IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2016-409-1226
[2019] NZHC 277
BETWEEN EMMONS DEVELOPMENTS NEW ZEALAND LIMITED
Plaintiff
AND
MITSUI SUMITOMO INSURANCE CO LIMITED
First Defendant
AND
VERO INSURANCE NEW ZEALAND LIMITED
Second Defendant
Hearing: 30, 31 October 2018, 1, 2, 6, and 9 November 2018 (and further memoranda) Appearances:
N R Campbell QC, P J Wood and T D Grimwood for Plaintiff M G Ring QC, C M Laband, J M Hayes and S R Merkin for Defendants
Judgment:
28 February 2019
JUDGMENT OF NICHOLAS DAVIDSON J
EMMONS DEVELOPMENTS NZ LTD v MITSUI SUMITOMO INSURANCE CO LTD & VERO INSURANCE LTD [2019] NZHC 277 [28 February 2019]
TABLE OF CONTENTS
Para No
A. INTRODUCTION [1] Declarations sought
[5]
Earthquake damage [7] Consultants [9] B. OVERVIEW OF ISSUES FOR JUDGMENT
[16]
The Policy and its application
[18]
Extensions [20] Earthquake full reinstatement cover MD022 [22] Concrete cracking [26] The Five Issues for judgment [38] The evidence - Overview [39] C. ISSUES
[42]
ISSUE ONE: MINIMUM CONCRETE CRACK WIDTH REQUIRING REPAIR
[42]
Submissions for Emmons [42] Expert evidence [55] Submissions for the Insurers [65] Discussion [84] Interpretation [100] Conclusion [114] ISSUE TWO: CONCRETE CRACK REPAIR METHODOLOGY
[126]
Submissions for Emmons [128] Submissions for the Insurers [136] BBR Contech trial [140] Discussion [150] Conclusion [163] ISSUE THREE: COVER FOR THE COST OF REPAIRING NON-EARTHQUAKE CRACKS IN DAMAGED PORTIONS
[174]
Comment [174] Submissions for Emmons [175] Submissions for the Insurers [185] Discussion [191] Conclusion [199] ISSUE FOUR: COVER FOR THE COST OF REPLACING, TO THE POLICY STANDARD, STRIPPED-OUT ITEMS THAT WERE NOT DAMAGED
[204]
Submissions for Emmons [204] Submissions for the Insurers [215] Discussion [225] Conclusion [230]
ISSUE FIVE: COVER FOR THE COST OF COMPLYING WITH REGULATIONS IN REPLACING STRIPPED-OUT ITEMS THAT
WERE NOT DAMAGED
[230] Submissions for Emmons [231] Submissions for the Insurers [237] Discussion [241] Conclusion [243] D. DISPOSITION
[244]
Declarations [245] E. COSTS
[246]
SCHEDULE ONE – Declarations sought by the parties
PLAN ATTACHMENT
A.INTRODUCTION
[1] The distinctive bow shaped white building once known as “Noahs” hotel, later “Rydges” has stood damaged and disused in the heart of central Christchurch since the Canterbury earthquake of 22 February 2011.
[2] This judgment concerns insurance cover for Rydges and the adjoining Car Park building (“Car Park”), each damaged but not destroyed. Along with the separate but now demolished building, Grant Thornton House, they made up the block between Cambridge Terrace and Cathedral Square, fronting Worcester Street. All these buildings were constructed in the 1970s.
[3] The plaintiff, Emmons Development New Zealand Ltd (“Emmons”) has owned the land and (now) Rydges and the Car Park buildings since 1990.
[4] The buildings were insured by Mitsui Sumitomo Insurance Co Ltd (“Mitsui”) for many years. This judgment concerns Emmons’ claim under the Mitsui Business Package Policy in place between 31 December 2010 and 31 December 2011, made up of a policy schedule and a policy document. The policy includes a material damage (“MD”) section with which this litigation is concerned. Cover was provided by Mitsui as to 75 per cent and Vero Insurance New Zealand Limited (“Vero”) as to 25 per cent, in this judgment referred to as “the insurers”.
Declarations sought
[5] Emmons and the insurers seek competing declarations (at common law rather than under the Declaratory Judgments Act 1908) in respect of five contested insurance issues. There is no relevant difference between these jurisdictions for this judgment, but declarations must be fact specific, efficacious and capable of practical application. Where a declaration is the only relief claimed, as here, then jurisdiction should be exercised with caution. Notwithstanding that caution, there is a manifest need for declarations to resolve the residual elements of dispute between Emmons and the
insurers. This is so despite the fact that the parties say they will still need to work with the Declarations to final resolution.
[6] Mr Ring QC, for the insurers, says that because a declaration must have utility, this influences the resolution of Issue One as Emmons’ proposed declaration will have no practical effect. Mr Campbell QC for Emmons disputes that.
Earthquake damage
[7] The Canterbury earthquake on 4 September 2010 caused relatively minor damage to these buildings. Emmons instructed Hawkins Construction Ltd (“Hawkins”) to carry out repairs which were nearly complete by 22 February 2011 for a sum within the deductible under the policy.
[8] The earthquake of 22 February 2011 caused extensive damage described in this way:
GTB [Grant Thornton building]: the Canterbury Earthquake Recovery Authority determined that the GTB was dangerous, and demolished it. The insurers, after Emmons sued them in an earlier proceeding, accepted that the GTB was destroyed by the earthquakes and that Emmons is covered for the reinstatement of the GTB. There are no longer any issues with respect to the GTB in the current proceeding.
The Rydges Hotel: the main Tower of the Hotel settled, including settling differentially. There is a differential settlement between the hotel tower and podia. There is extensive cracking to concrete floors, walls, columns and beams. There is other related damage. The parties now largely agree on what is needed to restore the damaged portions of the Rydges to the standard required by the Policy – except in relation to the concrete cracks.
The Car Park: The Car Park has settled differentially, including differential settlement between the main car park and the office/retail podium along Worcester Boulevard. There is extensive cracking to the concrete floors, walls, column and beams. There is further related damage. The parties now largely agree on what is needed to restore the damaged portions of the Car Park to the standard required by the Policy – except in relation to the concrete cracks.
Consultants
[9] Hawkins has been the head contractor for repair of Rydges and the Car Park, led by Ryan Croy. Holmes Consulting Engineering (“Holmes”) was engaged by Hawkins for Emmons after the September 2010 and the February 2011 earthquakes.
Holmes’ engagement included investigation of damage to the three buildings, led by John Hare, CEO of the “Holmes Group”. As Holmes became committed with other work, Hawkins engaged Thornton Tomasetti (“TT”) to assess damage to Rydges and the Car Park, led by Sam Cooper, the Vice President of TT.
[10] The insurers engaged Arup Pty Ltd (“Arup”), Construction Advice Ltd (“CAL”) (Roger Brown) and Compusoft Engineering Ltd (“Compusoft”), (Dr Nicholas Brooke).
[11] Hawkins also engaged BBR Contech (“BBR”) to conduct a concrete crack repair trial in Rydges. BBR is a specialist remedial engineering company, and the trial was conducted in December 2011, led by Peter Higgins.
[12] In 2012, Emmons engaged Tobolski Watkins Engineering Inc (“Tobolski Watkins”) of California, to provide an independent assessment of the structural engineering reports by TT (for Emmons) and Compusoft (for the insurers). His reports were reviewed by Tobolski Watkins’ director, Dr Nigel Priestley, an expert in the seismic design of reinforced concrete structures, who died in December 2014.
[13] Once Holmes had the capacity to provide advice to Emmons in 2013, it was re-engaged. Emmons also engaged Eliot Sinclair, surveyors, engineers, and planners, whose work included crack mapping some floors of Rydges, this work led by Warren Haynes.
[14] Fire safety, egress, electrical services, mechanical, hydraulic and civil services work was undertaken by Powell Fenwick Consultants (“Powell Fenwick”) for Emmons, and Aecom, Macdonald Barnett, and Protect Design for the insurers.
[15]Joint expert reports were prepared to address engineering and services issues.
B. OVERVIEW OF ISSUES FOR JUDGMENT
[16] Gradually, the claims by Emmons against the insurers have been refined and settled, by a “partial settlement agreement”, a credit to the parties, the experts and
counsel, who have navigated a pathway towards resolution with commendable co-operation, and strict focus at trial.
[17] The background to this judgment is in part set out in a second and revised amended statement of claim of 27 April 2018, a statement of defence of 13 June 2018, and Emmons’ reply of 15 August 2018. The pleadings have largely been superseded given the partial settlement agreement. Some Declarations are made by consent together with the Declarations for this judgment, under ‘Disposition’.
The Policy and its application
[18] The principal insuring clause in the material damage (“MD”) section of the policy reads:
The indemnity
We will indemnify you for damage to any of the insured property occurring during the period of insurance. You will be indemnified by payment or, at our option, by repair or by replacement of the lost or damaged property. …
[19] The insurers elected to pay Emmons rather than repair or replace. While indemnity generally is ‘old for old’, rather than ‘new for old’ as in reinstatement, Emmons purchased full reinstatement cover for earthquake damage, under the extension discussed below.
Extensions
[20] There are ‘Automatic’ extensions, and ‘Additional’ (optional) extensions. The automatic extensions apply as follows:
These automatic extensions form part of this material damage section and are subject to all its provisions (unless otherwise stated).
If there is any conflict or inconsistency between this material damage section and the extension, only the extension will apply. If there is any conflict or inconsistency between the extensions, only the more particular extension will apply.
[21] The automatic extension with which this judgment is concerned is that for ‘Unharmed Property’:1
27. Unharmed property
We will cover you for the cost to demolish, damage or remove any property or part unharmed where these costs are incurred for the sole purpose of reinstating damaged insured property.
We will also cover you for the cost of reinstating the property to a condition the same as, but not better nor more extensive than, its condition immediately prior to the demolition, damage or removal.
The indemnity provided by this extension will not increase our liability beyond the sum insured on the insured property damaged.
Earthquake full reinstatement cover MD022
[22] Emmons purchased full reinstatement cover for earthquake damage, as an Additional (optional) extension. An explanatory note describes the operation of Additional extensions in this way:
Each of the following extensions will have no effect unless there is a statement in the schedule that the particular extension will apply. They are subject to all the provisions of the policy and of this material damage section (unless otherwise stated). If there is any conflict or inconsistency between this material damage section and the extension, only the extension will apply. If there is any conflict or inconsistency between extensions, only the more particular extension will apply.
[23] The Additional extension MD022 (“MD022”) underpins this judgment. Rydges and the Car Park are agreed to have been damaged, but not destroyed. MD022 provides that:
We will pay the cost of reinstatement in the event of any insured property to which this extension applies suffering earthquake damage … during the period of insurance.
“Earthquake damage” means –
a) damage occurring as the direct result of earthquake, “Reinstatement” means in respect of insured property damaged:
a) where property is lost or destroyed, its replacement by an equivalent building or by equivalent plant as the case may require; or
1 In this part, the italics are those reflected in the Policy.
b) where property is damaged but not destroyed, the restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive than, its condition when new.
[24]“General Definitions” include:
Damage (except for machinery breakdown)
- Physical loss or damage unintended and unforeseen by you, and not the subject of a policy or section exclusion.
[25] The insurance effect of regulatory requirements during restoration work is in issue. Under MD022 there are:
“Special Provisions”
1.Compliance with regulations
The amount payable under this extension will include the cost incurred in
reinstatement that is necessary comply [sic] with any regulations. Provided that the amount payable will not include any such cost:
a)the extent to which the work had already been required of you by notice served by a regulatory authority before the happening of the loss or damage; or
b)in respect of undamaged property or undamaged portions of property other than foundations (unless foundations are expressly excluded from insurance cover under this material damage section).
This special provision 1(b) will apply whether or not the undamaged property or portion comprises a separate building or structure or a separate item of plant or equipment.
Concrete cracking
[26] Cracks are contemplated in concrete structures and reflect in design standards. They are thus to be expected. They may otherwise be caused by construction defects, short-term structural deflection, long-term creep and shrinkage deflection, and mechanical overload such as that imposed by an earthquake. Cracks may be widened by post-construction shrinkage and/or earthquake, and if caused by an earthquake may be widened by further seismic activity.
