McLean v IAG New Zealand Limited
[2013] NZHC 1105
•16 May 2013
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2012-409-002284 [2013] NZHC 1105
BETWEEN BRUCE DAVID MCLEAN, CHRISTINE LESLEY MCKEOWN AND PAUL LINDSAY BUTLER
Plaintiffs
ANDIAG NEW ZEALAND LIMITED Defendant
Hearing: 13 May 2013
Counsel: A Hooker for Plaintiffs
C J Hlavac and D Weatherley for Defendant
Judgment: 16 May 2013
JUDGMENT OF WHATA J
Introduction
[1] I have been asked to resolve on the following issue:
Whether IAG’s obligations under the applicable policy wording to pay the “present value” of the home, includes an obligation to pay “professional” costs such as architects, engineers, surveyors, building consultants, legal and council fees.
Facts
[2] Helpfully the parties have agreed the key facts:
(a) The plaintiff trust owns a property at 9 Bradnor Road, Christchurch. (b) The property is insured under NZI’s Brokerweb Group Home Policy
which is underwritten by the defendant.
(c) The property suffered significant damage as a result of the
Christchurch earthquakes.
MCLEAN, MCKEOWN AND BUTLER V IAG NEW ZEALAND LIMITED HC CHCH CIV 2012-409-002284 [16 May 2013]
(d) The property damage suffered during the earthquakes is covered under the policy.
(e) It is not economic to repair the property.
(f) The plaintiffs do not wish to rebuild the property, either at its current location or at an alternative site.
(g) The only basis on which the plaintiffs are entitled to a cash payment
under the policy is on a “present value” basis.
The contract
[3] This proceeding concerns the following provision of the NZI/Broker Web
Group Home Policy:
SETTLEMENT OF YOUR LOSS
If you repair or rebuild the home, following a loss covered by this Home
Policy, we will pay:
1.the cost of repairing or rebuilding the home to a condition as similar as possible to when it was new, using current materials and methods, and
2.any cost of compliance with Government or local authority bylaws or regulations, provided that:
(a) we pay the cost of compliance for only that part of the home
that has suffered loss covered by this policy, and
(b) the home complied with all requirements that existed at the time it was originally built and at the time of any alteration.
However, we do not pay if notice of non-compliance has already been given to you before the loss.
3. the following costs that are necessarily and reasonably incurred:
(a) architects’, engineers’, surveyors’, building consultants’,
legal and council fees, and
(b) costs of demolition and of removing debris and contents.
If you do not repair or rebuild the home, we will pay the present value of the home.
If the schedule shows an amount as the sum insured, then the most we will pay for any loss caused by an event, inclusive of fees and other costs, is the sum insured.
ALTERNATIVE SITE
If the home is totally destroyed and we agree, you may:
1. rebuild the home at a different site, or
2. purchase another home at a different site,
however, we will not pay more than the cost that would have been payable if rebuilding had been completed on the original site.
[4] Present value is then defined as follows:
The reasonable cost to repair or replace, less an allowance for depreciation based on age, condition and deferred maintenance.
[5] Loss is defined as:
Physical loss or physical damage.
[6] Actual value is also defined:
The estimated reasonable cost to repair or replace an item in New Zealand with an item that is of comparable age, quality and capability, and is in the same general condition.
The contentions (a summary)
[7] The plaintiff contends that:
(a) The words of the contract should be given their plain and special meaning: present value means “the reasonable cost to replace...” This must logically include reasonable costs to design and build a replacement, including any applicable architectural, engineering and other fees that would normally be associated with replacing the destroyed home.
(b)The parties did not need to specify that the professional costs were included, because they logically form part of the cost of replacing a home.
(c) An allowance for depreciation after costs is assessed as a question of fact.
