In 2010, soon after the start of Canterbury’s earthquake sequence, the Department ofBuilding and Housing published guidance on the repair and reconstruction of earthquake-damaged houses. These guidelines, now under the Ministry of Business, Innovation and Enterprise (MBIE), were a poorly conceived response to a major disaster. While delivering substantial cost savings to insurance companies, they have left Canterbury with ill-repaired buildings and homeowners deprived of their entitlements.
Although insurers including the EQC have given them quasi-legal recognition, the guidelines are just that: guidance to aid compliance with the Building Act 2004, and not the EQC Act.
Providing guidance on repair and replacement of foundations, chimneys, roof and wall structures, claddings and outbuildings, the guidelines were issued under section 175 of the Building Act. The guidelines state that they do “not relieve any person of the obligation to consider any matter to which that information relates according to the circumstances of the particular case.”
In other words, the guidelines are not mandatory. Private insurance contracts take precedence over their methods and solutions. While they may indicate a fix for damage, they do not override the insurance policy, or the Building Act where damage is above the EQC’s $100,000 cover.
Under Section 18 of the EQC Act any person who takes out home fire insurance is covered by EQC. That insurance is subject to Schedule 3, which states that the EQC has an option to reinstate or replace the property. EQC is not responsible for replacing or reinstating exactly, ‘only as circumstances permit and in a reasonably sufficient manner.’ Anthony Harper’s group legal action examines that standard. EQC’s requirement to replace or reinstate ‘reasonably sufficiently’ is a lower standard than a private insurance policy. IAG, Tower and Southern Response all include phrases requiring reinstatement ‘as similar as possible as when new’ or ‘as new’ in their policies.
While the MBIE guidelines discuss the Building Code, they provide no structural engineering justification for suggested options. ‘Acceptable Solutions and Verification Methods’ is another MBIE publication, which, if followed, results in work that complies with the Code. However, much of the guidelines’ content is not in ‘Solutions and Methods.’ Instead, the guidelines are alternative solutions that apparently provide authorities reasonable grounds to grant building consent. These options, however, do not automatically meet the Building Code’s performance requirements, nor the requirements of the EQC Act, nor the insurance policies’ ‘as new’ standards.
Under the EQC cap the guidelines might provide ‘reasonably sufficient’ standards for rebuild or repair. Where property damage is over-cap, building work standards are established in the insurance policy. Since they are not proven to meet the insurance policy’s ‘as new’ standard, the guidelines should be treated with caution by insurers. They risk the standard of repair or replacement falling below the policy’s contractual obligation. If insurers overlook this key point, a lower cost scope of works will eventuate than when the ‘as new’ standard is applied.
Insurers then have grounds to argue that it is economic to repair rather than rebuild the home. However, if the policy standard rather than the MBIE guidelines are used to scope repairs, that cost often equals or exceeds the rebuild cost. Insurers typically want to cash settle policyholders. Offers costed on an MBIE -scoped reinstatement will differ widely from those following the ‘as new’ policy standard. For those living in damaged homes for more than five years, this gap creates great anguish and leaves them unable to reinstate their homes to an ‘as new’ and Building Code-compliant condition.
The guidelines themselves state that “some insurance policies may require a higher standard of reinstatement than suggested,” therefore recognising the need to take the insurers’ contractual obligations into account. Using the guidelines will not adequately indemnify policyholders for the loss they have suffered, unless they are restored to a position of ‘as when new’ and adhere to the Building Code.
IAG admits using the MBIE guidelines rather than its own policy standard. A brochure it sent to policyholders says: “We use the guidelines issued by the Department of Building and Housing (DBH) in its November 2011 document, ‘Revised Guidance on repairing and rebuilding houses affected by the Canterbury earthquake sequence.’ …The changes in the guidelines mean that a decision to rebuild a house based on an assessment done before November 2011 could change because of revised guidelines now enables it to be repaired.”
Since the guidelines are inconsistent with the full replacement policies, insurers using minimum-quality or minimum cost repair strategies are violating their own contracts. If such a strategy results in quality below the original standard of a dwelling’s construction, then it is legally unavailable for use.
*Kalev Crossland BA, LLB Cant; LLM (First Hons), MComLaw (First Hons), MTaxS (Hons) Auckland, is a partner at leading business law firm Shieff Angland, which provides specialist legal services in commercial, property and business litigation. Christchurch born and raised, he heads the firm’s business litigation team and has advised numerous Canterbury clients on insurance law. He has spoken publicly to Christchurch audiences.