[2013] NZHC 3262
The plaintiffs, Mr and Mrs Rout, currently own and live in a house in Brooklands. The earthquakes damaged the Routs' house, but not to an extent that they could no longer live there. However, their property has been red zoned. The Routs have sold the land on which the house is built to the Crown, and will move out of the house in January 2014.
The judgment primarily involved the factual issues of whether the house was a repair or a rebuild, and the cost of that repair or rebuild. Justice D Gendall decided that the house was not economic to repair and was therefore a rebuild, and settled on a rebuild figure of $673,330.90 (including GST).
Although many of the determinations related specifically to the Routs' house, the decision will be of general use for a number of issues.
The red zone
Justice D Gendall agreed with the statements of Asher J in O'Loughlin v Tower Insurance Limited [2013] NZHC 670 that the red zoning itself did not cause damage in terms of the policy. He said that:
"I am satisfied the red zone designation itself did not cause any loss or damage to the Routs' house. The creation of the red zone could not be said to have any physical effect on this or any other house. Rather, it simply affected the way in which land and houses might be regarded in a particular area, and it also gave property owners in the zone a specific option for a time to sell to the Crown."
Repair or rebuild?
The policy provides for options where a house "is damaged and can be repaired" (clause 1(d)) and where the house is "damaged beyond economic repair" (clause 1(c)). Justice D Gendall noted that:
"On this question as to whether the house can be repaired, viewed in a purely technical sense, 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 undertaken. The test in clause 1(d) of the policy, as I see it, requires that the damaged house can be "economically repairable" in an objective sense".
In determining whether something was economically repairable, Justice D Gendall decided that:
"a rule of thumb test had been adopted and used throughout by insurers and insureds in Christchurch since the earthquakes... this test provided that, if the cost of repairs totalled more than about 80% of an actually assessed rebuild cost, then the repairs were considered uneconomic. It is appropriate as I see it to apply that test here."
It is likely that in the future, where the court is called upon to resolve a disagreement over whether a house is a repair or a rebuild, the 80% test will continue to be applied.
Low mobility grout
Southern Response's expert had proposed the use of low mobility grout in repairing the concrete slab foundation of the house. Justice D Gendall referred to the MBIE Guidance Document which he noted listed the low mobility grout as a repair option for TC1 and TC2 properties. He noted that the Routs' property would be classified as TC3, and said that "issues must therefore arise as to whether this LMG repair option is appropriate here."
Floor level
When the house was built, there was a minimum flood plain floor level for the property of 11.4m RL. This is specified in a certificate registered against the certificate of title. After the earthquakes, the house finished floor level is now between 11.193m and 11.252m RL. A new level of 11.8m RL is now required for the area.
Justice D Gendall confirmed that the cost of repair had to factor in the cost of reinstating the floor level to 11.4m RL, but that "existing use rights would apply for house repairs such as this and the new 11.8m RL requirement would only be enforced (if at all) for construction of new dwellings."
Foundations
One of the largest elements of the rebuild cost claimed by the Routs was for foundations. Justice D Gendall noted that:
"These notional rebuild costs, even assuming that substantial screw pile foundations would have been required for a rebuild on the Brooklands site, would be substantially higher than the actual rebuild costs that the Routs would incur for a similar rebuild on a sound non-red zone site."
He went on to say:
"The Routs are entitled under their policy to a replacement home and not more. Before me Mr Shand endeavoured to dispute this. In his submissions, he contended that, if the Routs obtained a windfall from Southern Response under this particular costing method he proposed, that was simply their good fortune and something that Southern Response as their insurer under the policy terms was obliged to do contractually. I reject that submission. In my view it simply cannot be correct. This is a replacement policy to replace for "loss" suffered. If replacement costs are not actually incurred then any recovery for this is a windfall. The Routs cannot as I see it be entitled to that windfall here.
I conclude therefore in general terms that Southern Response's obligation here is to meet the cost of rebuilding or buying a replacement house for the Routs which is of a comparable size and condition to their existing house as when new, and offering the same amenities. If a new house is to be built, it is to be on a sound site elsewhere."
A cash payment?
Where the house is uneconomic to repair, the Rout's policy provided that they could choose one of four options:
- to rebuild on the same site, where Southern Response would pay the full replacement cost of rebuilding the house.
- to rebuild on another site, where Southern Response will pay the full replacement cost of rebuilding the house on another site you choose. This cost must not be greater than rebuilding the house on its present site.
- to buy another house, where Southern Response will pay the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding the house on its present site.
- a cash payment, where Southern Response will pay the market value of the house at the time of the loss.
Option one, the rebuild on the same site, was not available to the Routs as they have sold their land to the Crown.
In the statement of claim, the Routs claimed for a declaration that if they chose to rebuild on another site then they were entitled to be reimbursed by Southern Response up to the claimed amount, or in the alternative, for a cash payment of the rebuild costs in the claimed amount.
Justice D Gendall confirmed that, pursuant to the policy, if the Routs insist on a cash payment, then the most that they are entitled to is the market value of the house at the time of the loss, which is significantly less than the amount claimed. He said:
"It may well be that Southern Response outside its obligations under the policy has been prepared voluntarily to make an immediate cash payment to the Routs for the cost of rebuilding or purchasing a replacement home, (as seems to have been the approach in the early negotiations between the parties) but this is always entirely optional and a matter for the company. The policy does not allow the Routs to insist upon a rebuild cost cash payment being made, as the Routs seek in their statement of claim, before rebuilding actually takes place and those costs are incurred. No such rebuilding has happened here."
General damages
The Routs sought an award of $50,000 general damages. Justice D Gendall noted that there were some aspects of Southern Response's action which invite criticism, including the time taken to process the claim, the change in position from the house being a rebuild to a repair, the limited instructions to the geotechnical and structural engineers, and the statements made in early negotiations that certain items were included in costings when that was not actually the case. However, he also contrasted it with the Routs increasing their claim to approximately $1.2million at the start of the hearing, then failing to support the quantum claimed with any evidence, and failing to disclose a rebuild estimate that they had received until half way through the hearing.
In the circumstances, Justice D Gendall rejected the claim for general damages.
The reasoning applied here by Justice D Gendall suggests that in the future the courts may be willing to consider an award for general damages for earthquake cases, depending on the actions of the claimants.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
