Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd

[2013] NSWSC 1975

Supreme Court

New South Wales

Medium Neutral Citation:

Camellia Properties Pty Ltd and Ors v Wesfarmers General Insurance Ltd [2013] NSWSC 1975

Hearing dates:

8, 9, 10, 11, 14, 15, 16, 17, 18, 21, 22, 23, 24, 28, 29, 30, 31 October 2013 and 1 November 2013

Decision date:

24 December 2013

Before:

Sackar J

Decision:

See paragraphs [707]-[710]

Catchwords:

ENVIRONMENT AND PLANNING - whether lodgement of development application was required for reinstatement of house to "as was" condition - whether, and extent to which, lodgement of development application necessitated upgrade of non-damaged components of the house.

ESTOPPEL - estoppel by convention - whether parties adopted common assumptions inconsistent with the terms of the insurance policy - whether insurer estopped from denying assessment of liability for reasonable costs of reinstatement by reference to various reports - whether insurer estopped from relying on terms of the policy in respect of costs of alternative accommodation.

INSURANCE - home and contents policy - construction of policy - whether policy terms varied by parties' communications - assessment of reasonable costs of reinstatement of fire damaged house - whether insurer or insured (or both) breached duty of utmost good faith.

Legislation Cited:

Crimes Act 1990
Environmental Planning and Assessment Act 1979
Environmental Planning and Assessment Regulation 2000
Revised Professional Conduct and Practice Rules 1995
South Sydney Local Environment Plan 1998 (Amendment No 5) - Exempt and Complying Development
South Sydney Development Control Plan 1999 - Exempt and Complying Development
Insurance Contracts Act 1984 (Cth)
Insurance Contracts Regulation 1985 (Cth)

Cases Cited:

Belgrove v Eldridge [1954] HCA 36, (1954) 90 CLR 613
Bowen v Blair [1933] VLR 398
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
Carter v Boehm (1766) 3 Burr 1905
CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1
Chaplin v Hicks [1911] 2 KB 786; [1911-13] All ER Rep 224
Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) [1986] HCA 14; (1986) 160 CLR 226
Cubillo v Commonwealth of Australia [2000] FCA 1084; (2000) 174 ALR 97
D'Aloia v Colonial Mutual General Insurance Co Ltd [1987] VR 807
DHJPM Pty Ltd v Blackthorn Resources Ltd [2011] NSWCA 348; (2011) 83 NSWLR 728
Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1
Durban Roodepoort Deep Ltd v Newshore Nominees Pty Ltd [2005] WASCA 231
Edwards v AA Mutual Ins Co Ltd (1985) 3 ANZ Ins Cas 60-668
Ewer v National Employers' Mutual General Insurance Association Ltd [1937] 2 All ER 193
Fink v Fink [1946] HCA 54; (1946) 74 CLR 127
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368
Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46
Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd [2001] NSWCA 313
JLW (Vic) Pty Ltd v Tsiloglou [1994] 1 VR 237
Johnson v Australian Gas Co Ltd (1992) 7 ANZ Ins Cas 61-109
Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406
London Assurance v Clare [1937] 57 Lloyd's Rep 254
Malec v J C Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638
Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd; The Star Sea [2001] UKHL 1; [2001] 2 WLR 170
McCrohon v Harith [2010] NSWCA 67
McGraddie v McGraddie and another [2013] UKSC 58; [2013] 1 WLR 2477
Moratic Pty Ltd v Gordon [2007] NSWSC 5; (2007) 13 BPR 24,713
Motor Accident Mutual Insurance Pty Ltd v Kelly (1998) 10 ANZ Ins Cas 61-420
Newnham v Baker [1989] 1 Qd R 393
NSW Medical Defence Union Ltd v Transport Industries Co Ltd (1985) 4 NSWLR 107
Nilon v Bezzina [1988] 2 Qd R 420
Orakpo v Barclays Insurance Services Co Ltd & Anor [1994] CLC 373
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10; (2003) 196 ALR 257
Ratcliffe v Evans [1892] 2 QB 524
Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603
Schultz v New Zealand Insurance Co Ltd [1983] 1 VR 189
South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortensen v Laing [1992] 2 NZLR 282
State of New South Wales v Burton [2008] NSWCA 319
State of New South Wales v Moss [2000] NSWCA 133; (2000) 54 NSWLR 536
Stuart v GRE Ltd (1988) 5 ANZ Ins Cas 60-844
Talbot v General Television Corporation Pty Ltd [1980] VR 224
Troulis v Vamvoukakis [1998] NSWCA 237
Ventouris v Mountain (The Italia Express (No 2)) [1992] 2 Lloyd's Rep 281
Waterman v Gerling Australia Insurance Co Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300
Wilson v Matthews [1913] VLR 224
Zorom Enterprises v Zabow [2007] NSWCA 106; (2007) 71 NSWLR 354

Texts Cited:

A M Gleeson, "Judicial Legitimacy" (2000) 20(1) Australian Bar Review 4
E R H Ivamy, Fire and Motor Insurance, 4th ed (1984) Butterworths
Kelly & Ball Principles of Insurance Law
P M Eggers, S Picken and P Foss, Good Faith and Insurance Contracts, 2nd ed (2004) LLP

Category:

Principal judgment

Parties:

Camellia Properties Pty Ltd (First Plaintiff)
SA Matthews Holdings Pty Ltd (Second Plaintiff)
Lithgow Properties Pty Ltd (Third Plaintiff)
David Ferdynand Libling (Fourth Plaintiff)
Sandra Anne Libling (Fifth Plaintiff)
Wesfarmers General Insurance Ltd (Defendant)

Representation:

Counsel:
M Jones SC and C Gleeson (Plaintiffs)
R Cavanagh SC and S Walsh (Defendant)
Solicitors:
Corrs Chambers Westgarth (Plaintiffs)
Turks Legal (Defendant)

File Number(s):

2010/302314

Judgment

Index

Proceedings	[1]
Background facts	[6]
The policy and its proper construction	[80]
Conventional estoppel	[100]
The duty of utmost good faith	[104]
Environmental planning and regulatory requirements	[127]
Issues of credit and witnesses	[162]
Plaintiffs' lay evidence - Mr and Mrs Libling	[165]
Plaintiffs' lay and technical evidence - Mr Rosselli and Mr Hassall	[169]
Mr O'Hearn	[173]
Mr David Martin	[177]
Mr Rhodes-White	[178]
Defendant's lay evidence - Mr Day	[179]
Mr Lloyd	[183]
Ms Gray	[184]
Defendant's lay and technical evidence - Mr Knox and Mr McNamara	[185]
Mr Meredith	[186]
The parties' experts	[187]
The estoppels	[190]
The KCJ estoppel	[195]
The alternative accommodation estoppel	[300]
The November/December 2008 reports estoppel	[336]
Did the plaintiffs breach their duty of utmost good faith?	[339]
Did the insurer breach its duty of utmost good faith?	[350]
Building costs - what was reasonable?	[386]
The plaintiffs' lay and expert witnesses on technical matters	[408]
Mr David Martin	[415]
The Sydcon tender	[436]
Mr Douglas Martin	[468]
The defendant's lay and expert witnesses on technical matters	[495]
Mr Knox	[496]
Mr McNamara	[512]
Mr Batger	[515]
Mr Bullen	[536]
Allowances / contingencies	[559]
The adequacy of the estimation documentation prepared by Mr Rosselli	[582]
Costs of remediation	[586]
Mr Gale	[589]
Dr Kemp	[598]
Conclusion on remediation costs	[613]
Assessment of damages for individual items	[621]
Appropriate amount for alternative accommodation	[671]
Professional fees	[689]
Storage	[693]
Interest	[694]
Distress and inconvenience	[698]
Failure to mitigate	[701]
Conclusion	[707]

Proceedings

1. The proceedings arise from a claim for indemnity by the plaintiffs from the defendant, Wesfarmers General Insurance Ltd (the insurer or the defendant), under a home and contents contract of insurance named the "Manorhouse Policy" (the policy), covering the period 13 February 2008 to 13 February 2009, in respect of premises at 44 Martin Road, Centennial Park (the building, the house or the property), owned by the fourth plaintiff, David Ferdynand Libling (Mr Libling), and the fifth plaintiff, Sandra Anne Libling (Mrs Libling) as joint tenants. The first to third corporate plaintiffs became involved in these proceedings as they held an interest in certain contents covered by, and as noted on, the policy.

1. The building, much of its contents, and specified valuables, were substantially damaged or destroyed by fire on 30 September 2008. Although the insurer accepted, after conducting forensic investigations following the fire, that the policy responded to the plaintiffs' claim, the parties fell into dispute about quantum. The house has now been rebuilt, but with a number of alterations and additions as compared to its pre-fire state.

1. The plaintiffs commenced proceedings by a Summons and Commercial List Statement, filed on 10 September 2010, and the insurer filed a Commercial List Response on 22 October 2010. Relevantly, but subject to its precise terms, the policy provided coverage for accidental damage to the building (clause 1.2), the costs of reasonable alternative accommodation for the lesser of the time it takes to make the building inhabitable or twenty-four months (clause 2.4(q)), and the costs of commercial storage (clause 2.4(b)). The plaintiffs allege that:

(1)   (alternative accommodation, at [12A] and [13] of the Commercial List Statement) conversations with the insurer's representatives in early to mid November 2008 had the effect of either varying the contractual terms of the policy or founding an estoppel, to the effect that as long as the plaintiffs' total spend on alternative accommodation did not exceed the amount that would be payable by the insurer had the plaintiffs elected to be accommodated in premises equivalent in location and amenity to the house, which was agreed to be no less than a rent of approximately $6,000 per week, then the defendant was prepared to continue to make payments to the plaintiffs for accommodation after the indemnity period (of twenty-four months) had expired until the sum total spent on alternative accommodation equated to two years at a rental per week to which the plaintiffs were entitled;

(2)   (basis of reinstatement, at [33] of the Commercial List Statement) as a result of events in late November to early December 2008, the insurer is estopped from denying that the plaintiffs' entitlement to reinstatement and associated benefits under the policy would be determined by reference to the information contained in certain reports, advices and architectural drawings and plans obtained in late November to early December 2008 (these documents will be identified in due course); and

(3)   (quantum of reinstatement costs, at [41] of the Commercial List Statement) as a result of events occurring in the first half of 2009, the insurer is estopped from denying that the plaintiffs' entitlement to reinstatement and associated benefits under the policy would be satisfied by a cash payment of an amount to be determined by a quotation to be provided by a particular builder, based on a particular architect's specification documents (the builder and architect will be identified in due course).

1. The plaintiffs also allege the insurer breached its duty of utmost good faith imposed by s 13 of the Insurance Contracts Act 1984 (Cth) to the plaintiffs in a number of respects by, generally, engaging in conduct inconsistent with the alleged estoppels (see [47(c)-(f)], [48(a), (c), (e)], and [50] of the Commercial List Statement). The plaintiffs also seek interest and costs. There is no longer any dispute as to the contents claim.

1. The defendant denies the estoppels alleged by the plaintiffs. It also denies breaching its duty of utmost good faith to the plaintiffs, and alleges that the plaintiffs have engaged in conduct in breach of their obligations of good faith to it by obtaining from the City of Sydney Council (the Council) a development consent when it was unnecessary to do so (see [C28(3)] of the Commercial List Response). In particular, the insurer alleges the plaintiffs represented to the insurer that a development application would be necessary to reinstate the house to its "as was" condition, when in fact a development application was only required as a result of proposed changes required by the plaintiffs. Accordingly, the defendant alleges it may have been prejudiced and borne costs unassociated with the reinstatement required under the policy.

