Skyward Aviation 2008 Ltd v Tower Insurance Ltd

• Jurisdiction: New Zealand
• Judge: Harrison J
• Judgment Date: 20 March 2014
• Neutral Citation: [2014] NZCA 76
• Docket Number: CA563/2013
• Court: Court of Appeal
• Date: 20 March 2014

BETWEEN

Skyward Aviation 2008 Limited

Appellant

and

Tower Insurance Limited

Respondent

BETWEEN

Tower Insurance Limited

Appellant

and

Skyward Aviation 2008 Limited

Respondent

[2014] NZCA 76

Court:

Randerson, Harrison and Miller JJ

CA563/2013

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal from a High Court (“HC”) decision which held that under an insurance policy, the respondent insurer was able to choose to settle a claim by paying the cost of buying another house or on the cost of rebuilding — appellant's building was damaged in the Christchurch earthquake and was located in the Red Zone — dispute concerned the measure of its insured loss under a full replacement policy — appellant claimed it was entitled to payment of an amount equal to the estimated costs of rebuilding or repairing its house — respondent countered that it had the right to choose from a variety of settlement options under the policy and that it was only obliged to pay the fair price of a replacement house elsewhere of comparable size, construction and condition — appellant had received payments from the Canterbury Earthquake Recovery Authority, the Earthquake Commission and $165,000 from the respondent for house damage based on the cost of purchasing a comparable house elsewhere — whether respondent had a contractual right to elect to settle the claim by paying an amount equal to the cost of buying a comparable house elsewhere because that would be the most economic option available — what was the correct measure of the respondent's liability — whether the respondent had had made an irrevocable election to pay full replacement value.

Counsel:

N R Campbell QC and KP Sullivan for Appellant

R B Stewart QC and M C Smith for Respondent

• A. The appeal against the High Court judgment answering questions 1 and 2 is allowed.

• B. The appeal against the judgment answering question 3 is dismissed.

• C. The respondent's appeal against the decision not to award costs in the High Court is dismissed.

• D. The respondent is ordered to pay 80 per cent of the appellant's costs for a standard appeal on a Band A basis together with usual disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Harrison J)

Introduction

1 The aftermath of the Christchurch earthquakes in September 2010 and February 2011 has generated extensive litigation between property owners and their insurers. This appeal arises as a consequence of earthquake damage both to a house and the land on which it is situated. The property is within what is known as the red zone, an area of land designated by the Christchurch Earthquake Recovery Authority (CERA) where repair would be prolonged and uneconomic. The owner of the property, Skyward Aviation 2008 Ltd, has accepted CERA's offer to buy the land at its then current rating value and pursued claims for loss of the house against the Earthquake Commission (EQC) and Skyward's insurer, Tower Insurance Ltd (Tower).

2 Skyward has since settled its claim against EQC. But it could not agree with Tower on the basis for or measure of its insured loss under a full replacement value policy. Skyward asserted that it was entitled to payment of an amount equal to the estimated costs of rebuilding or repairing its house on the land and issued a proceeding against Tower claiming damages. Tower countered that it had the right to choose from a variety of settlement options under the policy and that it was obliged to pay only the fair price of a replacement house elsewhere of comparable size, construction and condition as Skyward's house was when it was new.

3 Skyward's property in Burwood comprised 1,533 square meters. On it were an early 20th century villa and a separate sleep out. Both were rented to residential tenants. Skyward has settled its claim against Tower for loss of the sleep out which does not require further consideration.

4 Skyward bought the property in 2009 for $450,000.00 and insured the house with Tower. The certificate of insurance did not nominate a sum insured, providing instead that the house was insured for its full replacement value based on 210 square meters being built in 1900 with a $1,000.00 excess and EQ cover of $112,500.00. The house was damaged by earthquakes on 4 September 2010 and 22 February 2011 caused by liquefaction, burst sewage pipes and ground displacement. The land was also damaged.

5 In 2007 the property had a rating value of $582,000.00, divided equally between $291,000.00 for the land and $291,000.00 for improvements. Skyward gave Tower notice of its intention to accept CERA's offer of $291,000.00 for the land. Tower did not object. Its statement of defence to Sky's statement of claim pleads that the house was economic to repair. Nevertheless, because the property was in the red zone, Tower was willing to make a cash offer based on the cost of repair.