[27] Mr Ring adopts a description of ‘Category 1’, ‘Category 2’ and ‘Category 3’ concrete cracks, which derive from pre-earthquake design, construction and ‘life of the building’ factors, and the entire earthquake sequence. These ‘categories’ are not formally recognised in engineering practice but generated for this case. A crack of 0.3mm or wider (exterior), or 0.4mm or wider (interior) is described as in Category 1, between 0.2mm and under 0.3mm/0.4mm Category 2, and under 0.2mm Category 3. The Category 1 cracks are fewer in number and shorter in length than those in Category 2. Category 1 and Category 2 cracks may result from any one or more of the factors referred to. The insurers accept that some cracks may have widened or narrowed, or both, as a direct result of seismic activity, primarily that of 22 February 2011.
[28] Rydges is agreed to have performed well, indeed “better than satisfactory” during the earthquakes, and damage to it and the Car Park was relatively minor. Seismic cracking in concrete elements added to pre-existing cracking. Many services require upgrading, many are at the end of their economic life, earthquake or not, but there was little seismic damage to the services in Rydges.
[29] TT reported that the earthquake of 22 February 2011 caused minor damage including expansion of existing cracks. The Car Park was already in a poor state of repair, with long-term deterioration including previously repaired cracks, staining and efflorescence, build-up of salt and corrosion-induced spalling, described as “a bit grim”. There is an issue as to whether the exposed slab reinforcement on Levels 8 to 13 of the Car Park reflects pre-existing damage because of insufficient constructed cover (concrete over reinforcing steel) which could indicate ongoing maintenance issues for all slab reinforcement in these areas.
[30] Otherwise TT says that the Car Park appears to have performed relatively well, suffering only minor cracking to walls and corbels with some localised damage. The shops and offices in the Car Park building performed well. There are cracks and spalling in some pre-cast beams and corbels, and cracking to shear walls, and there is some pre-existing damage. Post February 2011 earthquakes caused minor damage, including expansion of existing cracks, not relevant to the policy excess of
$500,000.00, as only that of 22 February 2011 caused such damage.
[31] Each crack is separately repairable, in principle at least, where the width makes epoxy injection feasible. It is likely multiple or all cracks will be repaired consecutively and/or by separate teams in the one repair project. A crack-by-crack assessment is agreed to be required in the repair project itself, but that level of refinement is not for this judgment. The parties say that the Court’s declarations will be applied by them in a practical and economic way to apportion the actual cost incurred by Emmons between them (if allocation is required to distinguish cracks which reflect earthquake damage, and those which do not).
[32] To understand what damage has been caused by earthquake(s), the pre-existing (pre-earthquake) condition of building elements must be understood, in particular, concrete cracking in the usual course of life of these buildings. The expert witnesses agree that there were pre-existing cracks in the floor slabs of Rydges, and Dr Nicholas Brooke, the insurers’ expert witness, estimates that in one slab about 40 per cent of cracks, (in number), are pre-existing. Whether any particular crack was created by the February 2011 earthquake is moot and very hard to determine. It is not for this judgment to do so. The seismic effect on all cracks in their creation and/or under seismic load is in issue, in the context of ‘damage’, and ‘damaged portions’.
[33] Emmons says that any pre-existing cracks will have been exacerbated, widened and/or been ‘worked on’ by seismic cyclic loading, with material effect. The insurers hold to the position that cracks must be proved to have developed or widened to constitute damage as a direct result of the 22 February 2011 earthquake.
[34] Rydges’ floor slabs had sagged between columns before the earthquake sequence began, and the measured sag is a combination of short-term structural deflection, long-term creep and shrinkage, and additional deflection resulting from earthquakes. Holmes for Emmons says that it is not possible to determine the extent of the additional deflection caused by earthquake whereas Compusoft for the insurers estimates that about five per cent of the sag is likely to be from earthquakes, the rest pre-existing.
[35] If Emmons wants insurers to pay for crack repair, Mr Ring says it must show the “positive likelihood” that each crack for repair under the policy was by the
February 2011 earthquake to a width that exceeds the ‘allowable width’ (‘designated’ by judgment) or was widened by the February 2011 earthquake to that width, and as the result constitutes ‘damage’. Emmons says that if it has to prove each crack in this way the Court should recognise its will to do so, but where there are earthquake damaged portions of the buildings then the reinstatement cost of restoration includes repair of cracks of the designated width within such damaged portions, a rejection of the insurers’ ‘crack-by-crack’ approach.
[36] The parties thus are at odds over the approach which should be taken to each crack under these heads. The insurers say there must be a crack-by-crack assessment (with a qualification that cracks may combine in their effect) and if they can be proved to be a direct result of the February 2011 earthquake, and of the width designated by this judgment so as to constitute ‘damage’, they will be repaired with epoxy resin in the manner determined under Issue Two. Category 1 cracks are not in evidential dispute as constituting earthquake damage as the insurers concede that and if the Declaration to Issue One is as the insurers seek, they will make a formal acknowledgement to that effect. The insurers say that in the required crack-by-crack analysis there is an assumption that all other cracks in the element do not exist or have been repaired, and the insurance exercise involves comparing the durability, stiffness and strength of the building element before and after the February 2011 earthquake, and whether creation or widening of a crack or cracks as a direct result of that earthquake impaired the element with such engineering consequence that it constitutes ‘damage’.
[37] The parties do not want an indeterminate finding from the Court, or a finding that it is equally possible that each crack which pre-existed the February earthquake exceeded the allowable width and became wider still or was widened by an earthquake after the February 2011 earthquake to exceed the allowable width. As Mr Ring put it, the parties want a ‘binary’ judgment, to provide certainty as they seek to conclude their insurance relationship. The recognition that there will be discussion and negotiation between the parties about issues not settled by this judgment suggested that an interim judgment might be apposite, but the parties want a final judgment.
The Five Issues for judgment
[38] The Declarations as sought by the parties are set out in the Schedule to this judgment. There was some evolution in the Declarations sought and Emmons made further amendments after closing submissions.
The evidence – Overview
[39] The evidential exploration of the principal issues for judgment was assisted by the ‘hot tub’ evidence given over two days by Dr Brooke for the insurers, and Mr Hare for Emmons, who sat together for this exercise. They conducted themselves with respect for each other’s expert opinion and with the skilful and economical questions of counsel this combined process was of real assistance to the Court. In their illumination of complex evidential issues in this way, Dr Brooke and Mr Hare stand as models for expert witnesses.
[40] Counsel worked through two ‘hot tub’ topics relevant to Issues One and Two with Dr Brooke and Mr Hare.
Topic A Minimum concrete crack width requiring repair
1.Have any of the building or building elements’ qualities (such as durability, strength or stiffness) been impaired by concrete cracks of 0.2mm to <0.4mm (interior) or 0.2mm to <0.3mm (exterior?)
2.What industry standards or literature do you rely on for that opinion?
3.Will the damaged portions of the building be restored to the Policy standard (when new and compliant) if concrete cracks of 0.2mm to
<0.4mm (interior) and 0.2mm to <0.3mm (exterior) are not repaired?
4.if a pre-existing crack was already at the minimum width requiring repair, will widening of that crack in the earthquakes have further impaired the qualities (such as durability, strength, or stiffness) of the building or rebuilding elements?
Topic B Repair methodology
5.To achieve full penetration of epoxy in the length of horizontal cracks of the designated (minimum) width, should the top surface of the crack:
(a)Be sealed and epoxy injected over the full visible length; or
(b) Sealed and injected over the length where the crack is of the designed width plus one or two injection ports?
6.What industry standards, or practices, do you rely on for that view?
7.Did the BBR Contech trial support that view?
[41] The other witnesses who gave evidence (for Emmons) were: Mark Youthed (of Bayleys), Ryan Croy (of Hawkins), Peter Higgins (of BBR Contech) and Samuel Cooper (of Thornton Tomasetti). They were tested closely by Mr Ring for the insurers.
C. ISSUES
ISSUE ONE: MINIMUM CONCRETE CRACK WIDTH REQUIRING REPAIR
In order to restore the damaged portions of the Rydges and the Car park to a condition substantially the same as, but not better or more extensive than, their condition when new (including the cost that is necessary to comply with any regulations) (the Policy standard), it is necessary to:
(a)(Emmons’ position) repair concrete cracks with a width equal to or greater than 0.2mm; or
(b)(Insurers’ position) repair external concrete cracks with a width equal to or greater than 0.3mm and internal concrete cracks with a width equal to or greater than 0.4mm?
Submissions for Emmons
[42] Mr Campbell says Rydges and the Car Park have suffered earthquake damage, so the insurers are bound to pay ‘the cost of reinstatement’ being restoration to the Policy standard, and that this does not require each crack to be proved as ‘earthquake damage’ in isolation from other damage (including any distinction between cracks). Portions of the buildings indisputably suffered earthquake damage, so cover is for the cost of ‘full reinstatement’ of those damaged portions. That is how the Issue is expressed, and the Declarations sought by each party are based on the premise of there being damaged portions.
[43] With a qualification mentioned above to which I will return, the insurers submit that Emmons must prove that each crack, viewed in isolation from other damage, and in isolation from any other crack constitutes ‘earthquake damage’ on a ‘crack-by-crack’ assessment. They do not accept Emmons’ case that because there
are ‘damaged portions’ in the two buildings Issue One is answered simply by the application of the Policy standard to repair of those portions, however that word is interpreted, and for which there is no definition provided.
[44] Mr Campbell says that under MD022 the policy responds when insured property has suffered earthquake damage during the period of insurance and that simply means there must be a physical change to property beyond ‘de minimis’, (so small as to be put aside as it has no material effect), which impairs the value or usefulness of the property.2 This is submitted to turn on whether the proven change in the physical condition of the buildings has resulted from an event or series of events, not whether each item of physical change in isolation has impaired the value or usefulness of the property. Mr Campbell uses the illogic of “1,000 small scratches on a wall”, not constituting damage because each scratch of itself has no discernible effect on value or usefulness but taken together they have such effect.
[45] Mr Campbell submits that it is enough for Emmons to show that if it repairs all cracking as it proposes, including those in Category 2, then such will constitute restoration of the damaged portions to the Policy standard.
[46] Emmons faces the insurers’ case that Emmons must show that the difference between the insurers’ repair proposal and that of Emmons, in terms of functionality of the buildings, is more than de minimis in effect. Mr Campbell says that is a refinement which finds no home under the policy, which just requires proof of earthquake damage and physical change more than de minimis which has impaired value or usefulness, and the policy does not contemplate whether what the insurers propose will produce an outcome worse, equivalent to, or better than Emmons’ proposed methodology, but simply whether the restoration proposed by Emmons “will meet the Policy standard”.
[47] The insurers here had the option to reinstate or to indemnify by a payment, and that election is for the insurer.3 Here, the insurers will pay. MD022 provides that if Emmons elects to reinstate, the insurer will pay the cost of reinstatement, and subject
2 Arrow International Ltd v QBE Insurance (International) Ltd [2009] 3 NZLR 650 at [78] and
[82] (HC).
3 Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR 341 at [26].
to betterment Mr Campbell says that the reinstatement is for Emmons. “Substantially the same as its condition when new”, is not a definition of fine precision, but means “for the most part” or “essentially”. “Like-for-like” reinstatement may not be as palatable to the market as policies which, like this, are more flexible in their contractual target, and this has been recognised by the Supreme Court.4
[48] Mr Campbell addresses the insurers’ position that the cracks for determination in Issue One, those in Category 2 between 0.2mm and 0.39mm (interior) and between 0.2mm and 0.29 (exterior), must be proved as caused by the February 2011 earthquake, and constitute ‘damage’. He does so in the face of Mr Ring’s submission that Emmons cannot prove that a Category 2 crack constitutes earthquake damage. Whether Emmons can do so is not for this judgment, but it is on the evidence a very difficult exercise, which is a prompt for the Court in the interpretation exercise.