Background facts

1. The house was built in about 1911. There are only twenty-six houses in Martin Road, Centennial Park, each of which has uninterrupted views of the park. Mr and Mrs Libling bought the house in about December 1985.

1. When Mr and Mrs Libling purchased the house, it was not in very good condition and they decided to undertake extensive alterations and additions to it. Architects were engaged, and building renovations undertaken, for a two-year period from about 1987. Renovations were completed in early 1989 and then Mr and Mrs Libling moved into the house.

1. In about 1992, Mr and Mrs Libling further refurbished the house by building a pool and a garage, among other works.

1. In about April 1999, Sydney was hit by a hailstorm and the house was one of many damaged during that time. It was at this point that Mr Libling first met Mr William Lloyd (Mr Lloyd), who was an assessor engaged by the insurance company with which Mr Libling had insured the house at that time, being Mansions of Australia. Under the supervision of the insurer, protective work was carried out on the roof, which had been severely damaged in the storm, and storage was arranged for the plaintiffs' artworks, furniture and other furnishings, in order to enable parts of the house to be rebuilt as a result of the damage occasioned.

1. On 27 August 2008, the Manorhouse policy for the property was renewed with Lumley Insurance Limited (now known as Wesfarmers General Insurance Limited), covering the period 13 February 2008 to 13 February 2009. The total premium payable in 2008 was $20,356.44 (with an additional $2,727.58 as commission for the broker).

1. On 30 September 2008, the house was damaged by a fire which had started in the attic. The damage was significant. The incident report contains the following descriptions:

Fire in attic and roof space of 4 level house. Attic on L3, roof had collapsed onto attic level floor. Fire contained to floor level of attice [sic] and surround roof space. Severe water damage to basement, L1 & L2.

EXCAVATION: Could not be conducted due to instability of attic floor. A slight V pattern observed from the outside on the tiles on the W side which pointed to roughly the middle third of the attic...

INTERNAL: Large amount of water damage on basement, L1 & L2. All fire damage on L3-Attic. Fire penetrated L2 ceiling in various areas, but did not move down to this level. Most fire damage in L2 ceiling was above stairwell and bedroom to the S of the stairwell, relates roughly to the middle section of the attic. The stiarwell [sic] to L3 also showed severe charring at its upper areas, debris on the stairs.

EXTERNAL: Approx 90% roof collapse onto the floor area of attic. The timber ceiling of the front balcony area (S side) showed charring to middle section, fire appeared to come from above. No signs of suspicious activity.

OWNER: Mrs Sandy LIBLING. Was in kitchen with her son, hears a crackling and a bang, goes to L2 door to attic L3 open. Looks up and sees rolling orange flame at floor height. Exits house with son and dog. No smoke alarms. Attic was bedroom for other son, departed OS yesterday, not a smoker...

NSWFB: SO Craig Bishop (39D). Black smoke seen departing station - 2nd Alarm. Fire through the roof prior to arrival. Crews entered with 38, got to L2 at the base of stairs to L3 and could go no further, roof started to collapse. Fire involved whole attic, moved from room to room to fight from L2. L11 also used from above. SO Stubbs (13D): Isolated electricity, none of the CB had tripped, he moved them all down.

1. From about 1 October 2008, Mr and Mrs Libling commenced populating, and since then have maintained, a spreadsheet recording expenses related to the fire.

1. On 2 October 2008, Mr and Mrs Libling had a meeting onsite with Mr Lloyd (then employed by GAB Robbins), a Mr Nigel Day (the insurer's then claims manager, Mr Day), a Mr Rod Chacana (a senior claims adjuster at Lumley General), a Mr Don Hutton (an insurance broker) and a Ms Gray (the underwriter of the insurer). Mr Chacana and Mr Hutton do not feature subsequently in the case. During the meeting on 2 October 2008, Mr Lloyd, on behalf of the insurer, indicated that there would have to be a forensic investigation of the fire before liability would be accepted by the insurer, but that in the meantime payment of some $100,000 would be made to Mr and Mrs Libling (which would need to refunded if liability was not accepted) to cover urgent out of pocket expenses.

1. On 3 October 2008, the Council issued an emergency order (Emergency Order), pursuant to s 121B of the Environmental Planning and Assessment Act 1979, which included the following terms:

4. All work shall be completed to the satisfaction of Council.

5. On completion of work, obtain certification from a registered practicing [sic] structural engineer certifying that the temporary work is in a structurally sound condition.

Note: A Development application and Construction Certificate will be required to be submitted and approved prior to the reconstruction of a new roof to the premises.

1. Mr or Mrs Libling (or both) consulted an architect, a Ms Kerry Fyfe (Ms Fyfe), in early October 2008 to advise or represent them in drawing up a specification for the restoration works.

1. On 7 October 2008, Mr Lloyd informed Mr Libling that the insurer would appoint MCS Consulting (MCS). In a report of that date, he said:

MCS other building consultants instructed by us on behalf of Lumley initially to provide a scope for the demolition and make safe works and also to obtain the necessary council permission. Their future involvement would include preparation of the repair specification and tender documentation as submission of the DA to the council and obtaining the construction certificate. You will no doubt wish to engage your own engineer or architect to be involved the process and Lumley have confirmed that these costs will be recoverable under the policy.

1. Later that day, Mr Libling responded as follows:

We look forward to the meeting on Friday with Nigel and yourself. The matters that are weighing on my mind in anticipation of the meeting are:

#whether MCS have the skill set and inclination to develop the specifications and then manage the tender process for the level of finishes and quality that was in our house. I would be more comfortable if we commissioned an architect experienced in comparable houses to develop the specifications....

1. Mr Day, who had been copied in on Mr Libling's email of 7 October 2008, responded on 8 October 2008 in the following terms:

Whilst the matter would be best for greater discussion on Friday, in brief William's and my thought is to have an engineer and architect of your choosing draw up the necessary requirements managing the tender process etc. Lumley will pay the relevant reasonable costs. MCS will simply be there to check the scopes etc at the various stages required (with William and/or I plus you and your specialists in attendance) so that what is needed at each stage (including demolition and drying) is agreed by all prior to each stage. Lumley also recognise all work has to be in keeping with the qualities of your home prior to this unfortunate event and in accordance with your Policy with us, rest assured we will all work together closely to ensure that is achieved.

1. On 10 October 2008, Mr Libling and his wife met with Mr Day at the insurer's office. In the course of the meeting, Mr Libling informed Mr Day that he had retained Ms Fyfe as an architect. Mr Day informed Mr Libling that he intended to continue to use a Mr McNamara of MCS to provide technical support and advise the insurer on quantification.

1. The sketch plans prepared by Ms Fyfe in October 2008 indicate that Mr and Mrs Libling were considering some changes to the building during the course of reinstatement.

1. On 14 October 2008, Munters (a firm retained by the insurer to conduct preliminary works for the building in order to render it safe for access) commenced the make-safe works at the house.

1. On 21 October 2008, Mr Lloyd informed Mr Libling that the insurer accepted liability under the policy.

1. In late October 2008, Mr and Mrs Libling decided to no longer retain Ms Fyfe. They had heard some unfavourable reports from their neighbours and had formed the view that the type of architecture that Ms Fyfe was likely to recommend would not suit their taste.

1. By late October 2008, Mr and Mrs Libling had decided to retain Mr Luigi Rosselli (Mr Rosselli) as their architect.

1. However, on 2 November 2008, Ms Fyfe provided to Mr Libling a letter from RBV Builders Pty Ltd, providing a quote for the reinstatement of the house. A Mr Rod Verduci, a principal of that firm, had visited the house on 30 October 2008. His letter stated, amongst other things:

The home has been subjected to a major fire and started in the roof and worked its way down to the 1st floor level. It was evident in much of the remaining building materials that the home is now more damaged by the use of water to expel the fire than the fire it's self [sic].

In doing my inspection I noticed that all timber floors were excessively cupped and warped, skirting's [sic] and architraves are also cupped and have moved from their original fixings, the internal stair case has excessively moved and warped, the doors have also swelled, the ceilings to the ground floor are missing due to the water causing them to sag and collapse, the joists have also been exposed to the saturation which will be hard to correct.

In homes of this period, it was common practices to "socket" the floor joists into the brickwork for support. If the joists have been compromised by the water there is also the possibility that it will weaken the brickwork at that point due to the expansion properties in the timber once wet.

It would be my recommendation that the brickwork to the 1st floor be removed as the mortar in the joints would now be weaker due the heat experienced during the fire.

...

... When reviewing a proposal it is hard to pinpoint the exact period required to complete all the works. When a home has been damaged it would be even harder. I would have to allow an additional 6 months to the contract to cover us for the unforeseen. It is impossible when giving an estimate to repair a home of this scale due to damage the water and fire has caused.

I would not be confident or guarantee that by performing the rectification we can eliminate the odor [sic] left by the fire. I understand that the carbon should neutralise after a period of six months; however I am not sure what happens to the carbon and soot if it comes into contact with water or dampness.

Without doubt the cavities would be containing the majority of the carbon and soot. There would be a method to clean the cavities; however it would involve the re-introduction of water and several penetrations to the solid brick walls, both inside and external.

Based on the plans you have supplied and inspecting the high level of finishes to the home I can give two estimates to construct the home. The first would be to repair and renovate the existing with a generous contingency for the unforeseen, the second based on an average square metre rate based on similar homes we have built:

1. To renovate the existing home; total strip out, leaving only brick walls to the ground floor level and concrete slab to front verandah, clean up of sub soil to remove excess debris, remove all damaged window and door frames, skirting, timberwork. Strip walls of drummy render, strip stained plaster and dispose of same. Based on current rates to renovate I would allow $3.5 - $4.5 million with a time frame of 18 - 24 months. The additional time should cover for one off items that will be made to suit existing openings.

2. To build from new; demolish existing home, dispose of debris, clean surrounding soil. Based on homes we have built with similar level of finish, I would estimate the cost to be in the range of $4.2 million with a time frame not exceeding 16 months.

1. On 4 November 2008, Mr Libling sent an email to Mr Lloyd indicating that with Lumley's approval he and his wife would like to appoint Mr Rosselli as architect. On the same day, he forwarded Mr Rosselli's fee proposal to Mr Lloyd.

1. At the same time, Mr Lloyd put forward a Mr Knox (of DW Knox and Associates) for the purposes of an engineering input. He described Mr Knox as having a wealth of experience in fire damage restoration.

1. In an email of the same day, Mr Libling requested Mr Rosselli meet with Mr Knox, who he described as the insurer's man.

1. On 5 November 2008, Mr Lloyd confirmed in an email to Mr Libling that it was in order to instruct Mr Rosselli to proceed in accordance with this fee proposal.

1. On 6 November 2008, Mr Libling put a detailed proposal to Mr Lloyd in relation to alternative accommodation.

1. On 10 November 2008, Mr Libling sought the insurer's approval to Mr Rosselli's selection of consultants.

1. Also on 10 November 2008, a Hugh Rhodes-White (Mr Rhodes-White) of Sydcon Building Services Pty Ltd (Sydcon), provided an indicative quote again to Ms Fyfe for the reconstruction of the house. The one page letter indicates that Mr Rhodes-White had made an inspection of the house and considered two options. First, the repair and rebuilding of the fire damaged "elements" back to the original condition, and secondly, the demolition and rebuilding back to its original size and design. In relation to the first option, he indicated he was unable to make an accurate determination as to the cost of repair because he thought it likely there would be a large amount of damage to electrical wiring, drainage and water services built or concealed in cavities, which were not able to be assessed. He also expressed the view that "most timber elements in the house (floors, doors, architraves, skirting etc) and cupboards joinery etc have been subjected to water damage" and that it was difficult to say how that might be affected in time. He also made an assumption that most joinery items, such as the kitchen cupboards, would be irretrievable. The same he thought applied to all finishes and floor tiles.

