlement, the floor slope exceeds MBIE Guideline recommendation, the ground fails to meet the NZS3604 definition of good ground and the site is classified as TC3 as well as the load bearing capacity of the soil and its limitations.

This Case is currently on Appeal.



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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