March 2015

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NZILA President’s message
Jonathan Scragg


Repair costs ‘must be paid in advance’

The New Zealand High Court’s decision in East v Medical Assurance Society [2014] NZHC 3399 in late December provides guidance for insurers and insureds in situations where earthquake-damaged homes are to be repaired or reinstated.

The Easts’ home had been damaged in the earthquakes. They wanted to repair it. They had replacement value cover under a policy with the Medical Assurance Society (MAS). MAS wanted to make payments for the cost of repairs as they arose. The Easts argued payment should be made upfront.

In the High Court, Justice Whata held that MAS could not stage the payments. The court rejected the argument that payments for repair fell due only when the actual cost of repair had been incurred, for several reasons. First, the objective of the policy was to compensate the Easts for their loss. Second, the liability to compensate arose on the occurrence of a qualifying damaging event (for example, an earthquake).

Third, the quantum of replacement value was not based on the incurred costs of the rebuild or restoration. Fourth, there was no mechanism in the policy providing for incremental assessment and approval of costs by MAS. Finally, there was nothing in the policy to alert the Easts they would have their compensation fettered in the way suggested by MAS.

There was also disagreement on the standard of repair required, and whether underpinning or a similar engineering response was necessary. The policy required the home to be restored to an “as new” condition.

MAS argued the property was to be repaired to an “as new in 2007” condition, being the year the house was built. The court disagreed, holding that “as new” contemplates a restoration to a condition as new at the time of the rebuild, and implies repairs that are compliant with current minimum building standards.

That interpretation is reinforced by the statutory requirement on property owners to comply with the current building code.

Justice Whata considered evidence from various experts and concluded that, although the land did not perform poorly against governmental guidelines, the appropriate repair strategy should carefully assess the loadbearing capacity of the ground across the whole property. The court concluded that, on the balance of probabilities, underpinning or a similar engineering response was required to repair the house to a “substantially the same as new” condition.

The High Court’s decision has been met with some controversy and is understood to be under appeal. If the decision withstands the appeal, it will assist parties to understand when insurers are obliged to make payments and what standards of repair are required to earthquake-damaged properties.

 

2015 NZILA conference – save the date

This year’s annual NZILA conference will be in Auckland on September 10 and 11. The conference is an excellent place for insurers, brokers, loss adjusters, lawyers and other industry professionals to gather each year to learn, socialise and network with key industry colleagues.

Please be on the lookout for further details about the conference. Registration information and details will be available later in the year via the NZILA website, but save the date now.

 
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