It has been over three years since the February 2011 earthquake struck Christchurch. Despite this, many residential homeowners in Christchurch are still grappling with EQC or their insurer over unresolved earthquake damage to their properties. Case law has clarified some issues around the repair, rebuild or replacement of earthquake damaged properties. Many questions, however, remain unresolved.
One such question relates to what an insurer must pay when a decision has been made not to repair a damaged property. Is an insurer required to pay a sum which includes an allowance for the cost of enhanced foundations when that cost is not actually going to be incurred?
The answer to this question will depend on the wording of the relevant insurance policy. In this respect, it is our experience that where a repair is to be undertaken then generally an insurance policy will require the insurer to comply with current building regulations. However, where a damaged property is not to be repaired, the cost of repair becomes notional.
Cases that have been decided in respect of properties that were ultimately not repairable provide some guidance when considering this issue. In particular, the Court has decided that:
- When building on a new site, an insurer is only liable to compensate an owner for costs actually incurred on the new site.
- If the homeowner elects to rebuild on another site or buy another house for up to the hypothetical cost of rebuild, the hypothetical cost cannot include any extra costs necessary to comply with building regulations over and above those required to rebuild on good ground.
- When determining whether a red-zone house would be economically repairable, the hypothetical repair proposed must comply with the relevant building regulations. The cost of the hypothetical repair could render the house uneconomic to repair.
- In red-zone cases, where a payment is based on the cost of rebuilding a home elsewhere, payment must be made on the basis of the cost of building on a good site, not the weakened and vulnerable red-zone section.
- In a purely hypothetical situation (i.e. where a rebuild is not occurring elsewhere) payment should include the hypothetical professional costs necessary to design and build a replacement home.
- Whether a house is damaged beyond economic repair (and therefore a rebuild) must be assessed by looking at the overall damage to the house. However, once a house is determined to be a rebuild, the total cost to rebuild the house may need to be determined on an item by item assessment.
The above case decisions relate to distinct scenarios, predominantly around the rebuild of properties. While each situation needs to be considered independently and on the basis of the wording of the applicable insurance policy, the reasoning of the Court in the cases decided to date suggests to us that when costing a notional repair, an insurance company should include in its estimate the cost necessary to repair foundations (if damaged). The proposed repair itself must comply with the relevant building legislation. This conclusion is consistent with the Court’s approach to whether or not a house is economically repairable. In particular, when deciding whether a house is economically repairable, the Court has taken into account costs associated with enhanced foundation repair.
Overall, as noted above, to date no cases have considered the question of whether a notional repair payment must include costs associated with enhanced foundation repair on the damaged site. This is, however, an issue that will impact on a large number of insurance claims as insurance companies increasingly look to pay out insurance claims instead of completing repairs to damaged properties. In those situations, homeowners, when accepting an insurance payout, must be confident that they are receiving their full entitlement under their insurance policy. Based on case law to date, it is our view that when determining the appropriate sum payable in respect of a notional repair, enhanced foundation repair costs should not be overlooked merely because a repair is not being completed.
For those people whose insurer is looking to pay them out instead of repairing their property, we recommend that you seek advice from your legal advisor to ensure that your insurer is meeting its obligations under your policy.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.