Dodds v Southern Response Earthquake Services Ltd

• Jurisdiction: New Zealand
• Judge: Gendall J
• Judgment Date: 16 August 2019
• Neutral Citation: [2019] NZHC 2016
• Docket Number: CIV-2018-009-000417
• Court: High Court
• Date: 16 August 2019

Between

Karl Gregory Dodds and Alison Roma Jacqueline Dodds and St Martins Trustee Services Limited as Trustees of The Mattson Trust

Plaintiffs

and

Southern Response Earthquake Services Limited

Defendant

[2019] NZHC 2016

Gendall J

CIV-2018-009-000417

IN THE HIGH COURT OF NEW ZEALAND

CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA

ŌTAUTAHI ROHE

Contract, Insurance — alleged misrepresentation, misleading and deceptive conduct, and breach of the insurer's implied duty of good faith — insurer settled claim based on abridged report which omitted costs the defendant thought exceeded the insured's entitlement — effect of full and final settlement clause — s35 Contract and Commercial Law Act 2017 — s9 Fair Trading Act 1986

Appearances:

P J Woods and T D Grimwood for Plaintiffs

D J Friar and NFD Moffat for Defendant

JUDGMENT OF Gendall J

This judgment was delivered by me on 16 August 2019 at 11:00 a.m. pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: 16 August 2019

Table of Contents

	Para No
Introduction	[1]
Factual background	[2]
The policy	[3]
Out of policy options	[6]
The DRA	[10]
The election process — the 26 September 2012 letter	[16]
Information Sheets	[26]
January 2013 meeting/s, the MOU and Build Decision documents	[36]
Settlement Election form	[42]
The settlement	[45]
The claim	[51]
The Dodds' entitlement to the AMI Office Use section costs	[54]
The Avonside Holdings decisions	[56]
Theoretically, what would the applicable costs be now?	[64]
Claim 1: Misrepresentation	[77]
Was a representation made by words or conduct and, if so, was it false?	[80]
Did the misrepresentations induce the Dodds to enter into the Settlement Agreement?	[97]
Intention to rely	[102]
Reasonableness of reliance	[107]
Damages	[116]
Claim 2: Misleading and deceptive conduct under the Fair Trading Act 1986	[124]
Application	[136]
Damages	[149]
Claim 3: Common law breach of the duty of good faith	[152]
Does the full and final settlement clause count?	[171]
Application	[179]
Damages calculation	[202]
Interest	[208]
General damages claim	[214]
Orders	[225]
Costs	[226]

Introduction

1 An insurer commissions a report on the cost of rebuilding an earthquake damaged house. That report contains costings the insurer thinks are beyond the entitlement of the insured homeowner. The insured is provided an abridged report which excludes those costings and settles the claim on that basis. Later, the insured discovers the full unredacted report and feels deceived and misled. The insured sues alleging misrepresentation, misleading and deceptive conduct, and breach of the insurer's implied duty of utmost good faith under the policy. The potential liability of that insurer (if any) is at issue in this case.

Factual background

2 The plaintiffs, (“the Dodds”) owned a residential property at 9 Errol Lane, Huntsbury, Christchurch (“the property”) as trustees of the Mattson Trust. The house on that property (“the house”) was insured from the 1990s through AMI Insurance Ltd (AMI). A claim under the AMI insurance policy (the policy) eventuated when the house and the swimming pool on the property suffered major damage in the 2010/2011 Canterbury earthquake sequence. In February 2011, the Dodds filed a claim with the Earthquake Commission (EQC) and with AMI. On 5 April 2012, the defendant, Southern Response Earthquake Services Ltd (Southern Response) assumed AMI's liability under the policy for all earthquake damage resulting from the Canterbury earthquake sequence which occurred before 5 April 2012.

The policy

3 The Dodds' house was insured for full replacement cover under a policy described as an “AMI Premier House Cover” policy. The policy provides “top up cover” for earthquake damage over and above the amounts payable by EQC. It states under a section headed “cover for your house” that if the insured house is damaged beyond economic repair, which both parties accept was the case here, the insured can choose between four insurance options. This section goes on to describe what the insurer will do for each such option:

• (i) to rebuild on the same site. We will pay the full replacement cost of rebuilding your house.