1. In relation to the alternative option including a cost for demolition, he thought that it would be cost somewhere between $5,000 and $7,000 per square metre depending on the level of fitout. Upon the assumption that the house was approximately six hundred square metres, he thought the costs of the building in relation to the second option would be somewhere between $3 million and $4.2 million.

1. On the same day, Mr Lloyd confirmed with Mr Libling that it was in order for Mr Rosselli to retain his "preferred consultants", KCJ Constructions (a building firm, KCJ) and O'Hearn Consulting (an engineering firm). However, Mr Lloyd advised Mr Libling that he would keep DW Knox and Associates involved "with a view to advising on the proposed methodology for repair".

1. In the meantime on 12 November 2008, Mr Libling informed Mr Lloyd that he had gone ahead and rented a house in Watsons Bay, and further indicated that he had an agreement with the owners of the property at 40 Martin Road, Centennial Park, and that he wanted Mr Lloyd's formal response to the arrangement as he understood it.

1. Mr Lloyd replied on 14 November 2008, in the following terms:

I refer to previous correspondence in relation to this matter. As discussed I confirm that it is order to proceed with your proposal for accommodation.

1. On 21 November 2008, Mr Libling received a draft report from O'Hearn Consulting. It identified areas of extensive damage to the house.

1. In the report from Mr Rosselli dated 3 December 2008, a significant amount of the joinery was said, in his opinion, to be in need of demolition and replacement. So far as the Building Code of Australia (BCA) was concerned, he expressed the view that, again, a number of items, including the swimming pool, were not currently regulated by the BCA.

1. The KCJ fire damage report was dated 25 November 2008. Mr Martin had undertaken a detailed inspection of the property on 14 November 2008. The report is very detailed, however the summary section reads as follows:

2.0 Summary

Further to our on site inspection, I noted the following:

2.1 The building has been extensively damaged by a fire in the attic level floor and ensuing water damage from the emergency services, collapsing the attic level building members and allowing exposure to the elements.

2.2 The attic level and roof have been totally destroyed. There are minimal if any salvageable building elements.

2.3 The first floor is substantially damaged by fire, smoke, water, weather, building collapse and emergency services while making the premises safe.

2.4 The ground floor has extensive water, smoke and soot damage. Some building elements may be salvageable and restored however given the small number of salvageable components it is considered total replacement would be the most cost effective option.

2.5 The basement level has water, smoke and soot damage.

2.6 The external building facades have extensive smoke and soot damage and some emergency service damage. General cleaning and minor replacement of components required.

2.7 The pool has suffered mainly to the lack of power to keep filters running. Soot and physical damage to the pool internal surfaces may or may not be present but this was not visually accessible due to the putrefaction of the pool water.

2.8 The garage appeared to be unaffected by the fire.

1. A report had also been supplied from O'Hearn Consulting, dated 1 December 2008. A number of matters were identified as having been damaged or requiring structural support.

1. A further fire damage report was prepared by KCJ dated 2 December 2008, following a further inspection of the house on 1 December 2008. As a result of the clearing of certain debris and floor coverings, the further inspection was thought desirable given the house was now more accessible.

1. On 4 December 2008, an employee of Mr Rosselli, Simon Hassall (Mr Hassall), sent a number of reports to Mr Lloyd. They included a report from Mr Rosselli, which dealt with BCA requirements and joinery, a report from a structural engineer, Mr Mathew O'Hearn (Mr O'Hearn, the principal at O'Hearn Consulting), and a report from Mr David Martin (Mr Martin) of KCJ on the extent of damage done by the fire.

1. On 11 December 2008, Mr Lloyd requested Mr Knox to review the various reports of Mr Rosselli, Mr Martin and Mr O'Hearn. He also asked Mr Knox about how to best go about drying the house.

1. On 15 December 2008, Mr Knox provided comments on the various reports, but highlighted those matters in one or other of the reports where replacement of an item was suggested in the absence of it being damaged by fire.

1. On 16 December 2008, Mr Lloyd prepared a fire damage report for Mr Day. Mr Lloyd commented that reports had been received from an architect, an engineer and a building consultant who had "provided Scope of Work documentation". Mr Lloyd also commented that "on the whole the Scope appears to be in order although there are some elements which represent maintenance and are unrelated to the fire". Amongst other things Mr Lloyd recommended payment of outstanding consultant fees including those payable to Mr O'Hearn, Mr Rosselli and MCS.

1. On 5 January 2009, Mr Libling asserts that he had a conversation with Mr Lloyd in which Mr Lloyd indicated that the reports which had been obtained were "in order". Mr Libling asserts he told Mr Lloyd that he and Mrs Libling were considering some small changes to the design, which they would like to discuss, in response to which Mr Lloyd indicated Mr and Mrs Libling could make whatever changes they wanted, but that the insurer would however pay out the cost of reinstatement. Mr Libling further asserts that Mr Lloyd indicated that professional advisors had been obtained by the insurer in order to come to an agreement. Mr Lloyd indicated that the insurer had made its mind up to pay Mr and Mrs Libling "out". Mr Lloyd does not deny such a conversation.

1. On 28 January 2009, Mr and Mrs Libling had a meeting with Mr Day. Mr Libling asserts he also told Mr Day that he and his wife were proposing to make some changes. Mr Day agrees that such a comment was made by Mr Lloyd. Mr Libling accepts that Mr Day suggested it would be good to have a complete specification for rebuilding the house so that it could then be costed. Mr Day alleges he also told Mr Libling he would require a scope of works as regards to reinstating the house. Mr Day expressed the view at the meeting that he thought the various reports obtained from Mr Rosselli and others were insufficient to cost on. Further discussion ensued in which Mr Libling said he would prefer a swings and roundabouts approach to settling with the insurer, whereas Mr Day suggested he was thinking of agreeing on a pay out figure.

1. On 29 January 2009, Mr Libling sent an email to Mr Day and Mr Lloyd, enclosing drawings prepared by Mr Rosselli. The email is lengthy, but very important and it is therefore desirable that it be set out in full:

Dear Nigel and William,

Attached please find drawings as delivered by Luigi. As Sandy and I discussed with Nigel yesterday, these are not approved drawings. They came yesterday and it will take us a few days to think about them. But they are close enough to enable you to think about the principles and procedures of how the claim is to be handled from here on. Our target is to lodge a DA within the next 10 days and having considered an earlier version and Sandy having had a quick look at the plans yesterday, we think the plans are close enough for this to be feasible.

I have asked Ailie, my executive assistant (who has just come back from London) to organize a time suitable for everyone for February 9 or 10 for a meeting. Would you please let Ailie know (9391 2250) who besides yourselves will attend and his/their contact details so that Ailie can call them as well.

I undertook to Nigel yesterday to list the proposed changes from the house as it was before the fire. I do so below. The attached plans show the pre-fire house with dotted lines; nevertheless, Luigi if I have missed something please draw it to everyone's attention by email. Here it goes (I have assumed that the top of each drawing is North and therefore Martin Rd is East of the House and Oxley Lane west of the house; I know the site is angled but this made description of locations too complicated):

1. Site Plan: new garden shed on SE side of the house

2. Site Plan: new porte cochere in the middle of the N wall

3. Site Plan: demolish existing glass gallery and consequently square the NW corner of the house

4. Site Plan: when replacing the roof incorporate skylights

5. Site Plan: when replacing the roof incorporate solar panels (probably necessary to meet new energy use requirements)

6. Site Pan: new pool fence (statutory requirement)

7. Site Plan: change to roof shape at the W end of the house

8. Basement: (I have elected alternative 1 which is by far the cheaper): 2 new doors in the bar area: 1 in the E and 1 in the N wall

9. Basement: (I have elected alternative 1 which is by far the cheaper): remove door to N wall of the gym but leave the opening

10. Basement: (I have elected alternative 1 which is by far the cheaper): close up (small new wall) door on E wall of the gym

11. Ground Floor (as all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications): library & conservatory are merged and part of the partition is now a large door (E end)

12. Ground Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications): library now in the rear of hall (S wall)

13. Ground Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications): kitchen now has an island bench with 2 (1 previously) dishwashers

14. Ground Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications): change to the wall separating the stairs to the cellar (SW corner of house); new code requires higher wall

15. First Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, 1 only list changes which appear to have cost implications); new bifold windows (louvers?) on the verandah (balcony 1 on E end of house)

16. First Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, 1 only list changes which appear to have cost implications); new bathroom (S wall next to bedroom 2)

17. First Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, 1 only list changes which appear to have cost implications); joinery in the study not being replaced (now a bathroom - see 16 above)

18. First Floor (as all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, 1 only list changes which appear to have cost implications); higher stair railings (code requirement)

19. First Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications); marble spa/bathroom not being replaced (middle of N wall)

20. First Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications); joinery in Matt's room not being replaced (now rumpus room - NE corner)

21. First Floor (As all internal partitions, floors, ceilings and consequently fittings & joinery have been condemned, I only list changes which appear to have cost implications): balcony enclosed (W end of the house)

22. Attic: New balcony on E end;

23. Attic: balcony on W end not being replaced

24. Attic: walls & ceiling in modern materials; the Japanese gypsum and straw finish of walls and rice paper joinery not being replaced (see photographs)

25. Attic: rare wood on floor not being replaced

As Sandy, Nigel and I discussed yesterday, there appear to be 3 approaches one could take from here:

A. Produce complete specifications for the house as it was before the fire as well as the house Sandy & I would like to build, call for tenders for both and ascertain the difference. I said to Nigel that the cost of documenting the house as it was would be an additional $60K in architect's fees and 2 months delay, Luigi is this correct?

B. Take the view that the changes involve swings and roundabouts which are more or less equal (I actually think that the old house would be more expensive to replace) and not worry about the difference(s); and

C. Agree a pay-out sum.

No doubt we shall discuss these different paths at the meeting.

1. On or about 30 January 2009, Mr Knox raised the issue of putting a roof on the house with Mr Libling. Mr Knox expressed the view that to rebuild the damaged walls and put the roof on straight away would be the best course. Disagreement arose between Mr Knox and Mr Rosselli as to whether a DA would be required.

1. On 10 February 2009, there was a meeting with Mr and Mrs Libling, Mr Day, Mr Lloyd, Mr Rosselli and Mr Hassall. Discussion took place, to which I will refer later in some detail. As a result of the meeting, Mr and Mrs Libling alleged a particular understanding was arrived at between all relevant parties.

1. On 18 February 2009, a development application was lodged with the Council.

1. During the period February to April 2009, Mr and Mrs Libling worked with Mr Rosselli and Mr Hassall on the preparation of instructions and documentation for Mr Martin of KCJ. Mr Martin received a letter of instruction, dated 5 March 2009, as to the tasks he was to undertake on 13 March 2009.

1. Meetings took place between Mr or Mrs Libling (or both) and others in relation to the preparation by KCJ of the estimate on 12 and 23 March 2009.

1. On 2 April 2009, Mr Lloyd was provided with a package of documents prepared by Mr Rosselli, which included the letter of instruction sent to Mr Martin on 5 March 2009.

1. On 23 April 2009, KCJ provided its estimate to Mr Libling and Mr Rosselli. This report was provided to the defendant. The circumstances surrounding the reasons why it was not provided to the defendant will need to be considered in detail later.

1. On 8 May 2009, Mr Hassall sent KCJ's costings to Mr Lloyd. The total cost including GST was $4,183,667. This amount was made up as follows:

• reconstruction costs of $3,519,971;
• demolition costs of $189,946;
• compliance upgrade costs of $254,311; and
• environmental remediation $219,439.