[49] From the expert evidence, it is clear that cracking may have effect on value or usefulness not just by the width of a crack, but its location, including its location relevant to other cracking, its interconnection with other cracking, and the effect of seismic cyclic loading which includes the ‘working’ of cracks by way of expansion and contraction ‘backwards and forwards’, irrespective of their width before the seismic event.
[50] As Mr Campbell puts it, there are ‘undoubtedly’ damaged portions of the buildings so Issue One is directed to the application of the Policy Standard to those. What constitutes such a portion is not before the Court for determination, but he submits the policy does not call for the cracks to be considered in isolation from other cracks or other damage as the insurers contend, and this is a fundamental point of dispute.
[51] Emmons has elected to reinstate, meaning restoration of the damaged portion of the property to a condition substantially the same as that when new, but not better or more extensive than that. Mr Campbell illustrates a range of reinstatement approaches:
4 Tower Insurance Ltd v Skyward Aviation 2008 Ltd, above n 3 at [27].
Condition of damaged portion after reinstatement Within the definition of “reinstatement”? 1 Substantially the same as, but not better or
more extensive than, its condition when new
Yes 2 The same as (and therefore not better or more extensive than) its condition when new Yes 3 Substantially the same as, but better or more extensive than, its condition when new No (to the extent of the betterment)
[52] Based on this analysis Mr Campbell says Issue One requires the answer to three questions. I quote:
The first is whether Emmons’ proposal (to repair the cracks in issue as well as the wider cracks) will restore the damaged portions to “substantially the same condition” as when new.
If that question is answered in the affirmative, the second question is whether the damaged portions will be “better or more extensive” than their condition when new.
Emmons anticipates that the insurers will raise a third question: whether their proposal also would achieve the Policy standard (which relates to Issue 2) … Emmons’ position is that, even if the insurers showed that their proposal would achieve the standard, this would not detract from the fact that Emmons’ proposal also would do so – and Emmons would therefore be entitled to proceed with its proposal at the insurers’ costs. Nonetheless, again out of abundance of caution, Emmons will submit that the insurers’ proposal will not meet the standard.
[53] Mr Campbell says there is no requirement for Emmons to show why the insurers’ reinstatement should not be directed by the Court, if it would also meet the Policy standard. He says that is irrelevant. The insurers’ approach is said to be a conflation of the Policy standard with an aspect of the test of ‘damage’, which Mr Campbell says does not accord with the policy nor authority and is thus ‘wrong and unfortunate’. An insurer could propose partial restoration and place on the insured the burden of establishing that the full correction of a ‘lean’ would be ‘appreciably better’ as to functionality than the insurers’ proposal. As there are ‘damaged portions’ Mr Campbell says the only relevant question is whether the insured’s proposal will meet the Policy standard, otherwise the insured would have to compare potential methodologies and outcomes each time the insurer came up with a new proposal.
[54] There is, however, an inevitable qualification to that proposition to which I will return, based on the mutuality of obligation between insurer and insured, that there
must not be an unreasonable approach to reinstatement which reflects in greater and unnecessary cost to the insurers.
Expert evidence
[55] Mr Campbell says the Holmes’ crack repair specification in November 2010 still stands as the basis for crack repair and the Declaration to Issue One, but that Dr Brooke’s position has changed. He also says Mr Brown of CAL and Dr Brooke agreed to the 2011 crack trial being conducted on the basis of 0.2mm cracks being epoxy injected. That does not seem to me of any weight as it was a comparative trial based on Category 2 cracks as Emmons proposed and did not constitute a concession by these experts as to the allowable crack width.
[56] However, Dr Brooke has said that cracks 0.3mm and above should be filled based on NZS 3101: Part 1: 2006 (“NZS 3101”) and with reference to literature he now says 0.4mm internal cracks should be filled. Initially, Dr Brooke thought a crack below which no structural issue arose was 0.2mm, later 1.0mm and then in his brief 0.5mm, and Mr Campbell makes something of this evolving position. However, a good expert will not adopt a fixed position, and will reflect on all the evidence as it comes to hand.
[57] Mr Campbell submits that the professional and industry references on which Dr Brooke has relied do not warrant the conclusion he has reached. Aside from that Dr Brooke had no experience in this reinstatement or repair area as at 2011, whereas Mr Hare was Advisor to the Canterbury Earthquake Royal Commission, to the Canterbury Earthquake Recovery Authority (“CERA”) and was on the Engineering Advisory Group. Mr Hare and Holmes have experience of reinstatement of earthquake damage in large commercial buildings so their position is distinguished from Dr Brooke who does not have experience of reinstatement as such. Dr Brooke’s reliance on BRANZ (Building Research Association of New Zealand Inc) and its Bulletin 535 is criticised because he first referred to this at trial. No expert had mentioned this, and it is submitted the Bulletin was not intended to provide guidance for repair of structural elements of any buildings, let alone large-scale and complex commercial buildings like Rydges and the Car Park.
[58] Mr Campbell says the BRANZ Bulletin has no application to the issue, and Dr Brooke would not expect a competent engineer to rely on the Bulletin in respect of earthquake damage to buildings such as Rydges and the Car Park. NZS 3101 is concerned with durability and corrosion of the reinforcing within the concrete and is not referable to seismicity and wind loading. Publications by the Federal Emergency Management Agency (“FEMA”), FEMA 306 and FEMA 308 do not contemplate earthquake crack damage to concrete slabs. FEMA 306 is a relevant guideline, which requires the application of engineering judgment, but was not used by the Advisory Group. A paper by Hanson referred to further is primarily concerned with walls, and repair was not the main focus of the paper, so it is submitted.
[59] Dr Brooke was the only witness called for the insurers. Mr Brown with colleague Dr Davidson, initially thought the appropriate minimum width for repair was 0.2mm or appeared to accept that the only thing standing in the way of adopting such threshold was a minimum Code standard. They did not give evidence, nor did an Arup engineer.
[60] There is common ground that seismic load may affect the characteristics of concrete including its durability, strength, stiffness, vibration, deflection and shear capacity. In rejecting a crack-by-crack assessment, Emmons says that cracks must be looked at as a whole in the context of where they are situated, the elements they affect, interaction of cracks and those elements with others, and how the building and the element performed in the earthquake before any conclusion can be drawn about the effect of cracking on any element, as a damaged portion.
[61] There is perceivable sagging in the floor slabs and bays at all levels and Holmes concluded that the earthquakes contributed to such sagging and slopes. Mr Hare says the significance of seismic displacement includes its cyclical nature (“cyclic load”) and the impact of instantaneous peak displacements during shaking. This will reflect in the creation of and ‘working’ of cracks. The underlying concern is deterioration or ‘loss’ of aggregate interlock in the concrete leading to reduction in the vertical (shear) load carrying capacity of the slabs.
[62] Holmes’ specification is supported in evidence by Mr Hare, that all cracks 0.2mm up to 5.0mm in width should be repaired by epoxy injection. The future performance of the Emmons’ buildings is submitted to be a “key indicator” of bringing them back to the when-new standard. The cyclic loading described in evidence founds Emmons’ submission that the cracks went through cycles of being worked backwards and forwards whether they were created before the earthquake or during it. Repeated loads cause gradual deterioration as Mr Hare says, and it cannot be predicted how many cycles of load concrete can withstand, which I consider a significant unpredictability relevant to Issue One, as to damage. The major issue for future performance is a reduction in the shear capacity of the concrete directly affected by cyclic loading. The shear capacity of floor slabs is of more concern than of the walls because the slabs rely on the concrete for their vertical load carrying capacity. Mr Campbell refers to Dr Brooke’s evidence that cracks in the floor slabs between 0.2mm and 0.4mm caused by the earthquake would cause some loss in the shear capacity of the slabs, and repair of these would not make for better shear capacity than when the slabs were new.
[63] There is no generally accepted guide as to the width threshold for crack repair having regard to structural performance, strength, stiffness or shear capacity and in the end, it falls for engineering judgment. That is why it is submitted for Emmons that restoration of the shear capacity of the floor slabs must take into account the cyclic nature of seismic loading and the deterioration of concrete aggregate interlock. Mr Campbell submits that the widely adopted practice in Canterbury of repair of 0.2mm cracks provides reasonable assurance of restoration to the when new standard, and a threshold of 0.4mm would fall short.
[64] Mr Campbell says there is no case made out by the insurers that Emmons’ proposal would restore the damaged portions to a “better or more extensive” condition than when new, no evidence of that, rather the insurers simply say the Category 2 cracks cannot be proved to be earthquake damage and invite the Court to adopt their trial concession that 0.4mm (interior) and 0.3mm (exterior) cracks are earthquake damage to be restored to the Policy standard. Mr Campbell submits the insurers advance a case for “partial restoration” and to “step over” the cracks in issue and even if it were to “substantially” restore damaged portions of the building by adopting
a designated width of 0.4mm/0.3mm, Emmons says it should have cover for the costs of a more complete or full restoration which achieves the Policy standard which does not exceed the only limit the insurers chose to impose, that of betterment. Repair by epoxy injection as such is not an issue between the parties, to achieve the when-new standard, which differentiates this case from others.
Submissions for the Insurers
[65] The insurers’ case turns in part on what they say should be the evidential findings. They correctly say Category 1 and 2 cracking may be non-seismic, seismic other than February 2011, those causes plus the February 2011 earthquake, or as a direct result of the February 2011 earthquake. Mr Ring gave a useful summary of the way the Declarations will be applied, as the insurers see it, but submits Emmons will first have to prove the Category 2 crack width they seek for the Declaration to Issue One is a direct result of the February 2011 earthquake.
[66] That leads to the submission that the Declaration sought by Emmons for Issue One, based on a Category 2 crack, is not capable of practical application, as the insurers make no concession that such was caused by the February 2011 earthquake, nor that it is ‘damage’. A Declaration limited to Category 1 cracks as the insurers seek, would have immediate practical application because they will then formally concede that all Category 1 cracks in Rydges and the Car Park are the direct result of the 22 February 2011 earthquake, and the Declarations to Issues Two, Three, Four and Five may be made in that setting.
[67] Apart from proof that a crack of the designated width was caused by the February 2011 earthquake, Mr Ring says the Policy requires each crack to be proved as “damage”, being “physical loss or damage” which involves “physical change” to the extent it impairs capacity with engineering consequence compared with its pre-earthquake condition.5 That is a contextual question depending on the purpose of the building element in which the crack is situated, and its location, and the width and location of the crack. Seismic widening of a pre-existing crack may constitute
5 Ranicar v Frigmobile Pty Limited (1983) Tas R 113 at 115; Arrow International Ltd v QBE Insurance (International) Ltd, above n 2, at [89] and [82].
‘damage’ within the meaning of the policy, where the widened crack affects the use or amenity of the building. Whether the work required to remedy such damage would be the same as that required to remedy a pre-existing condition may be but does not dictate the measure of whether there has been qualifying ‘damage’.6
[68] While proof of damage under the test the insurers propose requires crack-by-crack assessment, they qualify that by accepting that while an individual crack may not constitute damage, the cumulative effect of multiple cracks, caused by the same earthquake, may cross the damage threshold on a ‘cracks by cracks’ basis, much the same as Mr Campbell’s “thousand scratches” analogy. This is a sensible concession. Otherwise, Mr Ring says that a crack-by-crack analysis must put aside the effect of all other cracks, seismic or otherwise, of whatever width including non-February 2011 earthquake Category 2 cracks, a submission for a ‘stand-alone’ analysis of each crack. Mr Ring says that the evidence of Dr Brooke and Mr Hare Category 2 cracks cannot be proved to be damage by the February 2011 earthquake, in that they came into existence because of that.