[8] The defendant responds:
(a) The policy indemnifies the insured for physical loss – and unless clearly expressed otherwise,1 an insured is indemnified for loss, and is not entitled to make a profit from the insurance.2
(b)If the insured rebuilds, the insurer will, as an added benefit, pay professional costs if such costs are reasonably and necessarily incurred;
(c) Since the plaintiffs will not rebuild the house, those costs will never be incurred;
(d)Payment of professional costs in those circumstances is illogical, and would result in a windfall to the plaintiffs;
(e) The plaintiff’s approach would also introduce unnecessary additional artificiality,3 namely an assessment of hypothetical professional costs, as opposed to a straightforward notional assessment of the costs of a physical replacement less depreciation.
(f) Depreciation cannot be sensibly quantified when professional fees are included within the replacement cost.
(g)There is no material difference between rebuild and replace – both are directed to physical reinstatement only,4 hence the need to include
provision for professional fees in addition to the rebuild cost.
1 For example as here where betterment is expressly contemplated by a rebuild.
2 Referring to Anderson v James [1908] 28 NZLR 34 at 42; see also Kerr & Kerr v The State
Insurance General Manager (1987) 4 ANZ Insurance Cases 60-781.
3 Citing the language used by Dobson J in Turvey Trustee Limited v Southern Response
Earthquake Services Limited [2012] NZHC 3344.
4 Citing by analogy the policies addressed in Turvey and in O’Loughlin v Tower Insurance Limited
[2013] NZHC 670.
Assessment
[9] In approaching the interpretative task I adopt the guidance afforded by
Tipping J in Vector Gas Limited v Bay of Plenty Energy:5
... The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.
[10] In so doing, I am satisfied that the “present value of the home” includes all
reasonable costs to replace it, including relevant professional fees.
[11] Commencing with the words used in the settlement clause, if the insured does not rebuild the home, the insurer agreed to pay the “present value of the home”. Present value is then defined as:
The reasonable cost to repair or replace, less an allowance for depreciation based on age, condition and deferred maintenance.
[12] Replace has been defined elsewhere as “to put back in place, to take the place of, succeed, be substituted for or provide substitution”.6 The reasonable cost to replace a home in this sense would normally involve professional fees and other fees and there is nothing to expressly exclude them from the ambit of “reasonable cost”. The words used therefore strongly suggest that professional fees are covered by the policy for the purpose of the assessment of present value.
[13] Mr Hlavac nevertheless maintains that the additional provision for payment of professional fees “necessarily and reasonably incurred” is an added benefit of a rebuild (not a rebuild cost) and an express exception to the principle of indemnity underlying contracts of insurance. A dichotomy is also drawn between the cost to rebuild or replace, and other costs. The former cost is then said to relate only to
physical works.
5 Vector Gas Limited v Bay of Plenty Energy [2010] 2 NZLR 444 (SC), per Tipping J at [19].
6 Chemainus Properties Ltd v Continental Insurance Company [1990] ILR 1-2574, 43 CCLI 146 (BC SC) at [16]-[17], cited by Dobson J in Turvey at [15].
[14] I disagree. The comprehensive treatment of costs associated with a rebuild is not a reason to read down the plain meaning of the words “reasonable cost to replace”. On the contrary, the inclusion of costs of compliance and professional fees is an objective indicator that the parties agreed that “loss” includes professional or other related fees necessarily and reasonably incurred to remedy it. Notably, the settlement clause also expressly links loss and fees in this way:
If the schedule shows an amount as the sum insured then, the most we will pay for any loss caused by an event, inclusive of fees and other costs, is the sum insured. (Emphasis added)
[15] Moreover, the identified costs in the first part of the settlement clause all flow from a “rebuild”. The costs of “rebuilding” the home to a specific condition are covered, as well as the other costs of the “rebuild”, including professional fees. If as Mr Hlavac suggests rebuild and replace are interchangeable concepts, then the costs to replace must be equally broad and inclusive.