1. On 11 May 2009, the KCJ report of 8 May 2009 was sent to Mr Knox and Mr Meredith for review.

1. On 21 May 2009, Mr Libling sent an email to Mr Lloyd asking for an update on the progress of the claim. The letter asked for a further $100,000 for the purposes of paying Mr Rosselli, rent and other expenses.

1. On 28 May 2009, Mr Day wrote to Mr Libling saying, amongst other things:

William has passed copies of the estimate from KCJ. I admit considerable surprise at the proposed costs. Our specialist consultants are checking the figures in detail and I expect their findings next week...

...

You will however now appreciate given the numbers proposed that I will need to refer this claim regularly to Senior HO Management as well as our reinsurers for appropriate instruction or any sign off.

1. On 10 June 2009, Mr Libling sent an email to Mr Day. It is lengthy but again it is very important and desirable that it be set out in full:

Dear Nigel

On many an occasion, you have stressed that Lumley recognized the quality and bespoke nature of our house and that you accepted that we could have it restored by a builder of our choice. When two months ago you decided that Lumley wanted to make a global pay-out and thus facilitate us making some changes to the house, we stressed that in order to obtain a meaningful and fair quote, the person quoting had to immerse himself in discovering what had been there. It was on the basis of Lumley's expressed agreement to that approach that David Martin was agreed upon and appointed as the third person best able to give a fair and impartial estimate of the cost of restoration. He has been supplied with such invoices and specifications for the house as we had and spent some time with Sandy and in detailed inspection of the house to produce his cost estimate.

I was very pleased to have you confirm in our telecom to-day that nothing has changed and that Lumley has engaged a QS (and other professional advisors) not for the purpose of putting forward their own figure for the cost of restoration (which they cannot accurately do without taking the weeks that David Martin has taken to prepare his estimate) but so that the Martin quotation can be tested. We accept that given the amounts Lumley wants to verify for itself that the estimate is not in error as to scope and cost of individual items.

I have spoken to David Martin and he will be pleased to meet with your QS; he of course expects to be paid for his time - I have assumed that this is a cost Lumley will bear as a continuation of the cost borne by it to obtain the Martin estimate. Before the meeting, David will need in good time in order to consider for the meeting:

# a detailed list of items in relation to which the scope is being questioned;

# the QS's cost summary and all supporting schedules, quotes and materials.

If anyone apart from the QS is to attend for Lumley, please advise David Martin prior to the meeting (if an engineer is to attend, I have asked him to arrange for Matthew O'Hearn to attend as well)

I would appreciate it if anything that is emailed to David Martin was copied to me.

As we discussed, it would be helpful if Sandy could participate in the Martin/QS discussion; she is likely to be able to supply valuable facts and thus shorten the process. Will you please establish a conference dial in for the meeting; if there is a difficulty Ailie can assist.

Regards

David

1. On 22 June 2009, there was an on-site meeting attended by Mr Martin, Mr Knox, Mr McNamara, Mr Meredith and Mr O'Hearn.

1. By 30 July 2009, the defendant asserts it had paid the sum of $1,292,545.20 to the plaintiffs. This amount included a substantial sum on account of agreed contents.

1. On 31 July 2009, Mr Lloyd forwarded to Mr Libling a report from Rider Levett Bucknall, signed by Mr Meredith. The report was critical of the KCJ estimate. It noted in particular that the trade summary was silent as to margins, risks, and the like, as well as to "the basis of the price". In conclusion the report stated:

We assess the reasonable reinstatement of the damage costs as being $2,238,280 including the GST and we do not agree with the cost submitted by KCJ as being reasonable or applicable to a reinstatement of the damage.

The report further concluded:

This should be considered that in this case the damage was limited to about 30% of the building and that about 60-70% of the building structure was not damaged.

In summary we are of the opinion that there is little or no damage to

1. The footings

2. The 280 cavity brick walls

3. the 110 internal brick walls

4. The basement structure

5. The external areas

1. On 10 August 2009, the insurer made an offer of settlement of $2.5 million for the entire claim. The offer was made in a lengthy email to which I shall return.

1. On or about 17 August 2009, Mrs Libling advised Mr Rosselli to put building work on hold pending resolution with the insurer.

1. On 27 August 2009, Mr Libling responded to the offer without expressly rejecting it. Mr Libling expressed the view that there may well have to be recourse to legal proceedings between the parties. Again I will deal with this later.

1. On 28 August 2009, Mr Libling instructed Mr Rosselli to call for tenders, in accordance with a budget of $2.7 million, on the basis that Mr and Mrs Libling bore certain costs and risks themselves.

1. On 22 September 2009, a meeting took place at the house between Mr and Mrs Libling, Mr Day, Mr Rosselli and others.

1. On 14 October 2009, Mr Day met with Mr Martin of KCJ to discuss KCJ's costings. On the same day, he sent an email to Mr Libling indicating that he was in effect reviewing his thoughts "in the light of David's further explanations and I also intend to speak one on one with the QS in the next day or so".

1. On 19 October 2009, the defendant made a second offer of $3.018 million for the settlement of the entire claim.

1. On 29 October 2009, Mr Libling made a counter-offer of $3,867,000 for the building, professional fees, demolition and landscaping claims as well as general contents.

1. Mr Libling also informed Mr Day that he was proposing to put a tender process in place, inviting two tenders, one for "a faithful restoration of the house as it was prior to the fire" and in the alternative a further tender with "some minor changes in the envelope of the building and more extensive differences in terms of internal design and finishes".

1. On 16 November 2009, the insurer rejected Mr Libling's offer.

1. On 30 November 2009, the insurer made a final payment of $2.4 million.

1. On 16 December 2009, Alvaro Brothers and Sydcon provided tenders for the reinstatement of the house. On the same day, they also provided, along with KCJ, tenders for the restoration and additions to the house.

1. On 23 December 2009, Mr and Mrs Libling granted the contract for the restoration of the house to Sydcon.

1. On 10 September 2010, the plaintiffs commenced proceedings against the insurer.

1. Between 14 April 2010 and 29 October 2011, Mr and Mrs Libling lived at various addresses in Vaucluse, Balmain and Edgecliff, during the building works.

1. In December 2012, Mr and Mrs Libling moved back into their house in Centennial Park.

The policy and its proper construction

1. The principles governing the construction of insurance policies were recently stated by the Court of Appeal in Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 (at [151]-[157] per McColl JA with whom Beazley P and Meagher JA relevantly agreed). I do not need to recite the principles in any detail, as there is no disagreement between the parties as to the principles or their application to the construction of the policy. It is only necessary to set out the clauses of the policy relevant to the dispute between the parties and to make a few observations along the way.

1. Immediately following the definitions section of the policy, there appears the following clause:

THE AGREEMENT BETWEEN YOU AND US (YOUR POLICY)

In return for your payment of the Premium or your agreement to pay it to us within the time we require, we agree to indemnify you against loss, damage or liability caused by a covered event occurring during the Period of Insurance, subject to the terms, conditions and exclusions of your Policy.

1. Relevantly, the schedule to the policy states that the cover includes "Building Cover" (Section 1) and "Contents Cover" (Section 2).

1. The indemnifying clause in respect of "Building Cover" provides:

1.2 Accidental loss or damage cover

We will cover you for accidental loss or Accidental damage to your Building occurring at the Situation and during the Period of Insurance.

1. Clause 1.3 then sets out the procedure for handling a valid Building Cover claim:

1.3 How we settle any valid claim

(a) We will, at out option:

(i) repair, replace or rebuild or pay you the reasonable cost to repair, replace or rebuild, the damaged part of the Building up to its Replacement Cost; or

(ii) pay you up to the Building Sum Insured [which is specified in the schedule as $3,946,000].

(b) If we choose to repair, replace or rebuild or pay you the reasonable cost to do so and you do not:

(i) commence repairing, replacing or rebuilding your Building within 6 months of the loss or damage; or

(ii) wish to repair, replace or rebuild your Building,

we will:

(i) deduct an amount from any claim settlement for depreciation, wear and tear, based on the age and condition of the Building immediately before the loss or damage; or

(ii) pay you up to the Building Sum Insured [which is specified in the schedule as $3,946,000].

(c) We will pay for the damaged portion of fixed coverings to walls, floors and ceilings, only in the room, hall or passage where the loss or damage occurred.

[Own interpolations in square brackets]

1. The term "Replacement Cost" (which appears in clause 1.3(a)(i)) is defined as follows:

DEFINITIONS

...

"Replacement Cost" means the cost of replacing, rebuilding or repairing the Building and/or Contents to a condition substantially the same as their condition when new. If the Building is Heritage or the architectural features and/or structural materials of the Building possess an ornamental, antiquarian or historical character, or the original materials are not available when the Building/Contents are lost or damaged, Replacement Cost shall mean the rebuilding or replacement or repairing or restoring to a reasonably equivalent appearance and capacity using original design and suitable equivalent materials.

1. The insurer may therefore handle a claim in one of a number of ways. First, the insurer may repair, replace or rebuild the damaged part of the house up to its Replacement Cost (clause 1.3(a)(i)). Secondly, it may pay the insured the reasonable cost of repairing, replacing or rebuilding the damaged part of the house up to its Replacement Cost (clause 1.3(a)(i)). Thirdly, it may pay the insured up to the Building Sum Insured, being $3,946,000 (clause 1.3(a)(ii)).

1. By reference to the definition of "Replacement Cost", clause 1.3(a)(i) of the policy plainly affords more than a "true indemnity", as it is aimed at bringing the house to a substantially new condition, rather than to a pre-fire condition. Therefore any assessment of value, for the purpose of clause 1.3(a)(i), should not have regard to depreciation for wear, tear and the age of the building immediately before the fire. That is in contrast with an assessment under clause 1.3(b) (addressed in the next paragraph), which is more favourable to the insurer, as it provides for a reduction based on wear, tear and the age of the building.

1. Two further options are open to the insurer, but only in limited circumstances. Where the insurer chooses to proceed under one of the two options in clause 1.3(a)(i), but then the insured either fails to commence work within six months from the date of the damage or does not wish to repair, replace or rebuild, then the insurer may take up either a fourth option of paying out the claim after making a deduction to account for depreciation, wear and tear, based on the age and condition of the building immediately before the damage (clause 1.3(b)(i)), or a fifth option of paying the insured up to the Building Sum Insured (clause 1.3(b)(ii)).

1. The insurer is not seeking to rely on clause 1.3(b). The plaintiffs asserted that the amount the insurer was liable to pay to the plaintiffs was a figure calculated by reference to the reasonable cost of reinstating the house to its original condition, without the alterations and additions that were implemented in the actual rebuild. The principal disagreement between the parties related to arriving at the correct figure for the cost of such reinstatement.

1. As I have observed above, although the house underwent renovations on at least two occasions after Mr and Mrs Libling purchased it, its original build is dated 1911. Unsurprisingly, the regulatory landscape for planning and development has changed. Relevantly, the Building Cover section of the policy includes a clause dealing with the costs of complying with local government regulatory requirements:

1.4 Additional Benefits and Limitations

...

(c) Additional Building Costs

We will cover the additional cost of complying with any government or local authority by-laws that regulate the repair, rebuilding or demolition of your Building made necessary by loss or damage covered under Section 1.2 above, provided you repair or rebuild your Building at the same Situation. We will only pay costs which relate to the damaged parts of the Building. Payment is limited to a maximum of 20% of the Building Sum Insured [which is specified in the schedule as $3,946,000]. We will not pay any extra costs if you receive notice of any building regulation requirements you must comply with before the date when the loss or damage occurred.

