the insurance fiasco

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

Residential-earthquake-decision-myall-v-tower-insurance

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Judgment: 23 February 2017

JUDGMENT OF Judge DUNNINGHAM

The Facts

Mr Myall owned a large house called Riverlaw (eight bedrooms + six bathrooms) built in 1852 and registered with the Historic Places Trust. The house had been recently renovated and refurnished. The house was significantly damaged in the Sept 2010 and Feb 2011 earthquakes. It was demolished in 2012.

Mr Myall held a Super Maxi Protection Policy with Tower Insurance- a full replacement policy.  Tower had estimated the floor area to be 650m2 but quantity surveyors found Riverlaw to be 799m2. The parties disagreed over the rebuilding methods, Tower wanting to substitute modern cheaper specifications while Mr Myall considered the Insurers’ obligation to rebuild the home as far as possible to original specifications.

The parties do not agree about the full replacement amount – and are $2,000,000 apart. The difference between the two quantity surveyors costings were unresolved.  My Myall sought a declaration that Tower is obligated to pay him the balance that he says is still owing under the policy. Tower paid an interim payment of $1,359,000 on Jan 31.

While there was no dispute over the cover under the policy the following issues arose.

The Issues

  1. do the specified building materials and construction methods ( for ceilings, timber surfaces, exterior walls, chimneys, interior structural walls) comply with the policy in particular the meaning of key clauses relating to what full replacement means, particularly given the heritage qualities of this home;
  2. are the cost allowances for matters such as contractor’s margins, contingency sum, cost of contracts works insurance, local authority fees and professional fees appropriate in terms of a high-value house; and
  3. how should an entitlement be altered by a significant under-insurance on the size of the house.

Tower says that the policy limits the extent to which he can claim the higher cost of materials and methodologies that are no longer in common use, or insist on original specifications when they are not required to produce a house of equivalent functionality and appearance. For this reason, Tower argues that the variations to the original specifications it proposes are consistent with its obligations under the policy. The Supreme Court said in Firm PI 1 Ltd v Zurich Australian Insurance [2014] NZSC 147, [2015] 1 NZLR 432 at [60], the approach is an objective one with the aim being to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of the contract.

Justice Dunningham confirmed that:

“the primary obligation is to meet the cost of rebuilding the house ‘to the same condition and extent as when new’. Despite the plaintiff’s submissions, I consider that on a plain reading, these words allow some tolerance from a requirement to build the house to the exact   specifications as when new. The word ‘extent’ clearly means a house built to the same size, and providing the same facilities, as the original. The word ‘condition’ imports both the state of being ‘as new’, and the quality of the building at the time it was new. In my view, the primary obligation allows some tolerance from building something which is identical to the original building, because it only requires Tower to achieve the ‘extent and condition’ of the house when new, rather than to rebuild to ‘as when new’. As a consequence, the wording of the primary obligation in the policy imports the notion of rebuilding something which is equal to, but not necessarily identical to, the original building.”…….“ I consider Tower’s primary obligation in this case is to pay for a house of equivalent size, functionality and quality and which reasonably recreates the character and appearance of the original. The latitude afforded to Tower to deviate, where reasonable, from the original specifications is reinforced by the other express terms of the policy.” … “I have generally accepted that the policy affords the flexibility claimed by Tower to substitute modern construction methods and materials where the original is no longer available, is no longer permitted, or is unreasonably expensive (albeit with the proviso that the substitute proposed ensures equivalence to the original condition of that element of the house).”

He felt that “regrettably, for many of these items, it was difficult to compare the two experts’ costs, or to understand the reasons for them being different. It would have been helpful if the experts had made greater effort in conferencing to align their cost schedules to make it easier to draw comparisons between their costs.”…. “the experts had not always identified where and how their costs differed, so it was difficult to ascertain whether there was in fact an error in the assumptions made by one expert, or whether the differences were simply differences of opinion.”….. “On many points therefore, the case has simply turned on whether Mr Myall has been able to discharge the onus on him to demonstrate that Tower’s costing was wrong, or that his should be preferred. Where that onus was not discharged, I have found in favour of Tower.”…. “Had the parties at least agreed on a scope of works and provided comparative costings for each element, I could have made an informed assessment of the two estimates. However, that is not possible and I have inadequate evidence on which to decide whether either party’s costing on this element meets Tower’s obligation under the policy.”….” Mr Eggleton provided his costings and rates so Mr Harrison could have pointed to any disagreement he had with Mr Eggleton’s methodology or the rates he had adopted. In the absence of any identified error in Mr Eggleton’s costings for all these sundry matters, the plaintiff has not discharged the onus on him to show that it is wrong. Accordingly, Tower’s costings on these components are upheld and can be used in calculating full replacement value.”

For full details relating to:

Preliminary and General costs see the case paragraphs 77- 90. The Judge accepted Mr Myall’s quantity surveyor’s allowance for scaffolding; a contingency sum of 10 per cent of the house rebuild costs; and that insurance costs should be calculated using 0.75 per cent of rebuild costs. Neither party adequately scoped and calculated the costs for exterior works.

Under Insurance: paragraphs 94 -102. Tower was entitled to adjust the calculated full replacement value of 799m2 house on a pro rata basis, to reflect the insured floor area of 650 m2.

Tower was successful on the majority but not on all issues and the costs are to be resolved between the parties based on the Court’s findings.

Cases Relied on by Mr Myall:

Robert Merkin & Chris Nicoll (eds) Colinvaux’s Law of Insurance in New Zealand (Thomson Reuters, Wellington, 2014) at [8.5.2].

Tower Insurance Limited v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR 341.

Spina & Spina v Mutual Acceptance (Insurance) Ltd (1983) 3 ANZ Insurance Cases 60-554, at 78,345.

Cases Relied Upon by Judge

Colonial Mutual General Insurance Co Ltd v D’Aloia [1989] VR 161 (VSC).

Turvey Trustee Ltd v Southern Response Earthquake Services Ltd [2012] NZHC 3344

Experts:

Quantity Surveyors for Tower: Eggleton Group

Quantity Surveyors for Mr Myall: Harrisons Quantity Surveyors

Full details of the Case: https://forms.justice.govt.nz/search/Documents/pdf/jdo/51/alfresco/service/api/node/content/workspace/SpacesStore/27f756f8-1c8a-429a-9917-73aa3c6324b6/27f756f8-1c8a-429a-9917-73aa3c6324b6.pdf

Author: Sarah-Alice Miles

Love to write and create - these days living in the Netherlands. 'Art allows us to find ourselves and lose ourselves at the same time'.

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