Southern Response Earthquake Services Ltd v Avonside Holdings Ltd

• Jurisdiction: New Zealand
• Judge: Glazebrook J
• Judgment Date: 22 July 2015
• Neutral Citation: [2015] NZSC 110
• Docket Number: SC 118/2014
• Court: Supreme Court
• Date: 22 July 2015

Between

Southern Response Earthquake Services Limited

Appellant

and

Avonside Holdings Limited

Respondent

[2015] NZSC 110

Court:

Elias CJ, William Young, Glazebrook, Arnold and O'Regan JJ

SC 118/2014

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from Court of Appeal decision that an insurance policy allowed a sum to be allocated for contingencies in a rebuild and that the extent of an allowance for professional fees payable under the policy was the amount calculated by the respondent's expert — policy stated that if the house was damaged beyond economic repair, the insured could elect to buy another house — the cost of the house could not be greater than rebuilding the house on its present site — insurer disputed the allocation of a 10% contingency allowance by the respondent's quantity assessor when he calculated what a rebuild would cost on the same site — argued that this should not be included in a “notional rebuild” figure — insurer also said that that adopting a percentage figure based on the expected professional fees was appropriate for an individually designed new house and not a rebuild — whether the policy allowed for calculation of a contingency sum — whether the professional fees should be estimated on a percentage basis.

Counsel:

B D Gray QC, C R Johnstone and S E Waggott for Appellant

N R Campbell QC and A M E Parlane for Respondent

A The appeal is dismissed.

B The appellant is to pay costs of $15,000 to the respondent, plus all reasonable disbursements, to be fixed if necessary by the Registrar.

JUDGMENT OF THE COURT

REASONS

(Given by Glazebrook J)

Table of Contents

	Para No
Introduction	[1]
The terms of the policy	[4]
What is at issue	[7]
Contingencies	[8]
Professional fees	[10]
High Court decision	[12]
Court of Appeal decision	[14]
Issues	[17]
Relationship between cl 1 and cl 4	[19]
Parties' submissions	[19]
Our assessment	[22]
Contingencies	[23]
The evidence	[23]
Parties' submissions	[34]
Our assessment	[38]
Professional fees	[41]
The evidence	[41]
Parties' submissions	[45]
Our assessment	[49]
Result	[50]

Introduction

1 Avonside Holdings Ltd (Avonside) owned a residential rental property in Christchurch (the property). It was insured under a policy issued by AMI Insurance Ltd (AMI). AMI's liability under the policy has been assumed by Southern Response Earthquake Services Ltd (Southern).

2 The property was damaged in the earthquakes of 4 September 2010 and 22 February 2011. The property is in the residential red zone 1 and Avonside accepted the Crown's offer to buy the land but retained its rights against Southern in relation to the improvements. 2 It is agreed that the house is beyond economic repair. As it was entitled to do under the policy, Avonside elected to buy another house. The policy provided that the cost of the other house can be no more than “rebuilding your rental house on its present site”. 3

3 This appeal concerns whether there should be a sum for contingencies and the extent of an allowance for certain professional fees when calculating the amount payable under the policy. 4 MacKenzie J in the High Court found in favour of Southern on those issues. 5 These findings were overturned by the Court of Appeal. 6

The terms of the policy

4 The policy provides as follows:

1 What we will pay

• a. We will pay to repair or rebuild your rental house to an ‘as new’ condition, up to the floor area stated in the Policy Schedule.

• b. We will use building materials and construction methods in common use at the time of repair or rebuilding.

• c. If your rental house is damaged beyond economic repair you can choose any one of the following options:

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

  • ii 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 rental house on its present site.

  • iii a cash payment. We will pay the market value of your rental house at the time of the loss.

• d. If your rental house is damaged and can be repaired, we can choose to either:

  • i repair your rental house to an ‘as new’ condition, or ii pay you the cash equivalent of the cost of repairs.

5 The term “Full replacement”, as used in cl 1(c)(i) of “What we will pay”, is defined in the policy to mean “replacement with a new item, or repairing to an ‘as new’ condition”. The term “market value” means “the value of an item immediately before the loss or damage occurred, taking into account wear and tear and depreciation”.