[16] I accept however that the requirement to account for depreciation for age, condition and deferred maintenance is a factor supporting the proposition that the present value assessment seeks to indemnify the insured. But I do not think the allowance for depreciation then means that only the cost of physical works is included in the assessment of present value. The parties plainly had in mind the reasonable cost “to replace” the house. Accounting only for the cost of physical works would not achieve that objective. Conversely, it would have been far simpler for the parties to simply contract for the payment of the reasonable costs of the physical works if that was their intention.
[17] Nor do I accept the defendant’s concerns about the hypothetical quantification of cost. If the insured elects not to rebuild, an assessment must then be made to assess the “reasonable cost” to replace “the home”. The “home” is not an abstract concept. It is (or was) defined physically and contextually. The assessment is therefore properly focused on its physical replacement within its post quake context. The extent to which professional fees would be incurred to enable its replacement should be readily capable of assessment within this context, and if necessary with expert advice. And in terms of the allowance for depreciation, it must be based “on age, condition and deferred maintenance.” Plainly these are
physical conditions and are readily identifiable sans professional costs and other fees.
[18] The defendant’s concerns about a windfall to the insured are also misplaced. I understand the insurer to be saying that the professional fees for a rebuild will never be incurred and so payment for them would be superfluous and a profit to the insured. But the cost to replace the home is simply the agreed measure of the present value. There is therefore no unanticipated windfall to the insured by including professional fees, provided that they would be necessary to replace the home.
[19] For completeness, this case is not like Turvey Trustee Limited v Southern Response Earthquake Services Limited7 relied upon by the defendant. In that case the Court had to decide how to quantify the insurer’s liability to compensate the insured for additional costs of rebuilding that are occasioned by the need to comply with the current Building Act and codes. The policy in that case covered the notional cost of rebuilding. The plaintiff argued that the calculation of a notional rebuilding
of the house on its original site could not be realistically completed without including an allowance for the additional costs of upgrading to comply with the building code on that site. Dobson J rejected this notional exercise as artificial, and favoured an assessment of the actual costs incurred for the rebuild.8 By contrast, the settlement clause in this case demands an assessment of hypothetical replacement cost. There is no actual rebuild cost. So to the extent that the assessment in this case
is artificial, the parties agreed to it.
[20] Finally counsel submitted that there was no authority directly on point that might shed further light one way or the other. It appears that this case raises a relatively novel point. Nevertheless, it is tolerably clear that the principle of indemnification does not prevent contracting parties from agreeing in advance to cover loss on the basis of the cost of replacing the home, provided that the cost
would be necessary to achieve replacement.9 In any event, to the extent that the
7 Turvey Trustee Limited v Southern Response Earthquake Services Limited [2012] NZHC 3344.
8 At [46].
9 Cf Spina & Spina v Mutual Acceptance (Insurance) Ltd (1984) 3 ANZ Insurance Cases 60-554 at 78,346.
contract departs from this principle, I prefer to give effect to the stated intentions of the parties.
Result
[21] Accordingly for the foregoing reasons, my answer to the question is yes. IAG’s obligations under the applicable policy wording to pay the “present value” of the home, includes an obligation to pay “professional” costs such as architects, engineers, surveyors, building consultants, legal and council fees.
Residual issue
[22] There is a residual issue, namely whether the costs of professional services already incurred for say plans, should be discounted on the assumption that those plans can be reused. This is a difficult issue to resolve, and one that also applies in relation to the assessment of the physical costs as well – for example should the cost of reusable brick be discounted also. It was a matter that was not argued thoroughly (as it was not necessary to resolve the preliminary question), so I prefer to make no final finding about it. It seems to me however that the exercise is aimed at providing a fair present value of the home based on the notional costs that would be reasonably necessary to replace the home. Intuitively therefore, only additional costs that are necessary to achieve replacement are properly claimable. This would also better accord with the indemnification principle.
Solicitors:
Andrew Hooker, Auckland
Young Hunter, Christchurch
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