[Own interpolation in square brackets, emphasis added]

1. The plaintiffs, unsurprisingly, placed emphasis on the enlarging effect of the words "relate to". There is authority explaining the breadth of that expression (Horsell International Pty Ltd v Divetwo Pty Ltd at [165]) and comparable terminology (see discussion of authorities in Kelly & Ball Principles of Insurance Law at [8.0020]). The significance of this clause 1.4(c) becomes apparent when one learns that the position at common law is as stated by Beach J in Schultz v New Zealand Insurance Co Ltd [1983] 1 VR 189 at 192 (citing E R H Ivamy, Fire and Motor Insurance, 4th ed (1984) Butterworths):

the author, when considering rules for calculating the value of the subject matter of the policy, stated:

"Where the cost of reinstatement is taken as the basis of calculation, the reinstatement contemplated is a reinstatement sufficient to restore the property insured to the condition in which it was at the time of the loss. Therefore, the amount of the indemnity will not include increased cost of reinstatement due to the fact that local by-laws or Building Acts prevent the property being rebuilt in the same style or without improved means of exit or safety precautions, for example, in the case of a theatre, unless such increase is specifically insured."

In my opinion, that is a correct statement of principle in relation to the matter and one I adopt in the present case.

It follows, therefore, that the liability of the defendant is to pay to the plaintiffs the cost of reinstatement of the damage caused by the fire, not the cost of reinstatement of the damage caused to other parts of the house by termites, borer or dry rot.

1. In D'Aloia v Colonial Mutual General Insurance Co Ltd [1987] VR 807 (at 812), Nicholson J cited Schultz v New Zealand Insurance Co Ltd [1983] 1 VR 189 with approval, but noted that the particular policy before his Honour specifically provided coverage for extra costs necessary to comply with building regulations or local authority by-laws (at 812) and said (at 813):

... the effect of the present policy [is] that the defendant will pay the extra costs of reinstatement necessary to comply with statutory building regulations or municipal or local authority by-laws. ... I should have thought that the very purpose of a clause such as this was to enable the insured to recover these extra costs, and which obviously contemplates the possibility that the building constructed may be larger and of a better standard than that which it replaced.

1. In that case, Nicholson J ultimately found that "the plaintiff [had] done no more than the regulations required of him" (at 814), and in the course of forming that view, said (at 814 and 815):

It seems to me that if the defendant considers it appropriate to insure buildings of this age and type upon the basis of a policy such as this one, then it cannot be heard to complain when the cost of reinstatement of the same to comply with modern building and planning regulations proves to be expensive.

...

[Counsel for the defendant] next argued that the insured should not be able to recover the cost of providing car parking and landscaping, as these were matters unrelated to the reinstatement of the building. However, I think it clear enough that they were costs necessarily incurred to comply with the relevant town planning requirements and fall within the terms of the policy.

1. Under "Building Cover", cover is also provided for professional fees incurred:

1.4 Additional Benefits and Limitations:

...

(b) Architects and other fees

We will cover architects, surveyors, consulting engineers and legal fees following loss or damage covered under Section 1.2 above up to a maximum of 10% of the Building Sum Insured.

1. Cover is also provided for alternative accommodation:

1.4 Additional Benefits and Limitations:

...

(n) Alternative accommodation when principal residence becomes uninhabitable

If the Building is owned and occupied by you as your principal place of residence and it becomes uninhabitable following loss or damage covered by Section 1.2, we will cover the additional cost of reasonable temporary accommodation for you and your household pets for up to 24 months or the period it takes to make the Building inhabitable, whichever is lesser. Payment is however limited to a maximum of 20% of the Building Sum Insured.

1. In the definitions area of the policy, the word "you" is defined as follows:

"you" and "your" means the person(s) named as the Insured in the Schedule and those persons who live with the named Insured(s) permanently who are any of the following:

- their legal spouse or defacto, or

- any member of the named insured's own family and their spouse's defacto's family.

1. The second type of cover under the policy is "Contents Cover". The indemnifying clause, which is not the subject of any controversy, provides:

2.2 Accidental loss or damage cover

We will cover you for Accidental loss of or Accidental damage to your Contents occurring during the Period of Insurance:

(a) whilst contained at the Situation; or

(b) whilst temporarily removed from the Situation to anywhere in Australia or elsewhere in the world.

1. Cover is also provided for commercial storage costs, in these terms:

2.4 Additional Benefits and Limitations:

...

(b) Commercial storage

We will cover your Contents in a commercial storage facility or furniture repository but only when moved from any Situation listed on the Schedule to a commercial storage facility or furniture repository within Australia, including transit to and from, but only when being moved by road, up to a maximum of $50,000 during any one Period of Insurance unless otherwise agreed.

1. Again, there is no disagreement between the parties about the proper construction of these clauses. The only dispute is whether there was a variation or an estoppel effectively varying the terms, or the basis, on which cover would be provided or assessed.

Conventional estoppel

1. As stated by Brereton J (in Moratic Pty Ltd v Gordon [2007] NSWSC 5; (2007) 13 BPR 24,713 at [32]) and accepted by the Court of Appeal (in Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [200] per Tobias JA with whom Mason P and Campbell JA agreed), in common law conventional estoppel, a plaintiff needs to establish:

(1) that it has adopted an assumption as to the terms of its legal relationship with the defendant; (2) that the defendant has adopted the same assumption; (3) that both parties have conducted their relationship on the basis of that mutual assumption; (4) that each party knew or intended that the other act on that basis; and (5) that departure from the assumption will occasion detriment to the plaintiff.

1. The doctrine of conventional estoppel applies to post-contractual (not just pre-contractual) assumptions (Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 at 432). The former requirement that the assumption be as to a state of facts (as distinct from law) has been discarded (see the authorities cited in Waterman v Gerling Australia Insurance Co Pty Ltd [2005] NSWSC 1066; (2005) 65 NSWLR 300 at [79] per Brereton J). In this case, as the alleged facts on which the plaintiffs base their estoppel claims all took place following entry into the relevant contract, I do not need to enter into the debate in the authorities as to whether parol evidence of pre-contractual negotiations which culminate in a written contract may be relied upon to set up alleged estoppels by convention (Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [204]-[214] per Tobias JA with whom Mason P and Campbell JA agreed). Whatever the true position, that restriction (if it exists) does not apply in respect of post-contractual conduct (Waterman v Gerling Australia Insurance Co Pty Ltd at [81]-[82]).

1. Perhaps one further point which needs emphasis for the purpose of this case is, as stated by Gibbs CJ, Mason, Wilson, Brennan and Dawson JJ in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Aust) [1986] HCA 14; (1986) 160 CLR 226 (at 244):

... there is no estoppel unless it can be shown that the alleged assumption has in fact been adopted by the parties as the conventional basis of their relationship... In the absence of proof of custom, there is no evidence that the parties adopted the alleged assumption.

1. In DHJPM Pty Ltd v Blackthorn Resources Ltd [2011] NSWCA 348; (2011) 83 NSWLR 728, Meagher JA indicated (albeit in the slightly different context of an equitable estoppel), that there must be some objective basis for concluding that there was the adoption of the relevant assumption, such as a "communication", or a relevant "conversation", and that there needed to be something more than a "hope" or even a "confident expectation" (at [67], Macfarlan JA agreeing).

The duty of utmost good faith

1. The alleged factual bases of the plaintiffs' claims that the defendant breached its duty of utmost good faith, are, in summary, that the insurer conducted itself in a manner inconsistent with the existence of (what I will call) the "KCJ estoppel" (at [47(c), (e) and (f)] of Commercial List Statement), that the insurer delayed in expressing any concerns it had about the KCJ estimate (at [47(d)]), that the insurer sought to rely on particular documents which the insurer knew did not reasonably reflect the nature and cost of the work that would be required for a notional reinstatement of the house (at [48(a), (c)]), and that it did so for the purpose of negotiating a smaller payout to the plaintiffs (at [48(e)]). The insurer denies breaching its duty of utmost good faith to the plaintiffs, and alleges that the plaintiffs have engaged in conduct in breach of their obligations of good faith to it by insisting on obtaining from the Council development consent when no such application was necessary (at [C28(3)] of the Commercial List Response).

1. When considering the duty of utmost good faith, there arise, in my mind, two areas for consideration. The first is the scope of the duty (i.e. to what aspect or aspects of the insurance relationship does the duty attach), and the second is the content of the duty (i.e. what exactly does it mean).

1. In relation to the scope of the duty, the common law requirement that insurer and insured act in the utmost good faith towards each other was usually recognised in connection with the duty of disclosure, at or before the formation stage of the contract of insurance. The classical statement of the duty and reason for its imposition was made by Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905 at 1909:

Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.

1. It was noted in the Law Reform Commission Report published prior to the enactment of the Insurance Contracts Act 1984 (Cth), that there was then "no reported decision in Australia applying the duty to the payment of claims" (Law Reform Commission Report No. 20, 1982 at [328]), but that there was merely an opinion expressed by Stephen J in his judgment in Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1 (at 31) to the effect that the duty of utmost good faith should apply to all aspects of the insurance relationship. The authors of the report then said:

The position must, therefore, remain in some doubt. That doubt should be resolved. Legislation should make it clear that the duty of good faith applies to all aspects of the relationship between insurer and insured, including the settlement of claims.

1. The Insurance Contracts Act 1984 (Cth) s 13(1) provides:

The duty of the utmost good faith

(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

1. The utmost good faith requirement therefore applies "in respect of any matter arising under or in relation to" the contract of insurance. The broad language of s 13 makes it clear that the duty of utmost good faith applies not only in the formation stage of the contract of insurance, but extends for the duration of the contract, including when a claim is made, and how a claim is handled. But despite the breadth of the language and the requirement not to "[limit] or [restrict] in any way by any other law" (s 12) the effect of the utmost good faith provisions, it is clear that the duty of utmost good faith does not impose "on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure" (s 12). The "duty of disclosure" referred to in s 12 is defined in s 21 as a duty only applying "before the relevant contract of insurance is entered into". The duty of utmost good faith therefore cannot be used to extend the statutory duty of disclosure past the formation stage of the contract. However, the insured may include in the terms of the insurance contract a "continuous disclosure" requirement, a breach of which could amount to a breach of the duty of utmost good faith, for which the insurer may seek a relevant remedy.

1. That construction of the provisions of utmost good faith is consistent with Rogers J's observations in NSW Medical Defence Union Ltd v Transport Industries Co Ltd (1985) 4 NSWLR 107 that the good faith duty applies as between the parties at all material times and in all material particulars throughout the term of the insurance (at 110), but does not require disclosure whenever a fact is known to the insured which would be material to an insurer in the making of a decision (at 111). Therefore in that case it was held that where an insurance policy did not impose upon the insured any obligation, to which the continuing duty of good faith could attach, of supplying information, there was no breach of the continuing duty of good faith arising out of the insured's failure to volunteer to the insurer during the term of the insurance information material to whether the insurer would terminate the policy on notice, or material to whether the insurer would obtain facultative reinsurance.

1. I turn then to consider the content of the duty of utmost good faith. Although the Insurance Contracts Act delineates the scope of the duty, it sheds little light on its content. The difficulty of identifying what "utmost good faith" means was noted in the English text, P M Eggers, S Picken and P Foss, Good Faith and Insurance Contracts, 2nd ed (2004) LLP (at [1.12], footnotes omitted):

What is meant by "good faith" or its sterner apparition, "utmost good faith"? It is an expression which everyone who turns their mind to it will believe they can define in a particular setting; no doubt everyone's view will be different, at least in their application. "Good faith" connotes a measure of honesty and fairness. The question is whether it is a dram or a noggin. Does it require us merely to watch what we do? Or does it require us to play nursemaid for others, at least those less well placed than ourselves?