[69] The burden on Emmons, given these hurdles, is indeed heavy if the insurers’ submission is upheld. Cracking from causes other than earthquake will usually arise in the first one or two years after construction, including cracks of up to 0.4mm and possibly wider, as Dr Brooke said in evidence. These buildings are of a type prone to shrinkage, and cracking in certain locations, similar to those locations where earthquake induced cracking occurs, so it is very hard to distinguish between possible causes, earthquake and other. If Emmons can surmount the first hurdle that Category 2 cracks are created by the February 2011 earthquake, Mr Ring says that still leaves it short as on the evidence to prove impairment to the strength or capacity of the concrete element as the Policy requires to constitute damage. I refer to Mr Ring’s submission:
5.20 It now seems to be accepted that when considering the impact of cracks on stiffness (and strength), it is a case of looking at it building-by building, element-by-element, bearing in mind other features which might mitigate the impact of cracks.
6 Bligh v Earthquake Commission & IAG New Zealand Ltd [2018] NZHC 2102, [2018] WL 3955510 at paras [25] – [26], [31], [35], [257] and [373] (“mere possibility [that cracks increased in width as a result of the earthquake] …is not sufficient’).
[70] Mr Ring refers to mitigation of cracks in the context of other features relevant in assessing impact on strength and capacity of building elements. So too, will other damage, which aggravates the effect of any particular crack or cracks. Of the qualities of concrete referable to damage being durability, stiffness, and shear strength or capacity, Mr Ring submits that durability is not relevant because after the crack is repaired the exterior will be coated in elastomeric paint, and the interior cracks will be covered and not exposed to moisture penetration. This seems to be agreed.
[71] It is common ground that any crack may affect the stiffness or “bounciness” of the building observed by users, but crack width is not relevant to this issue on these facts. Emmons does not say cracks need to be repaired to stiffen the building, but its evidence is that there will be an impact on stiffness. Not every crack caused by the February 2011 earthquake constitutes ‘damage’ purely because the crack exists, rather, the key question is the significance in engineering terms of that crack. A crack of any width causes a change in stiffness at a given location, but additional cracking in some buildings will cross the threshold to result in an unacceptable difference. The floors in Rydges are quite stiff, so any change or impairment from their condition prior to the February 2011 earthquake would be imperceptible to users. Mr Ring refers to Dr Brooke’s evidence supported by the Compusoft vibration analysis, that, the reduction in stiffness following the February 2011 earthquake would have been about 1 Hz.
[72] There was significant pre-earthquake displacement of slabs. The evidence of both parties came to a similar conclusion as to the proportion of seismic displacement compared to total displacement. The insurers say that Emmons’ evidence does not meet the onus on it to establish damage as a direct result of the February 2011 earthquake, in this respect and Mr Hare could not say what reduction of stiffness there would have been in the building, and whether a change in stiffness derives from earthquake-induced cracking is a matter of fine distinction. He did not observe any vibration during his inspection of Rydges. A slight reduction in stiffness falls short of damage because there is no proof of impairment to the functionality of the affected property, “perceptible to the senses”. A good example was given in evidence by Dr Brooke of the “bounciness” in the floor of a very well used building (out of Christchurch), which he treats as a caution to himself as a user. Once Category 1
cracks are repaired, stiffness would revert to ‘as new’ so Mr Ring submits, and the insurers say if all Category 2 cracks are repaired, that may put the building in a better position than it was. Functionality must be proved impaired by earthquake damage, not taken a step closer to that state of impairment. This proposition has resonance when the crucial issue of strength/capacity is under consideration.
[73] The strength of concrete reflects its resistance to load, which with displacement and deflection go to ‘capacity’. Each crack affects (decreases) the strength of concrete to some degree, but the insurers say crack widths do not provide a rational basis for determination of lateral strength reduction until the cracks are sufficiently large, well over 0.4mm, (citing Hanson)7 and that there is no evidence that Category 2 cracks should be repaired based on loss of shear strength or capacity. Therein lies an important factual issue for this judgment. If Emmons can get past the asserted need for proof that a crack is caused by earthquake, the insurers submit that Emmons’ 0.2mm threshold is arbitrary based on the width at which cracks are repairable, rather than the width at which there is a justifiable engineering reason to do so, based on impairment, and Mr Cooper said that the 0.2mm threshold was based on repairability rather than structural assessment of the width of a crack which requires repair. As with stiffness, the impact of cracks on the strength of an element requires particular assessment, not assumption, in the context of crack location, other cracking and crack interactions for cumulative effect, and Mr Ring says that Mr Hare “appeared to accept” that no consequential reduction in strength can be established as attributable to February 2011 Category 2 cracking, if a crack is proved to be such.
[74] This evidence as to impairment to strength and capacity must be put in factual context, for example, a multiplicity of Category 2 cracking, say 0.35mm to 0.39mm (internal), intersecting, otherwise grouped, in conjunction with Category 1 cracking, and location in a particular element. Emmons’ evidence refers to studies suggesting that cyclic loading during earthquake will cause a loss of aggregate interlock within concrete. Dr Brooke accepts such literature reference, although he considers that it is unlikely cracks in the floor slabs opened and closed repeatedly as Mr Hare
7Robert D Hanson “Evaluation of Reinforced Concrete Members Damaged by Earthquakes” (1996) 12(3) Earthquake Spectra 457.
contemplates, given gravitational forces on the slab pushing it down. This issue of impairment in the strength of the concrete and the floor slabs turns on the creation and widening of cracks and the impact of seismic cyclic load on such, and whether lost strength is consequential in engineering terms discussed above. Dr Brooke thinks otherwise and that Category 2 cracks do not have a foreseeable impact on the functionality of the building, in terms of use or safety but did not address multiple and intersecting cracking, including Category 1, and for location in an element. Mr Hare accepts that reduced capacity of the concrete will not have significantly impaired strength or capacity in the context of design and crack control under static loads, but he assumes loss of aggregate interlock from the 22 February 2011 earthquake cracks, and that is a reflection of a loss of strength to some degree.
[75] Mr Ring also submits the point at which damage occurs is when the affected item crosses the threshold from no or inconsequential impairment to consequential impairment and susceptibility to seismic damage falls short of this. Mr Hare thought that deterioration in the building’s capacity to resist future shaking was possible, but that could not be said definitively, and is “nebulous”. In all, Mr Ring submits that this evidence was simply speculative as to current and future damage, and not positive evidence of actual damage caused by proven February 2011 earthquake Category 2 cracks. Getting “closer to the doorway” of damage is submitted not to be ‘damage’;8 citing Bligh (above).
[76] Despite this litigation position, the insurers accept that if a February 2011 Category 2 crack (proved as such) caused damage to the relevant building element, it is because the crack has gone through enough seismic cycles to have weakened the concrete to a state that has engineering consequences but say that the evidence simply does not carry to whether a crack was caused purely by shrinkage, or discloses seismic damage or extension, nor whether a crack widened or closed, and if so how many times, during one or more seismic induced cyclic loads. Mr Campbell emphasised that the Court should not assume this cannot be proved by Emmons, if it is required to do so.
8 Citing Bligh v Earthquake Commission and IAG New Zealand Ltd, above n 6.
[77] Mr Ring submitted the evidential complexity is not answered by taking a “more conservative” approach to the evidence, because Emmons has to ‘tip the scales’ to establish the probability of earthquake damage to trigger cover. The literature does not reflect in standards or guidelines as to ‘allowable’ crack widths in a building which has undergone cyclic loading, and no reasonable engineer, according to Dr Brooke, could rely on the loss of strength that Emmons says could have resulted from a loss of aggregate interlock in Category 2 cracks. Design of concrete elements includes Category 2 cracks (under static load), and according to Dr Brooke it is conservative to apply NZS 3101, for new buildings, to an existing building. The design of Rydges allows for cracks of up to 0.6mm – 0.7mm, so even if the cracks opened and closed under cyclic loading it is unlikely that the cracks that remain unrepaired would have exceeded or even approached this sort of width. However, this is clearly not analogous as design cracking does not reflect seismic cyclic loading.
[78] Mr Hare agreed that this is an area of engineering where a large safety margin is built into design. After the September 2010 earthquake, the loss of aggregate interlock was not to the forefront of engineering thinking or debate, and he acknowledged that no one at first raised the possibility of such impairment to the strength of the concrete building elements. Mr Ring says that because Emmons is unable to prove damage it sidesteps the need for proof of relevant damage by asserting an ‘industry Standard’ that Category 2 cracks, both exterior and interior, must be repaired, but he submits there is no such Standard, and no authoritative document to that effect, and no ‘customary usage’ although the evidence is plainly that 0.2mm cracks are routinely, if not always, repaired. He is right that Category 2 cracks are not invariably repaired, and their repair depends on evaluation involving the design and construction of the building, and location of the crack.
[79] Mr Ring points to publications referred to above which he says indicate the tolerated crack width in a reinforced concrete building for design and repair purposes, including seismic, should be 0.3mm (exterior) and 0.4mm (interior) under NZS 3101:Part 1: 2006, BRANZ Bulletin Issue 535, American Concrete Institute ACI 224R-01, FEMA 308, and the American Society of Concrete Contractors Position Statement #33 – Cracks in Structural Concrete, which says 0.4mm is the allowable width for interior cracks, and Hanson to the same effect. The insurers accept that the
allowable widths referred to in this literature are driven by durability concerns which are not the focus of Issue One, but Mr Ring says it would be wrong to treat these limits as intended to apply only to durability, and that unexpressed narrower limits were intended only to apply if stiffness and strength were also taken into account. The insurers recognise that these publications do not focus on allowable widths for cracks in floor slabs caused by earthquake, but still say the publications reinforce that there is no industry standard of 0.2mm or wider, and that is the overwhelming inference from the cumulative reading of consistently greater widths in the literature. Emmons has not provided one publication which supports or even refers to a 0.2mm width.
[80] However and presciently for this judgment, given the background to NZS 3101 and the literature, Mr Ring submits that in the end it is a matter for engineering judgment in the context of the particular building, the particular element, the particular crack, and the cause of that crack, whether a crack impairs the capacity of the building in a way that is consequential from an engineering perspective, and thus to constitute damage under the policy, if caused by earthquake. That is why he submits Emmons must prove that each crack constitutes earthquake damage, while accepting cracks may combine in their effect.
[81] The result of the insurers’ proposed crack repair is set against the Policy standard. This is relevant to the scope of restoration work and to ensure it does not go beyond the Policy standard to betterment. There is authority that the ‘when-new’ Policy standard is applicable only once relevant damage has been established under the policy, and an item which is ‘still as good as new’ is not ‘damaged’.9 Restoration responds to functionality, aesthetic quality, and amenity value.10 This does not mean replication of every element when the building was new, as the standard is “substantially the same as…” the when-new condition. The insurer does not have to pay for a reversal in the stiffness or strength of the concrete element where that has not affected functionality to any consequential extent, as that is not ‘damage’.
[82] Mr Ring puts the question as whether, if the designated crack width for repair is 0.4mm, and the floor slabs and other cracked concrete elements are repaired to this
9 Parkin v Vero Insurance New Zealand Ltd [2015] NZHC 1675 (2015 WL 4396531J) at [120].
10 C & S Kelly Properties Ltd v Earthquake Commission & Anor [2017] NZHC 1583 at [124].
extent, that element will have the same functional qualities as it had when new. After one or two years a building will have settled into its environment and developed most of the shrinkage cracks inherent from the innate properties of concrete. Dr Brooke says that with reference to durability, stiffness and shear strength, the affected concrete building elements will be at least as good as, if not better than, they were when new, if Category 1 cracks are repaired. That means not every crack caused by the February 2011 earthquake needs to be repaired, only those where there has been consequential impact on strength and capacity of the concrete. The practical application of the when-new standard involves reflection of all the available evidence as to strength and capacity, including location and relationship with other elements.
[83] The insurers therefore say that Emmons has not established that there will be any sufficient reduction of functionality in a concrete element, compared to its functionality when, for example, it was one to two years old, if Category 2 cracks caused by the February 2011 earthquake remain unrepaired. Category 1 cracks are fewer in number, and shorter in length than those in Category 2, and each crack is in a different Category as a direct result of pre-earthquake construction issues and/or earthquake. However, they came into existence, some cracks may have widened, or narrowed, as a direct result of one earthquake or subsequent earthquakes and that could be from the September or February events or any earthquake after February 2011. On the evidence, post 22 February 2011 some cracks have widened, indeed most of them. One or two show no apparent further damage and one report said some cracks have narrowed by up to 1mm from one earthquake to another. Given the permutations as to the cause of cracking and seismic effect, Mr Ring reverts to the onus of proof and that Emmons must establish Category 2 cracks were caused by the February 2011 earthquake and constitute damage on the balance of probabilities and it cannot do so. That is why he says there is no practical effect in making Emmons’ declaration.
