This was a 107 page judgement so the Summary is longer.
Counsel : GDR Shand and A Ferguson for Plaintiff
BA Scott, K Millanrd and N Bruce-Smith for first defendant
CR Johnstone and A Shaw for Second Defendant
The Kelly’s owned a 100 year old property (132 m2) in Burwood on TC3 land in Christchurch. The building was timber construction with weatherboard cladding and timber subfloor framing on a mix of bluestone, concrete and timber piles. The property included an adjoining deck which had had alterations over the years. Southern Response Earthquake Services Limited (Southern) insured their home and it was to provide cover for loss or damage not covered by the Earthquake Commission (EQC).
The Kelly’s lodged claims after the 2010 earthquake. A preliminary assessment lasting two hours was carried out on behalf of Southern and dis-levelment in floors, settlement of piles, cracks in gib, lathe and plaster linings as well as damage to the bathroom floor tiles and shower were noted. The estimated repair was said to be $132,365.00. The Kelly’s lodged another claim after the February quake with both Southern Response and EQC. Extensive damage was reported and the Kelly family vacated the home. Southern then triaged the claim as one likely to be in excess of the EQC ‘cap’. And a subsequent inspection in the form of a repair/rebuild report (DRA) of the property took place on 31 Aug 2011. In Arrow’s (Southerns PMO) opinion the repair would be uneconomic and recommended the house be rebuilt.
In July 2011 EQC carried out its initial assessment and considered the damage from both earthquake events. Their suggested repair strategy involved lifting and re-piling part of the house at a cost of $106,441.67. At this stage EQC apportioned the earthquake damage to be 12% arising from the Sept quake and 88 % from the February 2011 event.
Because of the conflicting view an on-site joint meeting was held between EQC and Southern. After that meeting it was held that the damage could be repaired by “jacking and packing” damaged piles and was likely to cost less than the EQC ‘cap’. Southern’s assessor reassessed the property as then being economical to repair under a revised DRA of Feb 2013 with the cost of repair work being $81,813.33 including GST. And the building was passed back to EQC’s home repair programme and was now the responsibility of Fletcher Building Ltd (Fletchers).
July 2013 the Kelly’s disputed EQCs approach and commenced proceedings claiming that the damage to their home exceeded the EQC cap. The Kelly’s file then went through an internal Southern audit and the review team confirmed that it was economic to repair. In August 2013 another full examination took place and it was found that the original DRA did not appear to have taken into account any pre-existing settlement of foundations, pre-existing floor levels or the condition of the house. So the claim would remain under the EQC cap.
The parties engineers were directed to attempt to agree on a scope of works and costing, or identify the areas of disagreement if they could not do so. The experts were unable to apportion the relative contribution of pre-existing and post-earthquake settlement. The engineers signed an agreed scope of works but resolution of the matter did not follow. The costings for the two scopes were very different. EQC costed a new foundation at $45,452.86 for a Type 2A foundation while the Kelly’s received a costing of $548,000. Based on this difference the experts were asked to reassess and complete an analysis of the damage to the house. EQC and Southern then once again revised their opinion coming to the conclusion that there was no evidence that the earthquakes had caused subfloor damage and therefore floor level damage.
Kelly’s claimed that EQC failed or refused to make payment under the EQC Act 1993. They also claim that Southern refused to meet its policy obligations in that they failed to pay for them to settle their insurance claim. They claimed the earthquakes did substantial damage to their home and that the amount was likely to exceed the EQC cap. They sought judgement in the form of money from both EQC and Southern. Both defendants maintained that the damage was minor and capable of repair and questioned whether material alteration to the floor levels was in fact caused as a result of the earthquakes. They also maintained that Kelly’s were not entitled to a sum payment as EQC elected to reinstate their property and not pay cash. The Kelly’s did not challenge EQCs election to repair the house and for this reason their claim is unable to succeed.
There followed discussion on the EQC Act and the insurance policy and that in the event that the earthquake damage was less than EQCs statutory maximum ($100,000 plus GST) Southern’s insurance policy has no application, only if the sums exceed that ‘cap’ does Southern get involved. Cover under the EQC Act applies to the residential building and garage sited on the same property. External works such as driveways and fences are not included and fall outside the EQC statutory scheme. But those items are covered by the Southern policy.
