Newer isn’t always better.
This recent High Court decision discusses the liability of insurers under policies that provide an option to purchase a new house rather than rebuilding the existing one.
While the particular wording of each policy will be important, the case demonstrates that the courts will be mindful of established principles of insurance law when interpreting the scope of cover in these cases.
The St Albans property at the centre of this case was insured at the time of the Canterbury earthquakes by AMI Insurance Ltd under an AMI Premier Rental Property Policy. Southern Response is responsible for settling earthquake claims lodged by AMI policyholders for damage which occurred in the Canterbury earthquakes before April 5, 2012.
The previous owner of the property made a claim under the policy for damage to the property.
In 2011, Southern Response informed the previous owner that it considered it uneconomic to repair the house. In 2013, the previous owner elected under the Policy to rebuild the house on the same site. Following a geotechnical investigation and assessment the land was categorised as “Technical Category 3” land. As a result, an enhanced foundation option would need to be used if the house were rebuilt in order to be code compliant.
Shirley Investments bought the property in 2014 and took an assignment of the rights under the policy. In 2015, Shirley Investments advised Southern Response that it wished to change the election under the Policy, instead choosing the “buy another house” option.
The policy provided “We will pay the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your rental house on its present site”.
Southern Response disputed the amount it was required to pay to Shirley Investments under the “buy another house” option. Because Southern Response has a number of similar claims pending, it asked the Court to make two declarations:
(a) the amount payable under the “buy another house” option of the policy does not include either the notional cost of enhancing foundations for a new house on the same site and/or the cost of demolishing the existing house; and
(b) the amount payable under the “buy another house” option does not include the cost of buying the land on which that house is situated.
Under the policy, Southern Response was obliged to pay for the cost of rebuilding the house on its current site to an “as new” condition. The Policy also allowed for the payment of specific additional costs where they were approved by Southern Response and incurred by the insured.
By way of example, additional costs include: demolition, contents removal, architects’ and surveyors’ fees and any reasonable and required additional work which ensures the rebuilt house is code compliant.
The issue for determination was whether these additional costs must be taken into account when calculating Southern Response’s liability under the “buy another house” option.
Thomas J observed that the Policy distinguishes between “the full replacement cost of rebuilding” and what is additional to that cost. The Policy acknowledges that additional costs are costs that Southern Response might have to have paid. Shirley Investments’ interpretation would require that, in the case of the rebuild option, additional costs would not be included unless actually incurred but, in the case of the “buy another house option”, they would be included regardless. Thomas J held that this could not be correct.
Furthermore, Thomas J found that the purpose of the Policy is to put the insured in the position they would have been in had the damage not occurred, with the house being put in an “as new” condition. If Shirley Investments’ interpretation of the Policy was correct, it would be entitled to buy a house on stable ground with standard foundations and use the notional cost of enhanced foundations it would incur if it rebuilt the house at the same site to buy a more expensive house.
This would result in a windfall which would not accord with the purpose of the policy. Accordingly, the Court made a declaration that the amount payable under the “buy another house” option of the policy does not include the additional costs of either the notional cost of enhancing foundations for a new house on the same site or the cost of demolishing the existing house.
This became a moot issue between the parties by the time of the hearing due to the value of the replacement house that Shirley Investments acquired. However, the parties agreed that it was a question of some importance which needed to be resolved.
Thomas J found that Southern Response’s liability under the “buy another house” option does not include the cost of buying the land on which the new house is situated. The policy makes it clear that land is not covered. Buying another house means exactly what it says: it does not include the land.
Thomas J noted, however, that it would be a shame if this declaration would stifle flexibility on the part of Southern Response, for example in distinguishing which legal fees related to the house purchase and which to the land, for the purposes of coverage.
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