Discussion
[84] The evidence demonstrates that some, indeed a lot of, cracking was created by seismic force and without question, given its destructive force, that includes the February 2011 event. All cracks, whatever their cause, were worked on by that
earthquake through cyclic loading. Some cracks were created in each Category and, if pre-existing, widened and perhaps contracted. I accept Mr Hare’s evidence that there was such working “backwards and forwards” of all cracks, causing loss of aggregate interlock. Gravitational force may have tempered this, but not prevented it I find. There will have been some loss of aggregate interlock. There will have been widening and contraction of cracks. Where any particular Category 2 crack sits in this spectrum of cause and effect is said by insurers not proven nor proveable as earthquake damage.
[85] While the insurers say that each crack has to be proved as earthquake damage as a result of the February 2011 earthquake, and that Emmons cannot do so in respect of the Category 2 cracks, they acknowledge an isolated or ‘crack-by-crack’ analysis may be inappropriate while there is cumulative effect, without saying when that may be so. That must be correct in my view. Strands of rope make for collective strength, so too will cracks combine in their detrimental effect.
[86] Emmons roundly rejects the insurers’ approach based on what the parties intended by the wording of the insurance contract, and the context in which the contract was entered. Earthquake destruction and damage was contemplated, with its insidious manifestation. At the heart of such manifestation lies the loss of strength and capacity, that which is a risk to a building and its occupants.
[87] Rydges is a well-constructed building and given the concrete elements which make up the building, cracking was inevitable, and ‘designed’ in the sense that it was anticipated. In the event of a large seismic event the buildings, or elements of them would present with seismic and non-seismic cracking and seismic load would bear on all cracks. The insurers concede essentially for practical reasons that 0.4mm cracks are earthquake damage which is covered but say otherwise it is not possible for an expert witness to say that any particular crack reflects earthquake damage from the February 2011 earthquake.
[88] Mr Campbell’s essential submission for Emmons under Issue One begins with the stated premise that there are damaged portions in the two buildings, and there are without doubt, in particular those which the insurers are prepared to accept
are represented by Category 1 cracks. The insurers say that such cracks represent a ‘damaged portion’ whereas Emmons says that a damaged portion is more embracing and comprehends a portion, which I take to be a segment or part which circumscribes ‘damage’. Within that damaged portion there will be non-seismic and seismic cracking with all cracking having been worked by cyclic load.
[89] Mr Campbell says that Mr Hare was repeatedly asked if there would be any difference if cracks in Category 2 remain unrepaired in the building, if those in Category 1 are repaired but he says that is not the relevant question, which is simply whether Emmons proposal will meet the policy standard of restoring a damaged portion once established as such to substantially the same condition as when new provided the restoration does not make it better than when new. Mr Campbell says that is sufficient to found the Declaration sought by Emmons for Issue One but this does not determine what is a damaged portion.
[90] Mr Ring made some ground in his cross-examination of Mr Hare mentioned above, that once Category 1 cracks are repaired, shear strength and capacity will be substantially the same or better, and that will not be changed in a meaningful way by the existence or otherwise of unrepaired Category 2 cracks given the design of a slab which allows for cracks up to 0.6mm to 0.7mm under static load. That did not however comprehend seismic cyclic loading and the potential for cumulative loss of strength by Category 1 and Category 2 cracking or a multiplicity of Category 2 cracking in a given portion demonstrably (provably) damaged. Emmons draws on the general practice of Category 2 cracks being repaired, and I consider it is a practice used with some reason recognising the uncertain effect of seismic load, and the unpredictable effect on strength, although Mr Ring says something more must be known about each of the buildings to which it has applied. That practice is not however definitive and the engineering reasoning behind it is challenged in this case.
[91] Mr Cooper was asked about a site report of 21 January 2011 by Holmes and reference to the external cracks being repaired only where in excess of 0.3mm (externally). He did not agree that the Hanson paper indicated that tolerable cracks need not be repaired, and he said that his interpretation of what he called a “particularly complicated paper” was that a narrow crack does not affect strength, but Hanson does
not refer to the number, proximity or interconnection of cracks. He said that other components affect what crack width will be chosen in addition to “crack fatality”, and regulatory constraints; the brief from the client, the extent of the damage, the severity of the cracking, the distribution of cracking, the elements that are cracked, and the structural characteristics of the element itself. This points against an isolated perspective of a crack and I regard this evidence as helpful for Issue One, and relevant to what may be a damaged portion.
[92] The core walls of the Millennium Hotel had minor cracking but they were considered important for repair, hence the 0.2mm repair width. The eastern stairwell walls and adjacent beams and the slabs were recommended for crack repair, where less than 1mm. The waffle slabs, with concrete ribs, were considered to be of minor concern with very isolated cracking and given the nature of the slab or the construction of the element, it was appropriate to adopt 0.4mm. Mr Cooper acknowledged that what he was recommending was a crack-by-crack determination of 0.2mm and above. He acknowledged that TT had tried to ascertain whether crack damage specifically related to earthquake or not, and said if a crack of 0.2mm and 0.1mm was not earthquake related, its recommendation is that it would still be repaired. He acknowledged that from September 2010 to May 2012 some cracks were created, some were widened, some narrowed, and the effect would depend on the crack, the location, and the way the building moved under seismic force. Again, I find this evidence of assistance, as it illustrates the need to assess the effect of cracking in the full factual and engineering context.
[93] Mr Hare said that there were cracks in the building before the earthquake, but all cracks addressed by the experts were caused by or acted upon by the earthquake to widen or ‘work’ those cracks. Durability of the concrete directs the crack thresholds in NZS 3101, about 0.3mm (external) or 0.4mm (internal). The disagreement between Dr Brooke and Mr Hare really lies in the implications of cracks which might reflect in a combination of strength and long-term performance issues under future cyclic loads such as earthquakes, and as to whether those cracks need repair to put the building back as it was prior to the February 2011 earthquake. The literature focuses in many cases on lateral capacity or primary load resisting elements, particularly walls. Those walls often have flexural steel which elongates under bending action, and shear steel
which crosses perpendicular to the flexural steel to prevent failure of a building in the event of large cracking. In the main shear walls there are a number of diagonal or incline cracks in both directions, fairly clearly the result of earthquake shaking, and provided the widest of those cracks are filled and elastomeric paint applied on the outside durability seems largely agreed. The main area of disagreement is what is going on in the slabs because their behaviour and function is different to the walls.
[94] Cracks which result from flexural action as the building has moved and flexed result from the slab being forced to take up whatever shape is imposed by the walls under seismic movement. The flexural lateral movement and perhaps displacement of the raft which has bowed a little means the pattern of cracking is partly reflective of things which may have happened in the past (back to construction) and a lot of cracks may be the result of deformation of the building during the February 2011 earthquake. In a structural context, in my view, future behaviour must be considered, to provide for reasonable reassurance of performance in the event of live loads in future seismic events, to address the cumulative impact of loss of strength/capacity through cracking.
[95] The cracks going through the slab which were caused in construction would typically be more or less diagonal. The interlock of the concrete being the fine detail within the crack is needed to maintain load resistance, to avoid shear failure in the slab. In the seismic context, as the cracks move backwards and forwards, it is not possible to know the greatest width of the cracks during earthquake, during the extreme limits of the shaking movement, nor the impact of multiple cycles of loads, backwards and forwards. Mr Hare says it is generally accepted there is deterioration in the aggregate interlock through cyclic loading and I accept this evidence, but beyond that it is not possible to say, except that over the course of time it will degrade. Knowing that it has degraded and that cracks may have been wider at various times, means the only way to restore the bond is to epoxy fill those cracks based on what is reasonably and practically effective, using conventional techniques to catch all of those cracks which could have deteriorated in strength, and which will definitely deteriorate with further movement.
[96] Emmons’ rejection of a crack-by-crack analysis is put in a practical context. When Rydges and the Car Park suffered earthquake damage the insuring clause was triggered and insurers will pay the cost of restoration of the damaged portion to the Policy standard. Mr Campbell says that is how the engineers first approached damage, not whether cracks of a certain width constitute damage in themselves in terms of the policy but rather by asking what the appropriate restoration was for the cracking that occurred with TT saying 0.2mm and above, and Compusoft saying 0.3mm and above.
[97] When the insurers say that Emmons must prove (first) cracks in isolation constitute damage, Mr Ring qualifies that in recognising the combined cumulative effect of cracking. Emmons’ case is that the policy does not require cracks to be considered in such isolation and it does not call for crack-by-crack assessment. Mr Campbell accepts that damage for the purpose of MD022 is physical change that impairs the value or usefulness of the property but says that threshold of physical damage is reflected in the severity of the February 2011 earthquake and the totality of physical change on that day. This is in my view too sweeping a proposition as physical change is one element of damage, which has a critical qualitative component under the policy.
[98] Mr Campbell more narrowly says the property was undoubtedly damaged on 22 February 2011, so there are some damaged portions, and MD022 provides for the cost of restoring the damaged portions to the Policy Standard. He does not say this means that every crack over the years will be swept up, as there is proper dispute as to how many cracks were caused by the February earthquake as opposed to something else, particularly pre-existing cracking. Mr Campbell accepts that however Issue One is answered, there will still be a live issue as to which cracks were actually caused by the February earthquake which means that if Emmons gets the Declaration it seeks then subject to its argument about portions it does not say that it is automatically entitled to costs of repairing every single crack over 0.2mm. Mr Campbell agrees with Mr Ring that the Court is not for this judgment concerned with crack-by-crack assessment as the insurers say is necessary, but the parties will apply the Court’s determination in a practical and economic way to the actual cost Emmons incurs, to allocate the cost between insurers and Emmons if required. That means there is practicality in the Declaration that Emmons seeks. If Emmons has to come back to
Court to prove earthquake damage by any particular crack, Mr Campbell refers to Dr Brookes’ broad estimate in relation to Level 3 crack mapping, that some 40 per cent pre-dated the earthquake, which may represent a baseline for each of the floors but that scarcely suggests available proof, beyond an expert’s broad estimation. Emmons may say that on the balance of probabilities (some), 60 per cent of the cost of restoration does relate to earthquake damage.
[99] However, that does not detract from Emmons case that it does not have to prove each individual crack was caused by the February 2011 earthquake, and it can take a global approach because the policy responds to that, in a common-sense way. In essence, this is a submission that the policy simply requires consideration of whether there is an earthquake damaged portion, not a crack-by-crack assessment. As to portions, Mr Campbell says he agrees with Mr Ring that a damaged portion will turn on all the circumstances including the nature and extent of damage, the type of building element, and the sort of repair that is involved. Mr Campbell says the insurers’ proposal on the facts will not meet the Policy standard, but that is a fall-back position because Emmons says it does not matter whether the insurers’ proposal meets the standard or not, if Emmons’ proposal will do so.
Interpretation
[100] The parties should reasonably be taken to have known that in the event of earthquake there would be a forensic challenge to distinguish cracks caused or exacerbated by earthquake and those which were not, being those expected under static load. There will be seismic cracking and seismic influence on cracks. While the point may not have crystallised in their thinking, the notion of having to prove the cause of thousands of cracks on an individual basis is so unlikely as to bear on their contractual intention. I recognise that reasoning mixes factual proof with terms of contract, but I do not consider that is an answer, as reinstatement insurance must contemplate the insured event and its aftermath.
[101] This is reflected in the evidence which tended to focus narrowly on a 0.2mm interior crack, as Category 2 cracks range up to 0.39mm (interior) and 0.29mm (exterior) and with those in Category 1 will have been in some instances created by
earthquake, some not, some will have changed category, but all will have been subject to cyclic loading and all will have lost some aggregate interlock.