Kelly’s claimed the repair cost would be in the vicinity of $529,845 – $547,930 and a rebuild cost would be $590,996. They submitted that EQC was liable to pay $76,829.48 in respect of Sept 2010 Earthquake and $115,000 in respect of the Feb 2011 earthquake. They sought judgement from Southern for the balance of the rebuild cost being $399,166.
EQC responded by saying it had elected to repair the house and submits that Kelly’s claim for cash cannot succeed. Southern stated that while the damage was below the EQC cap it had no liability under the policy for earthquake damage until EQC pays a ‘cap’ payment for the loss and because EQC had elected to repair the property their obligations under the insurance contract had not been triggered. Southern too had elected to repair any damaged driveways or fences.
Can Kelly’s claim make a momentary claim in the absence of any pleaded challenge to EQC’s election to repair? No, because the Kelly’s failed to attack EQC’s discretionary decision to repair the property. Because the attack was not pleaded the claim is untenable. Because of EQCs election to reinstate the Southern policy is not triggered and therefore they have no involvement in the reinstatement of the Kelly’s home. However part way through the hearing there was another judgement delivered in Earthquake Commission v Insurance Council of New Zealand & Ors  2 NZLR 381 which held that EQC could be sued for money in an ordinary proceeding.
Repair rather than pay cash? The Judge basing his decision on Earthquake Commission v Insurance Council of New Zealand Inc (Full Bench Decision) states that the EQC Act creates contractual relationships to which the ordinary principles of insurance law and practice apply. “While the relationship between the parties is not contractual, it remains nonetheless an arrangement of insurance and, as already noted, ordinary principles of insurance law and practice apply to the EQC scheme”. The Commonwealth courts will intervene in the exercise of a prima facie unfettered discretion so as to give effect to the reasonable expectations of the parties. Contractual discretion will be open to challenge where is can be established that it was not exercised honestly in good faith or not exercised for the purpose for which it was conferred or when exercised in a capricious or arbitrary manner.
A challenge to the exercise of EQC’s discretion must be challenged but the Kelly’s failed to do so. EQC therefore submitted that it could continue to repair but its conclusion is subject to both the validity of the election and whether there has been unreasonable delay in making it. The Judge did not accept EQC’s submission that once it has made an election to repair that no matter how much it may exceed the statutory cap, its decision is immune from challenge. He also noted cl 8 of the Canterbury Earthquake (Earthquake Commission Act) Order in Council (2012) which provides that the order does not limit EQCs discretion under the Act to settle any claim by payment, replacement or reinstatement.
Timing of EQCs election? Issue of delay revolves around the timing of EQCs election to repair the property within a reasonable period of time and not the requirement to settle in a timely manner. Southern proceeded on the basis that election was made in Sept 2014. Kelly’s submitted that the election was made in September 2014 to ‘do physical work”. Judge found EQC’s position to be less transparent and at no point does EQC identify when an unequivocal election was made and chooses for a joint memorandum which the Kelly’s and Southern agree constitutes an election – 6 September 2013. Judge quoted s 29(4) of the EQC Act which prescribed a time limit of no more than 1 year – however this was modified by Order in Council which removed the specified limit. S 29 of the EQC Act states “as soon as reasonably practicable”.
Judge Mander found that EQC had failed to make an unequivocal election and their position was not communicated to the Kelly’s until 17 Sept 2014. However this has to be seen in the context of the unprecedented event and therefore had to make decisions about the order in which properties were repaired. Judge concluded that the question of delay requires an intensely factual assessment in respect of each insured property set against the ‘unique context of the Canterbury earthquake event’. However even under these circumstances he states that it is difficult to see how waiting almost two years to make an election, after being seized of all relevant information is a reasonable time in which to make an election. A purported election in September 2014 came too late as EQC had all the info in October 2012.
The Kelly’s therefore entitled to seek judgement for a money sum, though this is subject to them proving their loss was caused by the earthquakes and proving quantum.