1. The concept of utmost good faith is probably the same under the Act as it is at common law (see Kelly & Ball at [5.0250], in particular footnote 75).

1. The appropriate starting point in Australia is the decision of the High Court in CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1. The facts are sufficiently stated in the headnote to the report. The insured, AMP, provided unsatisfactory financial advice to investors, and informed the insurer, CGU, that it had become aware of several possible claims by investors. CGU advised AMP that, given the potential number and magnitude of the claims, CGU would take some time to determine whether the policy responded. During that period of time, AMP developed a "protocol", for managing possible investors' claims, which was agreed to in principle by the insurer, and CGU also advised AMP to act as a prudent uninsured when handling claims. AMP considered that it had a liability towards a number of investors and, without any of those investors making a claim as defined under the policy, proceeded to enter into settlements with those investors. CGU later denied liability to indemnify AMP under the policy. AMP sued CGU, claiming that it had relied on the protocol in settling with the investors, that those settlements were reasonable, and that CGU was estopped from denying indemnity under the policy in respect of those settlements. Alternatively, AMP claimed that CGU's denial of liability was a breach of the statutory requirement of utmost good faith.

1. The insurer succeeded. In arriving at this outcome, Gleeson CJ and Crennan J said (at [15]-[16], footnotes omitted):

[15] We accept the wider view of the requirement of utmost good faith ... in preference to the view that absence of good faith is limited to dishonesty. In particular, we accept that utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests. The classic example of an insured's obligation of utmost good faith is a requirement of full disclosure to an insurer, that is to say, a requirement to pay regard to the legitimate interests of the insurer. Conversely, an insurer's statutory obligation to act with utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. Such an obligation may well affect the conduct of an insurer in making a timely response to a claim for indemnity.

[16] However, the Act does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. If there is found to be a breach of the requirements of s 13 of the Act, there remains the question how that is to form part of some principled process of reasoning leading to a conclusion that the insurer is liable to indemnify the insured under the contract of insurance into which the parties have entered.

1. Callinan and Heydon JJ said (at [257]):

[257] At the outset we should say that we agree with the Chief Justice and Crennan J that a lack of utmost good faith is not to be equated with dishonesty only. The analogy may not be taken too far, but the sort of conduct that might constitute an absence of utmost good faith may have elements in common with an absence of clean hands according to equitable doctrine which requires that a plaintiff seeking relief not himself be guilty of tainted relevant conduct. We have referred to the doctrine of clean hands because, as with another equitable doctrine, that he who seeks equity must do equity, it invokes notions of reciprocity which are of relevance here. That is not to say that conduct falling short of actual impropriety might not constitute an absence of utmost good faith of the kind which the Insurance Act demands. Something less than that might well do so. Utmost good faith will usually require something more than passivity: it will usually require affirmative or positive action on the part of a person owing a duty of it. It is not necessary, however for the purposes of this case, to attempt any comprehensive definition of the duty, or to canvass the ranges of conduct which might fall within, or outside s 13 of the Insurance Act.

1. It is worth pausing here to make some observations. In the case before me, each side of the record alleges that the other has breached the duty of good faith in one or more respects. There appears to be a qualified suggestion by Callinan and Heydon JJ that a party to an insurance contract may be disqualified from relying on a breach of the duty of utmost good faith if that party is itself also in breach of that duty. The absence of reciprocity of good faith appears to have informed (in part) their Honours' conclusion that even if there had been a breach by CGU of its duty of utmost good faith, that should not sound in any remedy for AMP (at [261]). However, their Honours' suggestion of some requirement of mutuality has been described as "unhelpful" and "contrary to the legislative requirement" (Kelly & Ball at [5.0270]).

1. Kirby J said (at [130]-[131]):

[130] No one doubts that the absence of honesty on the part of an insurer (or insured) will, if proved, attract the provisions of s 13 of the Act. However, this does not mean that a want of honesty is a universal feature of a want of the utmost good faith in this context...

[131] ... In my view, the criteria of dishonesty, caprice and unreasonableness more accurately express the ambit of what constitutes a breach of s 13 of the Act.

1. Although that case involved an allegation only that the insurer breached its duty of good faith to the insured, I understand the above comments to describe the content of the duty generally, not just as owed by the insurer to the insured. The language of s 13 does not discriminate between the stringency of the duty owed by the insurer to the insured (on the one hand) and the stringency of the duty owed by the insured to the insurer (on the other). Nonetheless, some of the decided cases indicate that a less stringent standard of conduct applies to an insured (only honesty is required) as opposed to an insurer (reasonable conduct is required). This apparent difference was noted in Kelly & Ball (at [5.0250]). It is difficult to find a basis for that distinction either in the language of s 13 or in High Court authority. Some cases indicate that honesty is not always sufficient, and that an insured is required, as a manifestation of the principle of utmost good faith, to take reasonable steps to reduce or minimise the liability of the insurer (see for example the observations of Derrington J in Newnham v Baker [1989] 1 Qd R 393 at 398-399).

1. These general statements are sufficient for the purpose of determining whether, as the insurer claims, the plaintiffs would be in breach of their duty of utmost good faith if they obtained development consent from the Council when it was not strictly necessary to do so. However, it is helpful, in the particular circumstances of this case, to consider the content of the duty on an insured as applied to claims. This is because the insurer suggests that Mr and Mrs Libling sought impermissibly to inflate the quantum of their claim.

1. When comprehensively considering the content of the duty as applied to claims, the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd; The Star Sea [2001] UKHL 1; [2001] 2 WLR 170 made it clear that, on the part of the insured, the duty of utmost good faith is no wider than a duty not to make or present a fraudulent claim.

1. Exaggerated claims may or may not amount to fraud. In the English case of Orakpo v Barclays Insurance Services Co Ltd & Anor [1994] CLC 373, the Court of Appeal considered when an exaggerated or inflated claim would amount to fraud, or to a breach of the duty of utmost good faith, by the insured. In that case, insurance covered damage to a building. The insurance contract was in any event voidable since it had been induced by material misrepresentation, but the defendant insurance company had also relied upon the defence that the claim was grossly exaggerated and fraudulent. The Court of Appeal dismissed the insured's appeal holding unanimously that there had been a misrepresentation. But, in obiter, there was a difference of opinion on the fraudulent claim defence. Staughton LJ, dissenting, thought that any breach of an implied term or the duty of good faith would not have been so fundamental as to entitle the insurer to be discharged from liability. Staughton LJ said (at 383):

Other aspects of the claim, such as the items of dry rot and damage to furniture were so implausible as to cast doubt on their integrity. Of course, some people put forward inflated claims for the purpose of negotiation, knowing that they will be cut down by an adjuster. If one examined a sample of insurance claims on household contents, I doubt if one would find many which stated the loss with absolute truth. From time to time claims are patently exaggerated; for example, by claiming the replacement cost of chattels, when only the depreciated value is insured. In such a case, it may perhaps be said that there is in truth no false representation, since the falsity of what is stated is readily apparent. I would not condone falsehood of any kind in an insurance claim. But in any event I consider that the gross exaggeration in this case went beyond what can be condoned or overlooked. Nor was it so obviously false on its face as not to amount to a misrepresentation.

1. The majority, Hoffmann LJ and Sir Roger Parker, held that the insurer would on that ground as well have had a defence to the whole of the claim. Hoffmann LJ said (at 384-385):

One should naturally not readily infer fraud from the fact that the insured has made a doubtful or even exaggerated claim. In cases where nothing is misrepresented or concealed, and the loss adjuster is in as good a position to form a view of the validity or value of the claim as the insured, it will be a legitimate reason that the assured was merely putting forward a starting figure for negotiation...

...

The judge found that the plaintiff had dismissed his first surveyor, Mr Newbury, because he was unwilling to say that all the damage in the house had been caused by the burst pipes and storm. He instructed the next surveyor to proceed to produce a priced schedule of all the works required for the reinstatement of the premises. He then put this forward as the basis of his claim, the implication being that the items requiring reinstatement had been caused by insurable risks. It was only as a result of the size of this claim that the Commercial Union made its own enquiries into the previous state of repair of the property and found that it had been the subject of local authority notices.

1. The plaintiffs also point to the report prepared by O'Hearn Consulting which in items 14 and 15 identified that the timber flooring of the ground level was to be completely removed and the sub-floor dried and the sub-floor framing to be replaced as required due to water damage.

1. The plaintiffs also point to the KCJ fire damage report of November 2008 which indicated that the floors on the bearers and joists showed some bounciness. It was expected that the surface would be damaged and it was suffering from surrounding swollen timber floors. Mr Martin identified the ground floor timber joists as being swollen and formed the judgment that the risks of reinstallation were too great and hence priced for replacement. Mr Gale in addition identified that in his view the floor joists could not be properly cleaned as they were, and they were eventually replaced.

1. On that basis I think the figure put forward by the plaintiffs in relation to demolition should be preferred.

1. The defendant also complains about the costs of carpentry which it identifies as providing for the most significant difference between various experts.

1. The defendant relies upon Mr Batger who says that his costings were based on an analysis of items which he regarded as having been damaged.

1. The defendant submits that the costs of replacing the whole staircase should not be allowed. It submits that it is known that this did not occur because a variation was allowed during the course of the project when Mrs Libling requested an upgrade of the Pine to American Oak. It was not therefore demolished and replaced; it was simply being upgraded, it is submitted.

1. It is further submitted by the defendant that Mr Martin allowed for the costs of replacing the first and ground floor joists. Again the defendant points to the Hibbs reports to demonstrate that this did not happen. Indeed it is pointed out that a number of the reports establish that charges were made for the costs of remediating the joists.

1. Similarly, the defendant submits that photographs of at least one of the first floor balconies shows tiling and a balustrade in place, and further points to Hibbs charging for remediating those items. It points to the fact that Mr Martin however had included costs for the replacement of the first floor balustrade, demolition, removal and replacement of tiles etc.

1. The defendant also points to Mr Martin having included in his costings the cost of replacing the balustrades of the external balconies and the carpentry. It submits however that there is no evidence to support the need for its replacement because of the fire or exposure to water. Complaint is made in respect of Mr Martin including the cost of installing four sets of retractable louvres at a cost of $36,000 under carpentry. It is submitted there is no evidence that the louvres were on the house prior to the fire. Mr Martin it is pointed out by the defendant agreed that he could not find them on any photographs. However it is submitted by the defendant that Mr Martin was instructed to cost based on drawings and documents which themselves did not include only items which had been damaged in the fire or items which were present prior to the fire. The defendant submitted that the plaintiffs had not established that the defendant should bear the cost ($36,000) in respect of the four retractable louvres merely because Mr Douglas Martin suggested that he found them on some drawings for the purposes of a development application which was included in a letter to Mr Martin of 5 March 2009. The defendant submits that there is simply no evidence that they existed at the time of the fire and they should not be allowed merely because they are included in the Rosselli scope of works.

1. The defendant also complains that Mr Martin included in his costings the cost of replacing all of the shutters at ground level. It points to the fact that the KCJ fire report specifically noted that shutters were not damaged.

1. Further the defendant complains that Mr Martin included not only the costs of removing and cleaning some of the windows but the costs of replacing a large number of windows at a total of $70,000. It submits that he was unable to identify where these windows were and said that he simply based the estimate on the KCJ schedule of windows. The defendant also submitted that there is no suggestion in the KCJ fire damage report that the windows were damaged or needed replacement. It also points to the fact that Mr Martin specifically points to some windows having evidence of rot and prior patching. The defendant submitted that the rot referred to by Mr Martin in this context could not be caused by mould as explained by Dr Kemp.