• (ii) to rebuild on another site: We will pay the full replacement cost of rebuilding your house on another site you choose. This cost must not be greater than rebuilding your house on its present site.

• (iii) to buy another house. We will pay the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your house on its present site.

• (iv) a cash payment. We will pay the market value of your house at the time of the loss.

4 A separate section in the policy provides “cover for additional costs”. This outlines further costs the insurer will meet as follows:

1. Professional fees	We will pay the reasonable cost of any architects' and surveyors' fees to repair or rebuild your house. These expenses must be approved by us before they are incurred
2. Demolition and debris removal	We will pay the reasonable cost of demolition and debris removal. These expenses must be approved by us before they are incurred.
3. Removal of household contents	We will pay the reasonable cost of removing your household contents from your house when this is necessary to carry out repair or reinstatement of your rental house.
4. Compliance with building legislation and regulations	If additional work is required, we will pay the reasonable costs for compliance with building legislation and rules…

5 The relationship between the “cover for your house” section in the policy and the “cover for additional costs” section has been considered in a number of cases which I will outline later in this judgment.

Out of policy options

6 Southern Response, to its credit, at the time also offered policy-holder customers a number of alternative options which were outside the policy.

7 One of these options was “Flexi-Build”, which was called at that time “Build to Budget”. Southern Response developed this option, it said, because its standard policy only allowed customers to rebuild their insured house, and many customers wanted to use the payment they would receive under their policy to build something different. Southern Response therefore developed this out of policy option in which the customer could take the rebuild cost cap that applied under the Buy Another House Option (noted at [3](iii) above), and use this as a budget that they could then apply towards building a different house within the Southern Response rebuild programme (with certain restrictions). In some circumstances, the customer could also choose to contribute more to the cost of the new house than their budget. This might happen where the customer wanted to build a bigger house or a house with higher specifications than the original house. The basis on which Southern Response offered this option, it seems, evolved over time.

8 In Southern Response's communications with customers at the time, it contrasted this “Build to Budget” out of policy option with its obligations under the AMI policy by describing the policy rebuild options (outlined at [3](i) and (ii) above) as “Replicate to Policy”.

9 Two other out of policy options were available if a policy-holder customer decided to buy another house:

• (a) Buy and renovate: If a customer was to buy a house at a price less than the cost of rebuilding the original house, the policy did not allow the customer to keep the difference as a cash payment. However, in many cases where the purchase price was less than the estimated rebuild cost, Southern Response allowed the difference to be paid to the policy-holder in cash up to certain limits. Initially, Southern Response required the cash to be used to renovate the new house, but this requirement was later relaxed.

• (b) House and land package: Under the policy, a customer was able to use the “buy another house” sum to buy a new house, but not the land on which the house sat. This was recently confirmed in a decision of this Court, Southern Response Earthquake Services Ltd v Shirley Investments Ltd. 1 Notwithstanding this, under the house and land package, Southern Response did allow customers to use the buy another house sum towards the purchase of an entire house and the section/land on which it stood.

The DRA

10 In processing the Dodds' claim under their policy, Southern Response contracted with Arrow International Ltd (Arrow), at the time a large construction and quantity surveying company. Arrow assessed the earthquake damage to the house and provided an initial report. This essentially recorded the features of the house and the damage. Arrow was then to provide an estimate of the cost of repairing or rebuilding the house and to recommend whether it was economic to repair.

11 Arrow's initial report which was headed as a “Detailed Repair/Rebuild Analysis” report recorded the aspects of the house which had been damaged but without costing replacement. This was sent to the Dodds for comment on 21 October 2011 and then updated.

12 Arrow then produced to Southern Response a costed Detailed Rebuild/Repair Analysis (the Complete DRA) on 15 November 2011. The Complete DRA recommended a rebuild concluding that “the dwelling is uneconomical viable [sic] to repair”. Under the overall heading “Re-build budget” the Complete DRA itemised the cost of materials and labour required to rebuild the house at a figure of $895,937.78. A further section was included at the end of the Complete DRA under the heading “AMI Office Use”. In this section Arrow outlined a number of...