Consequences of unreasonable Delay? Mander J suggested that damages for delay may undermine the fundamental purpose of insurance – indemnity. Under a replacement policy the minimum entitlement an insurer should have where an insurer has failed to discharge its contractual or statutory obligation is payment for the loss they have actually suffered i.e. true indemnity because to do otherwise would be an anathema to a publicly funded scheme of insurance. The plaintiff is entitled to come to court and require EQC to discharge its statutory obligations. But EQC has the right to decide how it will elect to discharge its statutory obligations. However only a reasonable time will be permitted in which the party is able to make an election. Judge considered it appropriate to consider a money relief in response to EQCs failure to elect within a reasonable time.
Resolution of factual issues:
Admissibility of expert opinion? Witness may not give opinion evidence unless it falls within ss24, 25 of the Evidence Act 2006: which asserts that opinion can only be given if the fact finder will find help from the opinion of any fact that is of consequence to the determination of the proceeding. Lack of independence does not render expert evidence inadmissible except in most extreme cases where bias is established. There is nothing to stop employees of a party with the necessary expertise from giving opinion evidence. However a lack of independence may indicate lack of impartiality which will affect the weight of an expert’s evidence. EQC raised objection to the Kelly’s expert evidence as did the Kelly’s regarding EQC and Southern’s expert witnesses. The nature and scope of that relationship is a consideration which can be taken into account when assessing the independence of views of expert witnesses.
Is the floor dis-levelment earthquake damage? Defendant’s argue it is historic and settlement typical of a house of this age. Prior to the break down in joint engineering reporting both parties had agreed there was pre-existing settlement. At trial the defendant’s argued there was no ‘corroborating‘ evidence or ‘objectively ascertainable evidence’. EQC Act defines ‘natural disaster damage’ and the Full Bench Decision observed that natural disaster damage for the purposes of the Act requires physical change or loss which affects the use or amenity of the property. EQC submitted that Kelly’s had to show some physical change but there had to be some practical impact on the utility or value of the house as a result of the natural disaster. The defendants challenge that there has been any physical change to the floor levels as a result of the quakes.
The Inspections and Assessments: Kelly’s placed weight on the early assessments while EQC and Southern state they are not bound by the earlier reports because of more thorough intensive investigations including geotechnical opinion which lead to the conclusion that the earthquakes did not cause the floor dis-levelment.
Defendants argued the need for corroborating evidence in terms of other damage. EQC pointed to the absence of other evidence and pointed instead to evidence consistent with historic settlement –‘hogging’.
Kelly’s evidence regarding the condition of their home and levelness of floors: EQC claimed they had a mistaken impression of what the house was before and what later occurred – a heightened sense of awareness. The Judge did not except the Kelly’s perceptions supported by Southern’s file notes. However he was unable to reconcile the defendant’s expert evidence with the contemporaneous account provided by Mrs Kelly to her insurance company. Mrs Kelly reported damage to the floor on two separate occasions and the Judge was therefore satisfied that the Kelly’s established on the balance of probabilities that the floor was damaged as a result of the earthquakes. He also considered the dislevelment of the floor system to be more than de minimis and that it did have an impact of the amenity and utility of the house and therefore on its value to the Kelly’s and prospective buyers resulting in loss of amenity value and utility of the house.
Did Kelly’s prove a Type 2A foundation is required? Did they prove that it is more than likely than not a Type 2A foundation is required in order for the defendants to discharge their obligations under the EQC Act and the policy and the cost involved? No. The engineer failed to establish that EQCs election to repair the house was unreasonable in the sense that the decision was irrational or untenable.
Relief: It is anticipated that the floor levels can be restored to a condition as required by the EQC Act – namely a condition substantially the same as but not better or more extensive than its condition when new. This would bring the floor into level to within 20-30mm over the span of the house and a difference which would not be observable to the occupier. All experts agreed that this would restore functionality, aesthetic quality, and amenity value to the house.
Mander J found that EQC’s delayed election to reinstate resulted in the Kelly’s being entitled to a monetary award. He concluded that the Kelly’s are not prevented from insisting on a monetary judgement. There are two scenarios open to the Kelly’s – a finite monetary award or EQC agreeing to reinstate and being responsible for the job so long as the cost remains undercap. The cost of the relevelling of the floor has yet to be calculated and will be added to the $53,768.50 for repair of their home. The repair strategy has to be confirmed by a qs. Kelly’s have to choose their option. The content of any order to give effect to this judgment will be based on their decision.