6 Skyward has received a total of approximately $659,000.00, being: (1) $291,000.00 from CERA for the land; (2) $203,000.00 from the EQC for house damage (being the limit of the EQC's statutory liability); 1 and (3) approximately $165,000.00 from Tower for house damage based on the cost of purchasing a comparable house elsewhere. Tower's payment was made without prejudice to Skyward's right to claim more. Tower says Skyward is not entitled to anything more for the house than it has received from EQC and Tower together. It says that the pre earthquake market value of the property was $492,000.00, divided between land at $275,000.00 and house and chattels at $217,000.00; and that Skyward could buy a similar house – excluding the land – for $365,000.00. Skyward says the house could be repaired on the site at a cost of $682,525.00 or rebuilt elsewhere to regulatory standards for $770,960.00.

7 These figures reflect the financial difference in the parties approaches; they are at least $300,000.00 apart. The difference would be compounded if another $150,000.00 were factored in for the cost of constructing special foundations for a house in the red zone. But Mr Campbell QC accepts, following the judgment of Asher J in O'Loughlin v Tower, 2 that Skyward is not entitled to claim that cost in circumstances where it will not in fact rebuild in the red zone.

8 In summary, Tower says that (a) it has a contractual right to elect to settle Skyward's claim by paying the company an amount equal to the cost of buying a comparable house elsewhere because that would be the most economic option available; (b) its payments made to date are sufficient to discharge that obligation; and (c) settlement according to Skyward's measure would be contrary to settled principles of indemnity because the company would recover some $975,000.00 for a property which it bought in September 2009 for $450,000.00 and which had a pre earthquake market value of $492,000.00.

9 In an attempt to resolve their differences the parties agreed to submit these three questions to the High Court for determination:

• (1) under the terms of the insurance policy, on what basis is the amount payable by Tower to be calculated if an insured party's claim is to be settled by Tower paying the cost of buying another house;

• (2) under the terms of the policy, is it Tower's choice whether the claim is to be settled by paying the cost of buying another house or, if Tower settles by making payment, whether it is to be made based on the cost of rebuilding, replacing or repairing the house; and

• (3) did Tower make an irrevocable election to settle Skyward's claim by making payment based on the full replacement value.

10 David Gendall J answered all three questions in Tower's favour. 3 Skyward now appeals. The general issues are, first, which party decides whether and where to repair or rebuild the house or purchase another house and, second, once that decision is made, what Tower is bound to do or pay to meet its obligation to the insured party.

Insurance Policy

11 The parties entered into what is described as a “Provider House (Maxi Protection) Policy”, insuring Skyward against “[s]udden and unforeseen accidental physical loss or damage” to property. The policy contemplates various kinds of loss; not only natural disaster but also, for example, fire.

12 In the event of damage to the house caused by a natural disaster, Tower's financial obligation is limited to payment of “the difference between the amount paid under the EQ cover and the sum insured shown in the certificate of insurance”. 4 In other words, the policy provides what is known as topup cover for natural disaster damage, as is customary for domestic policies. EQC cover is capped at $100,000 per event.

13 The parties' differences start with this insuring provision:

HOW WE WILL SETTLE YOUR CLAIM

We will arrange for the repair, replacement or payment for the loss, once your claim has been accepted.

We will pay:

the full replacement value of your house at the situation; or

the full replacement value of your house on another site you choose. This cost must not be greater than rebuilding your house at the situation; or

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; or

the present day value;

as shown in the certificate of insurance.

We will only allow you to rebuild on another site or buy a house if your house is damaged beyond economic repair.

14 The policy has these definitions of terms “full replacement value” and “present day value”:

Full replacement value means the costs actually incurred to rebuild, replace or repair your house to the same condition and extent as when new and up to the same area as shown in the certificate of insurance, plus any decks, undeveloped

basements, carports and detached domestic outbuildings, with no limit to the sum insured.

Present day value means the cost at the time of the loss or damage...