Replacement
insurance which includes contingencies and professional fees on a rebuild require the same costs to be included in a notional rebuild on properties written off
in Christchurch’s earthquake-damaged red zone, the Supreme Court ruled. This ruling also benefits government rights
of subrogation with increased insurance recoveries now available on the
estimated $1.7 billion payable for red zone payouts.
After severe earthquake damage to Christchurch in
2010 and 2011, government decided to socialise the losses of many insured
residential property owners. Whole
suburbs were red-zoned: insured owners could sell out to government receiving
immediate payment at then current rating valuation or elect to receive rating
value of their land only and recover privately from their insurer the insured
value of their home.
The court was told Avonside Holdings Ltd
elected to take payment for the rating value of its red-zoned land only, but
could not agree with insurer AMI Insurance on the insured value of its
building. The AMI policy promised full
replacement cost for rebuilding. This
would include reasonable costs of professional fees such as architects’ and
surveyors’ fees. The house was not in
fact to be rebuilt; the land was red-zoned.
Compensation would be based on a notional rebuild as if the land were
safe for construction. Avonside Holdings
pointed to the policy wording: estimated professional fees and a ten per cent
loading for contingencies should be included in the figure as if there would be
a rebuild. AMI argued these sums should
be ignored: they would not arise because it was a notional rebuild.
The Supreme Court ruled policy terms governing
a rebuild were to apply even if it were a notional rebuild, as in this case. Avonside was entitled to an uplift on the
compensation payable to include what would have been necessary professional
fees on a rebuild together with the benefit of industry practice allowing a
further ten per cent on the estimated cost for any construction contract to
cover contingencies.
The economic effect of this ruling is that
government will be able to increase the amount recoverable from insurance
companies where government has paid out the full amount for land and buildings
on insured red-zoned land. Government is
subrogated to the rights of the former owner and can enforce the former owners
insurance rights against their insurance company. This right of subrogation is of no value in
respect of AMI policies. Government was
forced to take over responsibility for AMI’s Christchurch earthquake
policies. The sheer weight of Christchurch
property claims would have sunk AMI’s entire insurance business.
Southern
Response v. Avonside Holdings – Supreme Court (22.07.15)
15.084