1. Lastly on this topic the defendant submitted that Mr Martin allowed for the cost of replacing timber floors in some tiled areas and as I understand it, submits such costs should equally not be allowed.

1. On the basis of its submissions the defendant put forward suggested reductions in various amounts for the items identified.

1. The plaintiffs submit and I agree that there is an abundance of evidence which would suggest that the main staircase required a significant amount of work. Mr Martin identified damage to the main staircase in his fire report in November 2008. There is also mention of extensive water damage to the stairs. In the later report he prepared in December he expressed the view that the stairs needed to be stripped on the underside and/or wedges to be re-seated and glued.

1. The plaintiffs point to Mr Hassall who observed damage to the balustrade of the main stairs and in particular some of the vertical balustrades were broken and some were missing. Further observations indicated some were loose.

1. Mr Douglas Martin concluded that the requirement for removal of the main staircase arose from the need to remove the ground floor joists. The plaintiffs also point to Mr Gale who confirmed in his evidence that the main staircase needed to be removed due to mould contamination. I think the plaintiffs have amply proved the costs associated with the work identified in relation to the main staircase.

1. In relation to the first floor balcony balustrade there seems little doubt that it was affected by rot. I think the evidence especially that of Dr Kemp (which I accept) leads me to conclude that either the rot was caused by the fire or was certainly made worse as the result of water and soot damage. Mr David Martin gives evidence of the extent of the damage to the first floor balcony and I think there is ample evidence to suggest that the rot was at least related to the fire and therefore it was necessary to replace the balustrade accordingly.

1. So far as the retractable louvres are concerned it is true that they were included in the BASIX certificate for the DA. I otherwise accept the need for BASIX compliance. The plaintiffs point out that the louvres were indicated in drawings prepared by Mr Rosselli in the knowledge of the obligation to include them. The plaintiffs submit that the mere suggestion that they should not be allowed because they are included in Mr Rosselli's scope of work ignores the fact that Mr Rosselli and Mr Hassall had seen the house and therefore had the advantage of assessing the requirements for BASIX. The plaintiffs point out that it was simply not put to either witness that they had inappropriately included the items as part of the scope to reinstate them. It is also pointed out by the plaintiffs that there was no suggestion made to either of them that the louvres did not replace a damaged substitute.

1. In addition Mr Libling gave evidence that timber louvres existed outside "before the fire". Although he deferred to his wife as to the precise details his memory was that there were timber louvres at least on the western side of the house though he was not entirely sure how they operated; they may well have been he thought "hand operated" or they could have been electrically operated.

1. I think the evidence produced by the plaintiffs is more than sufficient to justify the inclusion of the costs of the retractable louvres referred to.

1. In relation to the ground level shutters Mr David Martin indicated in his costings spreadsheet precisely which shutters required replacement as a result of damage, namely a single shutter number S15. This formed the basis of Mr Douglas Martin's costing. It is submitted by the plaintiffs that what is in fact recorded in the KCJ fire damage report (item 9.2.2) is that the timber shutters appear to be intact. However what is also noted is that all the paint was stained by soot and smoke. The plaintiffs submit that it can be inferred and I think correctly that following inspection some months later Mr David Martin identified one shutter as sufficiently damaged to require its replacement and costed it accordingly. In my view there is ample evidentiary support for this and I think the plaintiffs' submission on this point is correct.

1. So far as windows are concerned Mr David Martin identified the windows which he thought required replacement in his spreadsheet. He made it clear in his fire damage report that all windows required repainting and that all windows were stained by water plus deeply ingrained soot and smoke. His evidence was that he would not repaint a surface affected by rot without repair of the rotted areas. I do not think any criticism can be levelled at Mr Martin because it does seem to me to be a perfectly reasonable approach to adopt.

1. Given the extent of fire and water damage in the house I do not think it is unreasonable to infer (which I do) that the windows were affected by rot either caused or exacerbated by the fire. Again in this regard I accept the evidence of Dr Kemp as to the effects of fungal rot and the time after which it will have effect. Her evidence of course was that the house was in a state of high-level contamination from four to six weeks after the fire. Further she gave evidence of the high level of penetration of the mould types that cause fungal rot. Her evidence went further in that she expressed a view that rough wood or wood with porous openings would be penetrated quicker but that sealed wood, that is varnished or treated in any other way by painting for example, can equally be penetrated by mould. Further Mr Gale's evidence was that the mould contamination was extensive in the house. Further I think there is ample evidence to suggest that a number of windows were in fact replaced due to mould contamination. The better view on the evidence which again I accept is that windows that were replaced indeed required replacement and hence reinstatement. The defendant's attempt to minimise the obvious extent of rot either caused or exacerbated by the fire simply has no evidentiary basis whatsoever. The evidence provided by the plaintiffs provides more than ample and sufficient evidence from which I can comfortably draw an inference that the rot in the windows for example and other parts of the house was either caused or exacerbated by the fire.

1. The plaintiffs in my view rightly point to other items such as the chimney, Japanese style doors and whether it is necessary to remove the timber floors sitting underneath the tiled floors and further the alleged overestimation of the area of the first floor by Mr David Martin. This latter criticism is on the basis that no account was taken of the need to make allowance for wastage.

1. In relation to these specific items I cannot detect from the defendant's written materials precisely the reasoning or evidence to dispute why they should not form part of the reinstatement costs other than perhaps to suggest that they were not intended to be replaced. I think that criticism or objection is, to correctly distil the defendant's position, in my view misconceived.

1. The defendant also complains about tiling costs. It submits that Mr Martin includes in his costing the labour costs of replacing all the Burlington slate when it is clear that the plaintiffs never intended to replace the slate and the costs of timber under the slate. The defendant also complains that Mr Martin includes the costs of laying new floor tiles on the balconies and replacing the water proof membranes underneath. In each case it submits that the items have been included as PC items.

1. The plaintiffs I think correctly point out that there does not really appear to be any contest but that the tiles to the dining room, laundry and cellar were damaged as a result of the fire. They point out again correctly that this was recorded in the KCJ fire damage report in November. Further they point to evidence of Mr David Martin and Mr Libling that the tiles were chipped, delaminated and swollen and that Mr Libling observed no drumminess or such condition prior to the fire.

1. The mere fact that Mr and Mrs Libling elected not to replace the slate during the rebuild I think again is a misconception of the policy obligations of the defendant.

1. The defendant contrasts the amount for cement rendering; on the one hand $45,269 and on the other $26,098. It submits that Mr Rosselli said that the external walls were not stripped and re-rendered. Further it submits that the evidence supports that patching was applied and again invites the court to take account of the fact that the actual cost was $36,000 and that this should be taken into account.

1. There does not appear to be any real dispute that work needed to be done to the external render as a result of the fire. Mr Martin's evidence was that he considered that patching the render created problems in that the patch is visible unless it has been a hard set. He costed for re-rendering the external cement render on that basis. The mere fact that it may not have been done in the actual rebuild does not in my view detract from the reasonableness of the assumption that it was required for reinstatement. I do not regard the defendant's criticisms as valid.

1. The defendant complains about the costs of air conditioning. It submits that there is ample evidence that Mr Libling wished to upgrade the air conditioning throughout the house and did so. This even involved the engagement of an acoustic engineers to reduce the sound and the erection of a concrete wall to prevent the sound from going into the neighbour's property.

1. The defendant submits that there is no evidence that anything other than the air conditioning unit for the attic was damaged in the fire. It submits the KCJ fire report mentions the air conditioning on two occasions and specifies only that the ducting was damaged. It submits Mr Hassall agreed that the damage was limited only to the ducting. Further it submits there is no inspection analysis or report by any other person to the effect that the first floor, ground and basement air conditioning units were damaged. It submits that in all probability they were not. In addition, the main air conditioning unit, it contends, was housed in a timber box situated externally on top of the laundry. This fact, it submits, tends to suggest either it was protected from the elements by the box or it was designed not to be damaged by the elements such as water. The defendant points to an email from Mr Libling dated 16 October 2010 in which he specifically queries whether the existing air conditioning unit for the cellar/basement would be satisfactory. It submits this material should be used to infer that he was still using the existing basement unit in 2010. Further, it submits there is no evidence that the main and first floor units were damaged. I am urged not to allow the cost of $96,000 which accounts for three out of four of the air conditioning units but rather I should adopt Mr Batger's estimate of $13,570.

1. The plaintiffs submit that the two relevant witnesses would be Mr David Martin and Mr Hassall. They submit that it was only Mr Hassall who had it put squarely to him that there was no damage to the air conditioning units and that he did not remember. The plaintiffs also accept that the KCJ fire report only refers to ducting but that in and of itself does not invite the inference that there was no damage to the first and ground floor air conditioning units.

1. The plaintiffs point to Mr Lloyd's reports in which he specifically made mention as part of his assessment that the electrical, hydraulic and mechanical installations had been severely damaged and he anticipated an effective strip out of the dwelling as warranted. He made clear in his evidence that that description included air conditioning units. In addition the plaintiffs point to Mr McNamara having made an allowance for air conditioning in his initial costs plan based on his observations at the time. Likewise Mr Meredith, the plaintiffs contend, makes an allowance for an air conditioning unit in his costing, I am asked to infer, having made an inspection of the house.

1. The plaintiffs further suggest that the fire incident report discloses evidence of damage to multiple air conditioning units. Indeed the fire incident report refers to "1AC" motor found under debris and another found in "NW" corner bedroom. In respect of both units there is the comment that there was extensive fire damage.

1. The plaintiffs accept that the primary claim made is on the basis of the allowance in the KCJ quote. For various reasons I have not accepted that that is an appropriate basis. However they point out that what was in fact put into the house by way of a new air conditioning system was "comparable to what was there before". The plaintiffs further content, I think correctly that the requirement to get an acoustic engineer was a condition of the DA. Again the plaintiffs contend, correctly in my view, that the fact that the installation of replacement air-conditioning created additional compliance obligations is nonetheless a matter which falls within the policy.

1. I am satisfied that the plaintiffs have proved the reasonableness of these costs and again I reject the defendant's criticisms.

Appropriate amount for alternative accommodation

1. There does not appear to me to be any issue as to the plaintiffs' entitlement to claim an amount for accommodation and incidental expenses incurred by them up to 2 October 2010 which is two years after the fire.

1. The primary basis upon which this claim of course was put was that there was either was an agreement and/or the defendant was estopped from subjecting the plaintiffs to the maximum period. The cap, by reason of the terms of the policy is $789,000.

1. The evidence is that the plaintiffs incurred accommodation and related costs of $527,653.13 in the 24-month period immediately following the fire. This amount is made up of $464,525.25 for accommodation and $63,127.88 for related costs. There does not again appear to be any issue but that these amounts were expended.

1. Unsurprisingly the defendant accepts that it should pay for the 24-month period. It is disputed by the defendant however that the use of the term "you" in clause 4.1(n) is defined to mean the persons named as the insured in the schedule as those persons who lived with the named insureds permanently.

1. The defendant submits that there were three people living in the house at the time of the fire. Although Mr and Mrs Libling had another son, it is contended I think correctly by the defendant that there is no suggestion at any time that accommodation was required for him.

1. The defendant also contends that the policy would not respond to every personal expense incurred by Mr and Mrs Libling in the two year period. Only the reasonable costs of alternative accommodation are required. The defendant further contends that the defendant has in fact paid the sum of $450,000 already.

1. The defendant accepts that it should pay Mr and Mrs Libling's expenses in staying in a hotel up to the time they went overseas on 5 December 2008. Further the defendant accepts that it should be responsible for additional charges which might be viewed as personal expenses for Mr and Mrs Libling but not the hotel expenses referable to Mr Libling's friend. I think that contention is correct.