6 Cover is also provided for certain additional costs in the following terms: 7

4 [C]over for additional costs

We will pay for the following additional costs.

1 Professional fees	a. We will pay the reasonable cost of any architects' and surveyors' fees to repair or rebuild your rental house. These expenses must be approved by us before they are incurred.
2 Demolition and debris removal	a. 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 rental house contents	a. We will pay the reasonable cost of removing your rental house contents from your rental house when this is necessary to carry out repair or reinstatement of your rental house.
4 Compliance with building legislation and regulations	a. If additional work is required to ensure that the repair or rebuilding of your rental house complies with the building code, we will pay the reasonable costs of the additional work.
	b. We will not cover any additional work required:
	i if a notice has been served requiring compliance with the Building Act 1991 or the Resource Management Act 1991 before the loss or damage occurred, or
	ii if your rental house did not comply with the relevant governing building controls when it was built or at the time of any alteration, or
	iii to any undamaged part of your rental house, whether or not it complies with the building code.

What is at issue

7 The witness for Avonside was a quantity surveyor, Mr Harrison. Witnesses for Southern were Mr Phillips, the “Build Technical Advisor” employed by Southern, and Mr Farrell, a quantity surveyor and the commercial manager of Arrow International (NZ) Ltd (Arrow). The primary focus of Mr Farrell's work is the damaged homes of policy holders of Southern.

Contingencies

8 Mr Harrison for Avonside and Mr Farrell for Southern agreed on the following definition of contingency sums: 8

Contingency sums are for items, the nature or extent of which cannot be defined otherwise in the contract document. Such sums are wholly under the control of the architect, engineer or client's representative administering the works and may be expended or deducted in part or in whole under his/her authority.

9 Mr Harrison, for Avonside, included a figure of 10 per cent of the total price calculated, some $143,200, for contingencies. 9 Mr Farrell, for Southern, made no allowance for contingencies.

Professional fees

10 Mr Harrison made an allowance for the fees of various consultants of 10 per cent of the total cost (including the allowance for contingencies) amounting to some $157,180. 10

11 Mr Farrell made an allowance of $29,000 to cover geotechnical fees, consent fees, engineering and architectural drafting.

High Court decision

12 MacKenzie J held that there should be no allowance for contingencies on the basis that this was a notional rebuild and unexpected events will thus not occur. He said: 11

In a notional rebuild, there can, by definition, be no unexpected items. What is required is the best assessment of the cost of rebuilding, based on all known circumstances. Because there will be no actual rebuild, that assessment will never be put to the test. There is no need to add a contingency sum to reflect possible contingencies which will never be encountered.

13 As to professional fees, MacKenzie J considered that the amount allowed by Mr Farrell was the “appropriate estimate of the fees for items which would be necessarily incurred in the notional rebuild”. 12 He rejected what he described as “Mr Harrison's approach of adopting a percentage figure based on the expected professional fees for an individually designed new house”. 13 In any event, MacKenzie J held that the policy treated architects' fees as additional costs under cl 4 and not part of the basic cover. 14

Court of Appeal decision

14 First, the Court of Appeal held that the limit of Avonside's entitlement under cl 1(c)(ii) involved both the full replacement cost and additional costs under cl 4. The cost of rebuilding the rental house on the present site would include both the full replacement cost and necessary additional costs and thus is the amount the insurer would be liable for if the insured exercised the option to rebuild on the same site. If

the policy intended to limit the costs payable under cl 1(c)(ii) to replacement cost only, then it would have said so. 15

15 Second, the Court rejected the distinction made by MacKenzie J between a notional and an actual rebuild. It said: 16

… it is irrelevant in the present context that rebuilding will not take place: what is required is an assessment of the costs that would be incurred if rebuilding were actually to occur. … [C]osts cannot be excluded merely because the rebuild is not going to happen and costs will not be incurred.

16 This meant that a reasonable estimate for professional fees and contingencies should be included in the sums payable, as if the house is actually being rebuilt. 17 The Court of Appeal thus preferred Mr Harrison's approach to the issue of professional fees and...