[102] With that backdrop, it is highly problematic that an insured has to prove a particular earthquake caused damage crack-by-crack before turning to the means of addressing such. The permutations are numerous, to repeat a pre-existing crack may have formed, without any impairment to the building or an element. That crack may have been exacerbated by seismic event(s), widened, or widened and contracted through cyclic loading to constitute some degree of impairment. Another crack may have different features. Some cracking may have intersected with other cracking in Categories 1 and/or 2, pre-existing or earthquake induced and the intersection may be seismically related.
[103] Thus, the obligation on the insured to first prove any Category 2 crack was caused by the seismic event on 22 February 2011, is on the evidence so problematic that I find the parties could not have intended that. They plainly intended and contracted for reinstatement of that cracking which constitutes earthquake damage within a damaged portion, which for this case is related to the crucial engineering issue of shear capacity in the floor slabs. They chose not to refer to repair of cracks, but to damaged portions.
[104] The insurers do not help resolve the evidential conundrum of crack-by-crack analysis and proof of damage by saying this can be avoided by simply adopting Category 1 cracking for the purpose of Issue One and for whatever reason accept that on that basis proof of such cracks as earthquake damage can be put aside. That is to sidestep the issue, which cannot assist resolution, except in a practical (admittedly attractive) way, and indeed the insurers explain their concession in pragmatic terms, “… to facilitate the efficient, expeditious and economical resolution of (Emmons’ claim) …”. They do so with reference to evidence of Category 1 crack or damage.
[105] The enigmatic setting of a crack-by-crack assessment for proof of earthquake damage where the evidence indicates this is a fraught exercise except in ‘without doubt’ instances is said by Emmons to result from the wrong approach to the Policy by the insurers, based on an incorrect interpretation. Issue One assumes damaged
portions in the building, and repeats the Policy wording, and this wording is said to obviate a ‘crack(s)-by-crack(s)’ analysis. This is an encompassing approach, to identify ‘damaged portions’ which could be reflected in cracking and other physical change, but the portion must be earthquake damaged a portion which is materially impaired. Emmons’ proposal is to repair Category 2 cracks to meet the Policy standard of restoring damaged portions to substantially the same condition as when new, not better or more extensive than that condition. It accepts that some Category 2 cracks were not created by earthquake but says all were worked on, and it accepts that if damaged portions are repaired, so as to restore capacity of elements of the buildings by repair of cracks which would not by themselves qualify for reinstatement but for the ‘damaged portion’ argument, then there is arguably an element of betterment.
[106] Mr Campbell acknowledges the uncertainty as to how many and which cracks were caused by the 22 February 2011 earthquake as opposed to something else, but he agrees with Mr Ring that it is not for the Court to decide. He has to accept this as the experts are uncertain. On his argument the choice of the Court, such as it is, is whether the Policy applies to all cracks which lie within ‘damaged portions’ (see further discussion below), or whether on a crack-by-crack assessment, cracks between 0.2mm or 0.4mm (interior), and 0.2mm or 0.3mm (exterior) must be proved to constitute ‘earthquake damage’, from the February 2011 earthquake, which is what the insurers assert, and if so Mr Campbell flags that Emmons may seek to prove that.
[107] The Court is not asked to mark out ‘damaged portions’ but I conclude that the use of such wording and the sheer difficulty in proving a crack is caused by the February 2011 earthquake, created or widened, points against a crack-by-crack analysis, and points squarely to the need to scope such a damaged portion. It may comprehend damage other than cracking. It could be a large portion or much more confined. It could be a whole floor, a section of a slab, but it must be proven to be an earthquake damaged portion, materially impaired. Issue One is expressed on the basis there are such portions.
[108] Mr Campbell made it clear that it is not suggesting that it is automatically entitled to the cost of repairing every single crack over 0.2mm, as that is still subject to argument whether a crack is within a damaged portion and that is an appropriate
concession. A damaged portion will not be restored at the insurers’ expense to include cracks which do not contribute to an earthquake damaged portion or otherwise to constitute betterment.
[109] Mr Ring and Mr Campbell agree that the Court’s determination will be applied in a practical and economical way to the actual cost that Emmons incurs, to allocate that cost if required. I consider the Declaration Emmons seeks would be of practical application, but not dispositive. If co-operation does not result in settlement then Emmons may have to come back to the Court, but in the meantime, it says that the ‘portions’ argument is sufficient for the Declaration it seeks to be made, and allocation on the lines discussed above may be a practical way forward.
[110] I refer again to Mr Hare’s evidence. Because he said the difference between the two approaches to crack repair would have no more than negligible effect, Mr Ring naturally enough made something of that, but I agree with Mr Campbell who says that Mr Hare had difficulty with the question because that was to isolate the cracks in issue which is not what an engineer would do when considering restoration, by breaking the building up into different parts rather than portions. The engineer would not load the cracks up into “one class or another” but take a comprehensive view of the cracks for their place in a damaged portion, whether they were created by or worked on by cyclic loading, this proximity to or intersection with other cracks and the element involved.
[210] When the insurers say that AE27 refers to the ‘cost of reinstating”, the word ‘reinstating’ is not expressed in italics so Mr Campbell says that is not an implicit reference to or adoption of MD022’s definition of “reinstatement”, again consistent with AE27 being in the default part of the policy, operating even when there is no full reinstatement cover. Sometimes reinstatement will be the appropriate measure of indemnity value, so an indemnity only provision may refer to reinstatement. If it is thought the language of AE27 limits MD022 in some way, that is submitted to mean there is an inconsistency between the two parts of the policy because otherwise enabling costs would clearly be covered by MD022. If there is a conflict or an inconsistency between the material damage section and MD022, then only MD022 will apply. Insurance law does not abide inconsistent interpretation of different parts of a contract so interpretation should reconcile those parts.
[211] Emmons’ submission means that unless it is possible to remove and replace the stripped-out item without damaging it, it should have the cost of replacing it to a “new-for-old” standard. If that submission is not upheld then Emmons says it will be entitled to recover on a “new-for-old” basis where the item in question is part of a ‘damaged portion’, even though it is not damaged.
[212] Mr Campbell stepped back from his proposition in opening for Emmons that if a floor slab is damaged then the damaged portion will include items which are part of the floor such as floor coverings and bathroom tiles. That he recognises is too sweeping as to identify a damaged portion requires an assessment in context. The Court is asked by Emmons to answer Issue Four in a way which simply reflects MD022’s reference to ‘damaged portions’.
[213] Emmons says it is a “non-issue” as to whether it is entitled to the costs of stripping-out and replacing items other than for the “sole purpose” of reinstating earthquake damage. Mr Campbell submits that Emmons’ entitlement to these costs is presupposed by the question to be governed by AE27 wherein lies the “sole purpose” test, and Emmons sidesteps the operation of AE27 by claiming these costs under MD022, and says that they have nothing to do with AE27. Issue Four relates to the cost of replacing stripped-out items, not the costs of stripping-out, so it does not understand how there is an issue under the “sole purpose” test but the AE27 clauses read together make it plain the second clause refers to the same property or part of the first. When the insurers refer to the cost of replacing stripped-out items, Emmons says there is no issue in light of the partial settlement, that the cost of replacing those items is covered by the policy, even if Emmons’ entitlement is under AE27 to the exclusion of MD022, the heart of this Issue Four.
[214] If the submission that AE27 does not apply to MD022 is not accepted then Emmons says cover lies within ‘the damaged portion’. Mr Campbell says it is enough for Emmons if the answer to Issue Four reflects the MD022 reference to damaged portions.
Submissions for the Insurers
[215] Mr Ring refers to property not directly damaged by the 22 February 2011 earthquake but which must be demolished, damaged or removed to gain access to, and to repair the earthquake-damaged property. The agreement reached about stripping out the Rydges Tower does not amount to ‘gutting’ the Tower, but Emmons is doing so. Mr Ring says that is entirely for it, but not at the insurers’ expense. There are, however, some things not in dispute. The insurers accept that it is necessary to strip out significant items of fit out such as floor coverings, ceilings, linings and services, in order to repair earthquake damage, but they say the February 2011 earthquake damage can be repaired without a wholesale strip out of Rydges.
[216]Mr Ring refers to Dr Brooke’s brief of evidence at paragraph 48:
48.I do not agree that it would be necessary to fully strip out the floors of Rydges to enable repairs as claimed at paragraphs 18(c) and 19(c) of the SOC. While it is likely that all bathrooms would require removal,
some partitions and ceiling mounted services could be left in place during repairs. In particular based on the nature and extent of cracking recorded by Eliot Sinclair in report (sic) dated 21 June 2018, sufficient access to complete repairs could be obtained without removal of the ceiling mounted services in the central corridors.
[217] Determining the strip out will be influenced by the designated crack width determined under Issue One, and its place within a damaged portion and other conditions and circumstances encountered by repair contractors. The Court’s answer to the damaged portion argument affects the application of AE27.
[218]Mr Ring puts the insurers’ position this way:
Where items of fit out are proven to be February 2011 earthquake-damaged, Insurers will pay the reasonable cost to restore these items in accordance with the when-new Policy standard (under MD022).
[219] This will mean a significant betterment to Emmons under the when-new Policy standard, especially when combined with Special Provision 1(b). However, most fit-out items were not damaged in the earthquake. The services engineers agree on that, in their domain. The insurers say any obligation to pay for the costs of reinstating fit-out items which are not damaged is governed by AE27 with its particular application whereas Emmons relies entirely on MD022 to recover the cost incurred to remove the fit-out whether damaged or not, and replace it on a ‘new-for-old’ basis, and in compliance with applicable current regulations.
[220] The insurers reject Emmons’ contention it can choose which part of the policy under which to claim. They say that MD022 stands with AE27 and that means they are only bound to pay for the reasonable costs of strip out, and to replace the February 2011 earthquake-damaged items of fit-out on a new-for-old basis, in compliance with current regulations. They will pay the same reasonable costs to strip out items unharmed, but only these which must be removed solely to reinstate damage, and then to pay the cost of reinstatement of those items of fit-out on an old-for-old basis.
[221] Mr Ring therefore submits Emmons has no cover for the cost of stripping-out unharmed property if the purpose is for example to investigate whether there is underlying damaged property, and the scope of repairs required for such. Mr Ring
says the onus falls on Emmons to prove its entitlement to indemnity under AE27 and refers to authority that the sole purpose means just that.15
[222] To get around the impact of AE27 in the way the insurers contend, Emmons says (above) it is entitled to the reinstatement cost of unharmed property on a new-for-old basis, based on a ‘damaged’ portion, as the costs of removing and replacing unharmed property are simply part of restoring the damaged portion. The insurers do not accept that unharmed property must be restored on a new-for-old basis just because it falls within what it calls the “vast and ill-defined concept of ‘portion’.” Mr Ring takes issue with what he submits is Emmons “expanded concept of what is a damaged portion” which he says is employed to result in a strained interpretation whereby MD022, which requires “direct” earthquake damage to trigger cover, captures indirect damage as well. That strain is submitted to be reflected in the fact that AE27 will never come into play when the insured has reinstatement cover and elects to reinstate, because unharmed property is demolished, damaged or removed in the course of reinstatement is invariably replaced as a by-product of reinstating the earthquake damaged portion, so will always be indemnified under clause (b) of the definition of “Reinstatement” in MD022.