1. The defendant also contends in my view correctly that it should pay the rental which Mr Libling informed Mr Lloyd he would be incurring in the period from Christmas to 19 January 2009. Albeit expensive, the insurer was fully informed by Mr Liblng as to what he thought he had to do and in my view agreed to meet that expense.

1. The defendant also contends which I think is correct that is by no means clear what other expenses are in fact claimed for in the period from Christmas to 19 January 2009. I observe of course that the status of the spreadsheet remained subject to a s 136 qualification. It was certainly not admitted on the basis that any of the amounts expended were referable to and/or accepted as reasonable expenses pursuant to the policy. I was not addressed orally or in writing by the plaintiffs in respect of these expenses. That not only covers the current period I am discussing but any other period.

1. The defendant correctly submits that between 19 January 2009 until 12 April 2010, Mr and Mrs Libling resided at 40 Martin Road at a rent of $13,000 per month including GST. The defendant accepts it should pay that amount. Further, from 19 April to the end of the two year period in early October 2010, Mr and Mrs Libling resided at 120 Hopeton Avenue, again at a rent of $13,000 per month. The defendant again accepts it should pay that amount.

1. The defendant contends that it should not be required to pay amounts for gardeners and pool maintainers at 44 Martin Road. I think that is right. I do not see how it could be regarded as costs of reasonable temporary accommodation consistent with the clause. The clause is predicated of course upon the original residence being uninhabitable.

1. The defendant contends that it should not be required to pay for the costs of cleaning the fishpond at 40 Martin Road. Such a cost may or may not have been a term of the lease Mr and Mrs Libling entered into with the owners. I am not in a position on the state of the evidence to know one way or the other and consequently I am not satisfied that the plaintiffs have proven that such is recoverable under the clause.

1. The defendant also submits that it is not or should not be required to pay for the additional items of furniture which Mr and/or Mrs Libling may have decided to purchase during their stay in the houses. Again I am simply not satisfied on the state of the evidence, first as to precisely what was purchased and when and/or why. Why may be easier to answer than the other questions. Many of the items may well have been damaged or destroyed by water, soot or for that matter fire. Again no attention has been paid by the plaintiffs to the precise items that are claimed apart from tendering the spreadsheet.

1. The defendant rejects any obligation to pay for the upgrading of security systems, from the security systems which were present in the houses. I do not agree. The clause is directed to reasonable temporary accommodation. But for most persons especially in areas like Centennial Park, or Vaucluse burglary is a real threat and an upgrading of the security system at least as a matter of general principle I do not find is unreasonable. Likewise the changing of locks is clearly in my view a reasonable cost and should be paid for by the insurer pursuant to the clause.

1. The insurer objects to paying for the internet and phone adjustment costs, the cost of an additional fly screen for the spare bedroom or the cleaning of a garage. Additionally the insurer objects to the payment of some $4,000 for the storage of wine and costs associated with having wine delivered to Mr Libling's house. Though it is true that the clause does not anticipate perhaps that the temporary accommodation will in all respects be identical with the "principal place of residence" but I think it is reasonably clear that albeit temporary there has to be something a little more than a tent and small wooden boxes to sit on. Such a policy is clearly intended to maintain reasonably to a large extent the environment in which the insured previously enjoyed his or her home. In his previous home for example Mr Libling had internet and phone connections of his choice. Likewise he stored wine at his home. I see none of these expenses as unreasonable and I think the insurer should pay for them. So far as costs associated with delivery of wine to Mr Libling's house as opposed to storage, I think it is open to argument that that would fall outside what is reasonable; I think to that limited extent I would disallow that expense.

1. Insofar as the plaintiffs' claim expenses associated with hotel accommodation for friends and relatives, I agree with the defendant that this would and should fall outside the scope of the policy. It is quite immaterial whether Mr and Mrs Libling on a regular basis or otherwise entertained friends and relatives. The policy is confined to providing temporary accommodation for members who permanently reside at the residence. Such persons however close they may be as relatives would obviously fall outside what in my view the clause is intended to deal with.

1. The plaintiffs make a claim in relation to the kennelling of their dog up to 5 December 2008. The defendant apparently does not object to payment for that period. Thereafter the defendant submits that the plaintiffs went overseas and from the time they returned they were living in houses where they could have kept the dog. There is actually no evidence one way or other on that item but more to the point I am not satisfied that the plaintiffs have substantiated a claim for the housing of the dog otherwise for that earlier period when Mr and Mrs Libling from time to time may have gone overseas.

1. Apart from the amounts that I have referred to above the status of the spreadsheet does not permit me together with the evidence otherwise to be satisfied that other than those amounts I have dealt with specifically the plaintiffs are entitled to any monies pursuant to the clause during the 24 month period. A calculation will need to be undertaken before I can make any orders finally in relation to this aspect of the matter.

Professional fees

1. The limit on this claim pursuant to clause 1.4(b) is $394,600.

1. The evidence put forward by the plaintiffs is that they have expended $394,953.25 in professional fees in respect of the reinstatement of the premises which included the minor alterations and additions.

1. The plaintiffs point out that the professional fees are not dealt with by the builders who have costed. There is however, both sides accept, no dispute between Mr Martin and Mr Batger as to the appropriate percentages to be applied for professional fees. Mr Martin and Mr Batger agreed on 12%. The defendant points out that Mr Rosselli in fact charged on the work he did at approximately 9.6%. The defendant therefore submits that the defendant should not be liable to pay at a rate higher than Mr Rosselli actually charged. In my view that does not really address the issue satisfactorily.

1. On Mr Martin's costings, the professional fees are $424,301.97 which of course exceed the indemnity limit. The plaintiffs therefore submit that the appropriate figure in all the circumstances is the indemnity limit. I agree.

Storage

1. Under the policy the maximum benefit is $50,000 pursuant to clause 2.4. Only the plaintiffs have addressed this item and in writing. The actual costs incurred are $40,311.48. I do not detect any opposition from the defendant in relation to this and I think that is the appropriate amount to be awarded.

Interest

1. The plaintiffs claim interest pursuant to s 57 of the Insurance Contracts Act. Pursuant to that provision interest runs from the day from which it was unreasonable for the insurer to have withheld payment of the amount. The amount is that prescribed by the Insurance Contracts Regulations 1985.

1. The plaintiffs contend that the largest items to which interest is attracted are the cash amount attributable to the building claim and the professional fees applicable. They submit that the timing of the accrual of interest will in part depend on the nature of the agreement that the insurer has or has not bound itself to.

1. I have found that the insurer did not bind itself to either the process or the estimate provided by KCJ.

1. The plaintiffs submit that on any view the alternative approach is that interest should run at the latest from the time that the insurer made its first offer of settlement to the plaintiffs. The defendant submits on the other hand that Mr Libling used the money advanced by the defendant in 2008 and 2009 by depositing it in accounts of one of his various companies and then transferring it back by way of some form of loan agreement when necessary. It is further submitted that the evidence records Mr Libling having received interest of in excess of $50,000 on these amounts by March 2010. The defendant submits that if the defendant has underpaid and the plaintiffs are entitled to damages then any consideration as to interest must have regard to the fact that payment is in respect of an amount which the defendant was not actually liable to pay until the reinstatement work was undertaken. The defendant therefore submits that this may be an issue on which further submissions can be made depending on the terms of any judgment. I am content to leave this matter for the moment on that basis. I would therefore reserve to both parties in the light of my findings an opportunity to make further submissions about this.

Distress and inconvenience

1. Certain types of contracts have as one of their objects the provision of peace of mind, convenience and freedom from distress to a party. Where such a contract is breached in a manner causing distress, pain, suffering or physical inconvenience, the court may award a sum as compensation. Although certain types of insurance contracts clearly fit within that class of contract, there are types of insurances which do not (for example in Ventouris v Mountain (The Italia Express (No 2)) [1992] 2 Lloyd's Rep 281 at 293, Hirst J found that a contract of marine insurance was not one to provide peace of mind or freedom from distress).

1. In my view, the plaintiffs correctly submitted, and there is plenty of authority to support the proposition, that the type of contract in this case is recognised as one which has as one of its objects the provision of peace of mind to the insured (Stuart v GRE Ltd (1988) 5 ANZ Ins Cas 60-844 at 75,281-75,282; South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortensen v Laing [1992] 2 NZLR 282 at 313; Edwards v AA Mutual Ins Co Ltd (1985) 3 ANZ Ins Cas 60-668; Johnson v Australian Gas Co Ltd (1992) 7 ANZ Ins Cas 61-109; Motor Accident Mutual Insurance Pty Ltd v Kelly (1998) 10 ANZ Ins Cas 61-420 at 74,719).

1. The plaintiffs submit that I should make an award for damages which is based upon the delay in the insurer meeting its promise. As I have not been satisfied that any of the promises asserted were in fact made nor estoppels created I do not think this is an appropriate case to award any damages under this head.

Failure to mitigate

1. The defendant submitted that the plaintiffs have failed to mitigate.

1. They submit that they raised the issue of a temporary roof to protect the home in October 2008. The matter was further raised but the defendant submits that Mr and Mrs Libling simply did not want to do this because they wanted to make changes to their house.

1. It is submitted by the defendant that as Mr and Mrs Libling did not accede to the defendant's requests to put a permanent or temporary roof on, that there is a relevant failure to mitigate.

1. I have already dealt with the issue of mould remediation and it does not seem to me that as a matter of reality the roof issue is a real one. I have dealt with this earlier in the judgment. It is simply a red herring.

1. Whilst I have not found any of the promises alleged by the plaintiffs, given the nature and complexity of the task (which both sides were using their best efforts to grapple with) I think such a submission is entirely misconceived.

1. I reject the submission that the plaintiffs failed to mitigate.

Conclusion

1. To summarise, I have rejected each of the variation and/or estoppel claims advanced by the plaintiffs. I have also rejected every claim of breach of the duty of utmost good faith made by the parties. Accordingly, it was necessary for me to assess the reasonable cost of reinstatement of the house to its "as was" state, by reference to the evidence before me. For the reasons I have given, I prefer the estimation of Mr Rhodes-White, subject to an adjustment to take into account the actual cost of remediation rather than the estimated cost. As I have rejected the estoppel covering the claim for alternative accommodation, it was necessary to make an assessment of what should be allowed. The parties will need to collaborate, given my rulings, to work out precisely and mathematically where my reasons place them on this issue. In relation to professional fees, I have come to the view that the appropriate figure is the indemnity limit. In relation to storage costs, I have formed the view that the plaintiffs should receive the amount I understand they seek. I have rejected the plaintiffs' claim for damages for distress and inconvenience. I have also rejected the defendant's allegation of a failure to mitigate on the part of the plaintiffs. On the question of interest under s 57 of the Insurance Contracts Act, I would allow the parties to provide further submissions, in the light of my reasons in this judgment.

1. Clearly, an adjustment should be made to take into account amounts already paid by the insurer to the plaintiffs. In this regard, I would accept what I understand to be the uncontested approach proposed by the plaintiffs. That would involve applying the insurer's funds against benefits that were never the subject of any controversy first, leaving the balance to be adjusted against the three main items in controversy in the case.

1. I invite the parties to prepare and send to my Associate short minutes of order giving effect to these reasons, and to arrange with my Associate for a suitable time to have this matter re-listed to be heard on costs and interest, unless the parties reach a consensual position on those questions.

1. Given the length and complexity of the judgment, I think it is also appropriate to give liberty to the parties to apply to have the matter re-listed if it becomes necessary to do so.

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Decision last updated: 07 January 2014