[223] Neither will AE27 be required under Emmons’ interpretation of the policy in the very rare situation where insurers choose to reinstate rather than to pay indemnity value. Unless there is a provision to the contrary, the insurers have to reinstate at whatever cost it takes, even if it exceeds the sum insured. That applies even if costs are far more than expected, or because of circumstances beyond the insurers’ control, so AE27 would be redundant. Emmons’ position that AE27 has no application in respect of reinstatement under MD022 is submitted by Mr Ring to stand without support, and to be untenable, having regard to the policy wording. The Automatic Extensions form part of the material damage section and are subject to all of its
15 Young v Maryland Casualty Co (1909) 14 BCR 146 (CA) at 153; 10 WLR 8 (CA) “… The word “solely” eliminates all other causes…”: Smith v Cornhill Insurance (1938) 61 Ll.LRep. 122 – ”directly, independently and exclusively of all other causes” are “fairly equivalent” to “solely” at 154-155.” … the moment one gets another cause, it is not solely as a result of the accident, …” at 153: Guardian Royal Exchange Assurance of NZ Ltd v Stuart [1985] 1 NZLR 596, where the issue was whether the sole purpose test applied to legal professional privilege. The Court said at 79: “The sole purpose test I regard as too restricting. It results in the loss of privilege if there is any purpose, no matter how unimportant, other than submission to legal advisors”.
provisions, and the additional extensions, including MD022. There is nothing to say that MD022 is not subject to AE27, nor is there any conflict or inconsistency between the two provisions. The High Court considered the relationship between automatic and additional extensions in TJK (NZ) Limited v Mitsui Sumitomo Insurance Company Limited.16 There, Miller J was inclined to the view that the introduction to the automatic extensions incorporated the general indemnity obligation.
[224] AE27 is quite clear that it applies to the costs of demolition damage or removal of unharmed property solely to reinstate damaged insured property, and to the “cost of reinstating the unharmed property”. Mr Ring submits that reinstatement and the cost of reinstatement are addressed under MD022 and there alone, because that is where the policy definition of “reinstatement” lies, and Emmons will have the cost of repairing such damage to a when-new standard. Unharmed property may ‘stand in the way’ of something directly damaged by earthquake, and Emmons is submitted to be without cover for the cost of reinstating that property under MD022 as it has not been directly damaged by earthquake. Rather, it is entitled to the cost of reinstating that unharmed on an “old-for-old” basis under AE27. This gives Emmons full replacement cover, including regulatory or upgrade cover in respect of direct earthquake damage and partial reinstatement cover (“old-for-old”) for property not directly damaged by the insured peril, stripped-out and replaced as a consequence of direct earthquake damage. AE27 provides cover for the cost necessarily required to complete reinstatement of the insured property. Without that, Emmons would have been left in part without cover.
Discussion
[225] MD022 covers the cost of restoration of damaged portions of the property. The costs of labour and materials will be incurred in restoring damaged portions, for example, epoxy injection and other contract work, but indirect costs will be incurred, being “enabling costs”. They are costs that are the ordinary incident of restoration work. There may be protection of property from damage such as dust or contaminants, or to get access for restoration work. Sometimes property can be removed and put
16 TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd [2013] NZHC 298, (2013) 17 ANZ Insurance Cases 61-968, at [30] – [31].
back undamaged, and protection while in storage may become uneconomic in itself. Much or most undamaged property will be damaged or destroyed in the course of removing it, for example, the partitions. It is not possible to “build old partitions” and I agree it is most unlikely that Emmons would be able to obtain “several hundred old bathrooms”.
[226] If Emmons is right, AE27 does not figure in Issue Four because it says it can claim under whatever insuring clause it chooses, so it is not caught by AE27. Emmons says AE27 is to be interpreted as a default provision in the “old-for-old” part of the section extending cover which the principle indemnity clause provides and the words “we will also cover you…” are said to be plainly the words of extension, not limitation. That means, it will operate even when the policy holder has not chosen reinstatement cover, so it is not tenable to treat it as a cross-reference to MD022. The idea of the sole purpose test as a non-issue, is predicated on Emmons’ position being governed solely by AE27 rather than MD022, which does not inform Issue Four because that is concerned only with the cost of replacing stripped-out items and the parties have agreed that strip out is necessary to restore damaged portions of the building to the Policy standard.
[227] The insurers’ position turns on the nature of the strip out which in part includes the designation of the crack width under Issue One and what is found during the repair work. They agree that they will pay the reasonable cost to restore items of fit-out earthquake damaged to the when-new standard. If fit out is not damaged the insurers say their obligation is expressly to reinstate such items pursuant to AE27 alone, so the obligation to cover removal of the fit out for damage and loss and replace on a new-for-old basis in compliance with current regulations is governed together by MD022 and AE27.
[228] There is nothing to say that MD022 is not to be read with AE27. There is, in my view, no conflict between the two provisions. AE27 refers expressly to unharmed fit out and the cost to demolish damage or remove it solely to reinstate damage. Reinstatement new for old occurs under MD022, but reinstatement of unharmed property is expressly governed by AE27. There is no principled basis to say the insured can ‘choose’ which part of a policy under which to claim.
[229] I consider that Mr Ring is right that MD022 and AE27 are coherent and internally consistent, providing full replacement cover including regulatory upgrade for direct earthquake damage and partial reinstatement cover old-for-old for property within the AE27 standard. The sole purpose test applies in full force. It does not undo MD022 in any way, where damaged property is covered, new for old. The actual costs of removing undamaged property are those to reinstate damaged property. That undamaged property is expressly not covered new for old and there is no place for this express provision to be subsumed in the portions argument.
Conclusion
[230]The Declaration to Issue Four is that sought by the insurers.
ISSUE FIVE: COVER FOR THE COST OF COMPLYING WITH REGULATIONS IN REPLACING STRIPPED-OUT ITEMS THAT WERE NOT DAMAGED
On a proper interpretation of Additional Extension MD022, including Special Provision 1(b) of that Extension, where Emmons demolishes, damages, or removes, as part of the (agreed) strip out of the floors of the Rydges Tower, items that were not damaged, and in reinstating those items it is necessary (to comply with regulations) to replace those items with new and/or upgraded and/or different and/or additional items, is Emmons entitled to indemnity for the costs, actually incurred, in so replacing those items?
Emmons says it is entitled to such indemnity. The insurers say it is not.
Submissions for Emmons
[231] Emmons says that where there has been demolition, damage to or removal of items not damaged as part of agreed strip out of floors of Rydges Tower, and in reinstatement it is necessary by regulation to replace those items with new, upgraded, different or additional items, then it is entitled to indemnity for the compliance costs actually incurred in such replacement. An example given is the removal of a panel for the purpose of agreed strip out, where the reinstatement of the panel is subject to new fire regulations.
[232] Emmons says that MD022 Special Provision 1 provides for this, but the insurers rely on the proviso which cuts down the insurers’ promise of cover for compliance in the course of reinstatement.
Special provisions
1. Compliance with regulations
The amount payable under this extension will include the cost incurred in reinstatement that is necessary to comply with any regulations.
Provided that the amount payable will not include any such cost:
a) the extent to which the work had already been required of you by notice served by a regulatory authority before the happening of the loss or damage; or
b) in respect of undamaged property or undamaged portions of property other than foundations (unless foundations are expressly excluded from insurance under this material section).
This special provision 1.(b) will apply whether or not the undamaged property or portion comprises a separate building or structure or a separate item of plant or equipment.
[233] The Special Provision plainly provides for costs of reinstatement to comply with regulations. The proviso operates as an exclusion so Emmons says that the insurers bear the burden of showing why it operates against its claim, and the insurers must prove that compliance costs are “in respect of undamaged property or undamaged portions of property”.
[234] Mr Campbell submits that the meaning and effect of the exclusion of undamaged property or undamaged portions of property is to be found in the purpose and context of the Special Provisions. Building codes and regulations change over time so upgrading of property is commonly required even in good times, unexpected and unwanted perhaps, but full reinstatement insurance generally provides for such compliance costs unless known before the insured event, reflected in Special provision 1(a). Emmons says that the necessary upgrade to undamaged property or portions of property is captured by Special Provision 1(b) and Mr Campbell gives the example of Rydges Tower having suffered no damage by earthquake, but damage to the podia requires a complete upgrade of services in and around the Tower. He submits that compliance costs would plainly be “in respect of” undamaged property or undamaged portions, and that explains the purpose of the exclusion because if it did not operate in those circumstances, he says it is hard to see when it would.
[235] Mr Campbell points to the damage to the Tower throughout Rydges and the Car Park, and items are being stripped out to enable restoration of the damage. There is therefore a connection between compliance costs and the undamaged stripped out items but he says there is a stronger connection between compliance costs and damaged property, being the damaged portions of the Tower which required stripping out. The compliance costs are not therefore “in respect of undamaged property”, but “in respect of damaged portions” of the Tower.
[236] The insurers say that the exclusion operates whenever compliance costs are incurred in upgrading an item of property that was not damaged, Mr Campbell says that is to recast the exclusion simply to apply whenever there is a compliance cost incurred for undamaged property or an undamaged portion and that would be curious. He uses the example of the laundry to be demolished and rebuilt, because the insurers would not be liable to pay for compliance costs on services or other items in that demolished part that were themselves undamaged. Something more therefore is submitted to be required before the exclusion applies, and it is not simply because a compliance cost is incurred “on undamaged property or an undamaged portion”. Hence the submission for Emmons is that compliance costs incurred in the replacement of stripped out items are in respect of damaged rather than undamaged property or portions, so the exclusion does not operate.
Submissions for the Insurers
[237] Mr Ring puts Issue Five in the context of upgrading of plant, machinery and services which were not damaged. He refers to the joint reports of the services experts, which reflect agreement about the compliance work required. Many services require upgrading and the example is given of switchboards at or near the end of their economic life, where components are obsolete. Emmons claims the costs of reinstating unharmed items demolished, damaged, or removed as part of the agreed strip out, including regulatory upgrade which may extend to new, upgraded, different, or additional items.
[238] The insurers say that “pure compliance costs”, being the costs of upgrading, replacing or adding to property not directly damaged by the February 2011
earthquake, are not covered by the policy, and that is consistent with the position under AE27, that cover to reinstate non-regulatory unharmed property is on an old-for-old basis and does not include compliance upgrades. MD022 provides for reinstatement of damage that has occurred as a direct result of earthquake, not the cost of upgrading undamaged items and this is said to be confirmed by and to be consistent with Special Provision 1(b) which simply states that there is no cover for compliance costs in respect of undamaged property or undamaged portions of property.
[239] Cover under Special Provision 1 is submitted to be an expansive insuring promise cut down by an express exclusion of undamaged property which requires regulatory upgrade. Additional costs to comply with current regulations are covered but not “in respect of” undamaged property or portions of property. While those words point to a wide connection or relationship, Mr Ring submits there must be a discernible and rational link between the relevant additional cost and the excluded items.17 This means, as I take the submission, that compliance must be directed to the compliance costs for undamaged property being an incident of repair of damaged property.
[240] The services experts have identified three categories of compliance work against which Mr Ring puts the insurers’ position:
(i)fit-out, earthquake damaged and non-compliant with current regulations, for which insurers agree to pay the reasonable cost to strip out and replace such or fit out on a new-for-old basis in compliance with current regulations.
(ii)items of fit out undamaged by the earthquake, non-compliant and not stripped-out for the purpose of reinstating earthquake damaged property, are not in issue.
(iii)items of fit out undamaged by the earthquake and non-compliance, but damaged in the course of reinstatement are submitted covered for the cost of strip out for the purpose of repair or damage and for replacement
17 Technical Products Pty Ltd v State Government Insurance Office (1989) 5 ANZ Insurance Cases 60-914 (HCA).
of the fit out on an old-for-old basis under AE27 with no compliance costs. A grid demonstrates this:
Insurers pay cost of strip out (AE27) Insurers pay cost of old-for-old reinstatement (AE27) Insurers do not pay cost of compliance (SP 1(b)) Strip out unharmed ceiling in Rydges Tower to
remediate cracks in slab
Reinstate ceiling New internal surface finishes to comply with
permitted Group Number in NZ Building Code for fire rating purposes.
Damage to unharmed light fittings as a result of ceiling strip out Reinstate light fittings New light fittings must be rated IPX5 to comply with NZBC Electricity
regulations and NZS3000.
Discussion
[241] A regulatory compliance impost for reinstatement work goes with reinstatement insurance, even though it may well be “unexpected and unwanted” as Mr Campbell puts it. There will be exclusions, for example, where such costs are already expected, but otherwise undamaged parts of the building may require a regulatory upgrade in the course of reinstatement of damaged portions.
[242] The issue falls to the way compliance costs connect to undamaged items of agreed strip out. If those compliance costs are truly as a matter of contextual interpretation “in respect of” undamaged property or undamaged portions, Mr Campbell accepts they fall within the exclusion. There was damage to Rydges Tower and strip out is needed to restore the damage so there is clearly a connection between compliance costs and the damaged property in the sense they are incurred in the course of reinstatement of damaged property. The insurers’ argument that compliance costs for reinstatement of property not damaged are not covered by the policy is submitted by Mr Ring to be complementary and consistent with AE27, expressly excluded.
Conclusion
[243] I conclude that the meaning of Special Provision 1 is plain. Reinstatement includes compliance costs incurred in reinstatement, but expressly excludes those in respect of undamaged property. This exclusion will relate to items of property which are stripped out. Special Provision 1(b) is part of MD022 and read together there can be no other meaning than that undamaged strip out which requires compliance upgrade is not the subject of indemnity for the compliance costs actually incurred in replacing those items. This is entirely consistent with AE27, where there is cover for the costs of unharmed property being demolished, damaged or removed for the sole purpose of reinstating damaged insured property, but reinstatement is not to the when new standard. The Declaration to Issue Five is that sought by the insurers.
D. DISPOSITION
[244] I have not been asked to give an answer to Issue One which reflects my view of the facts. I am asked to simply make one Declaration or the other. I was asked not to make Emmons’ Declaration based on there being no utility in my doing so as Emmons cannot prove any Category 2 cracking is earthquake damaged. Emmons’ declaration for Issue One captures cracking in Category 2, but only that within a damaged portion. The insurers sought a declaration which differentiated between the interior and exterior designated crack width. Given the evidence, I would have been inclined to adopt the insurers’ exterior 0.3mm crack width, but I have been asked to deliver judgment with binary effect. I would not have made the declaration to Issue One without having concluded that Issue One is expressly put on the basis of repair of cracks of the designated width which lie within a damaged portion. The damaged portion must reflect earthquake damage and will only include Category 2 cracks with causative nexus to make up the damaged portion.
Declarations
[245]Declarations are made by consent that:
(1)To restore the damaged portions of the Rydges to the Policy standard it is necessary to:
(a)Lift and relevel the main Tower by approximately 150mm.
(b)(i) Demolish and rebuild the Podia;
or
(ii) Repair and relevel the Podia (also see paras 2(a)(ii) and 2(c) below),
(in both cases including removal and replacement of the ground floor slab), whichever is the more efficient and economic.
(c)Strip out the floors of the Tower, including removing and replacing to the Policy standard the roof membrane, floor coverings, bathrooms and ceilings (including bathroom ceilings) – subject, if and to the extent applicable, to Automatic Extension 27 (unharmed property) and MD022 Special Provision 1(b) (compliance with regulations).
(d)Strip out the floors of the Tower, including removing and replacing to the Policy standard the linings to shear walls and external panel elements, partitions and ceiling mounted services:
(i)To the extent required to most efficiently and economically repair the concrete cracks that need to be repaired to restore the damaged portions of the Rydges to the Policy standard (the extent of that crack repair to
be determined by the Court it not agreed by the parties); and
(ii)Subject, if and to the extent applicable, to Automatic Extension 27 (unharmed property) and MD022 Special Provision 1(b) (compliance with regulations).
(e)Replace the damaged portions between the first floor beams and the top wall beside the driveway, Tower and back of house.
(f)The wall alongside the entry to the Car Park (to the south of the ramp) is to be fully seismically separated from the slab above and restrained with sliding head restraints.
(2)To restore the damaged portions of the Car Park to the Policy standard it is necessary to:
(a)(i) Construct bunds to pre-earthquake levels, and modify local drainage of the upper floors to ensure effective and efficient stormwater management;
or
(ii) Relevel the Car Park in conjunction with relevelling the podia and the shops and offices (also see paras 1(a)(ii) above and 2(c) below), whichever is the more efficient and economic.
(b)Break out and replace the basement slab in the lower ground area, with new waterproof membrane, as identified on the attached plan.
(c)Repair and relevel the shops and offices, either in isolation or in conjunction with relevelling the Car Park (also see paras 1(b)(ii) and 2(a)(ii) above) (in both cases including removal and
replacement of the ground floor slab), whichever is the more efficient and economic.
(2) Declarations in terms of Issues One to Five above are made as follows:
Issue One
In order to restore the damaged portions of the Rydges and the Car Park to a condition substantially the same as, but not better or more extensive than, their condition when new (including the cost that is necessary to comply with any regulations) (the Policy standard), it is necessary to repair concrete cracks with a width equal to or greater than 0.2mm.
Issue Two
In order to repair the concrete cracks of the designated width, it is within the Policy standard (being the restoration of the damaged portions of the property to a condition substantially the same as, but not better or more extensive than, its condition when new), when carrying out epoxy injection to cracks in the top surface of horizontal concrete elements to seal and epoxy inject over the full length of the crack on the top surface.
Issue Three
On a proper interpretation of Additional Extension MD022, Emmons is also entitled to indemnity for the costs, actually incurred, to repair any concrete cracks in the Rydges or the Car Park that were already of the designated width before the earthquakes (the “pre-existing cracks”), where the pre-existing cracks are in “damaged portions” of the Rydges or the Car Park.
Issue Four
On a proper interpretation of Additional Extension MD022 and Automatic Extension 27, where Emmons demolishes, damages or removes, as part of the (agreed) strip out of the floors of the Rydges
Tower, items that were not damaged, Emmons is entitled to indemnity for the cost of reinstating those items to a condition the same as, but not better or more extensive than, their condition immediately prior to their demolition, damage or removal (but in any event only if those items were demolished, damaged or removed for the sole purpose of reinstating the concrete cracks of the designated width caused by the earthquakes).
Issue Five
On a proper interpretation of Additional Extension MD022, including Special Provision 1(b) of that Extension, where Emmons demolishes, damages, or removes, as part of the (agreed) strip out of the floors of the Rydges Tower, items that were not damaged, and in reinstating those items it is necessary (to comply with regulations) to replace those items with new and/or upgraded and/or different and/or additional items, Emmons is not entitled to indemnity for the costs, actually incurred, in so replacing those items.
E. COSTS
[246]Reserved.
…………………………………………….
Nicholas Davidson J
Solicitors:
Anthony Harper, Christchurch DLA Piper New Zealand, Auckland cc counsel:
Neil R Campbell QC, Auckland M G Ring QC, Barrister Auckland
SCHEDULE ONE
Declarations sought by the parties
Issue Emmons The Insurers One In order to restore the damaged portions of the Rydges and the Car Park to a condition substantially the same as, but not better or more extensive than, their condition when new (including the cost that is necessary to comply with any regulations) (the Policy standard), it is necessary to repair concrete cracks with a width equal to or greater than 0.2mm. In order to restore the damaged portions of the Rydges and the Car Park to a condition substantially the same as, but not better or more extensive than, their condition when new (including the cost that is necessary to comply with any regulations) it is necessary to repair external concrete cracks with a width equal to or greater than 0.3mm and internal concrete cracks with a width equal to or greater than 0.4mm. Two In order to repair the concrete cracks of the designated width, it is within the Policy standard (being the restoration of the damaged portions of the property to a condition substantially the same as, but not better or more extensive than, its condition when new), when carrying out epoxy injection to cracks in the top surface of horizontal concrete elements to seal and epoxy inject over the full length of the crack on the top surface. In order to repair the concrete cracks of the designated width, it is necessary, when carrying out epoxy injection to cracks in the top surface of horizontal concrete elements, to seal and inject over the length where the crack is of the designated width, plus one or two injection ports – subject to such modification as after appropriate trials, are demonstrated to be necessary in order to achieve a minimum of 90% of the crack filled, as visible by inspection of the core surfaces in core samples taken from the locations at which the crack narrows from the designed width. Three On a proper interpretation of Additional Extension MD022, Emmons is also entitled to indemnity for the costs, actually incurred, to repair any concrete cracks in the Rydges or the Car Park that were already of the designated width before the earthquakes (the “pre- existing cracks”), in either of the following circumstances:
(a) where the pre-existing cracks were worked by the 2011 earthquakes, whether or not that working led to the cracks becoming wider; or
(b) where the pre-existing cracks are in “damaged portions” of the Rydges or
the Car Park.
On a proper interpretation of Additional Extension MD022, Emmons is not entitled to indemnity for the costs, actually incurred, to repair any concrete cracks in the Rydges or the Car Park that were already of the designated width before the earthquakes.
Four On a proper interpretation of Additional Extension MD022 and Automatic Extension 27, where Emmons demolishes, damages or removes, as part of the (agreed) strip out of the floors of the Rydges Tower, items that were not damaged, Emmons is entitled to indemnity for the cost, actually incurred, to replace those items to the Policy standard:
(a) where the stripped-out item was in a “damaged portion” of the Rydges; or
(b) in any other case, except where it is possible to remove and replace the stripped-out item without damaging it.
On a proper interpretation of Additional Extension MD022 and Automatic Extension 27, where Emmons demolishes, damages or removes, as part of the (agreed) strip out of the floors of the Rydges Tower, items that were not damaged, Emmons is entitled to indemnity for the cost of reinstating those items to a condition the same as, but not better or more extensive than, their condition immediately prior to their demolition, damage or removal (but in any event only if those items were demolished, damaged or removed for the sole purpose of reinstating the concrete cracks of the designated width caused by the earthquakes). Five On a proper interpretation of Additional Extension MD022, including Special Provision 1(b) of that Extension, where Emmons demolishes, damages, or removes, as part of the (agreed) strip out of the floors of the Rydges Tower, items that were not damaged, and in reinstating those items it is necessary (to comply with regulations) to replace those items with new and/or upgraded and/or different and/or additional items, Emmons is entitled to indemnity for the costs, actually incurred, in so replacing those items. On a proper interpretation of Additional Extension MD022, including Special Provision 1(b) of that Extension, where Emmons demolishes, damages, or removes, as part of the (agreed) strip out of the floors of the Rydges Tower, items that were not damaged, and in reinstating those items it is necessary (to comply with regulations) to replace those items with new and/or upgraded and/or different and/or additional items, Emmons is not entitled to indemnity for the costs, actually incurred, in so replacing those items.
PLAN ATTACHMENT
- AGLC
- Emmons Developments New Zealand Ltd v Mitsui Sumitomo Insurance Co Ltd [2019] NZHC 277
- Case
- [2019] NZHC 277
- Decision Date
CaseChat Overview and Summary
The main legal issues before the court were:
1. The minimum concrete crack width requiring repair to restore the damaged portions of the buildings to the Policy standard.
2. The repair methodology for concrete cracks of the designated width.
3. Cover for the cost of repairing non-earthquake cracks in damaged portions.
4. Cover for the cost of replacing, to the Policy standard, stripped-out items that were not damaged.
5. Cover for the cost of complying with regulations in replacing stripped-out items that were not damaged.
The court found in favour of Emmons on issues one, two, and three, and in favour of the insurers on issues four and five. The court made the following declarations:
1. To restore the damaged portions of the Rydges and the Car Park to the Policy standard, it is necessary to repair concrete cracks with a width equal to or greater than 0.2mm.
2. It is within the Policy standard to repair concrete cracks of the designated width by sealing and epoxy injecting over the full length of the crack on the top surface.
3. Emmons is entitled to indemnity for the costs to repair any concrete cracks in the Rydges or the Car Park that were already of the designated width before the earthquakes if they were worked by the 2011 earthquakes or are in damaged portions.
4. Emmons is not entitled to indemnity for the cost of reinstating stripped-out items that were not damaged, even if they are replaced to comply with regulations.
5. Emmons is not entitled to indemnity for the costs of replacing stripped-out items that were not damaged with new and/or upgraded and/or different and/or additional items, even if it is necessary to comply with regulations.
Orders
Orders of the court
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Background
Background to the litigation
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Evidence
Evidence Before The Court
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Decision
Reasons for decision
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Ratio Decidendi
Legal Principle Established
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