Tower Insurance Ltd v Skyward Aviation 2008 Ltd

• Jurisdiction: New Zealand
• Judge: William Young J
• Judgment Date: 15 December 2014
• Neutral Citation: [2014] NZSC 185
• Docket Number: SC 41/2014
• Court: Supreme Court
• Date: 15 December 2014

BETWEEN

Tower Insurance Limited

Appellant

and

Skyward Aviation 2008 Limited

Respondent

[2014] NZSC 185

Court:

McGrath, William Young, Glazebrook, Arnold and O'Regan JJ

SC 41/2014

IN THE SUPREME COURT OF NEW ZEALAND

Appeal by Tower Insurance Ltd against the Court of Appeal finding that insurer was not entitled to choose from a varietyof payment settlement options under an insurance policy and that it could not discharge its obligations by doing no more than paying the cost of another (not necessarily new) house elsewhere — insured cross appealed for costs following thedecision of the lower courts that costs should lie where they fell — issues related to interpretation of full replacement value which policy which proceeded on the basis of replacement on a new for old basis — if an insured party's claim was to be settled by the insurer paying the cost of buying another house, how was the amount payable calculated — whether under the policy it was the insurer's choice as to whether the claim was to be settled by paying the cost of buying another house — if settlement by making payment was chosen, whether the payment was to be made based on the cost of rebuilding the insured house, replacing the insured house or repairing the insured house.

Counsel:

R B Stewart QC and M C Smith for Appellant

N R Campbell QC and K P Sullivan for Respondent

• A The appeal is dismissed. We answer the questions posed as follows:

  • (a) 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?

  • Answer

  • Tower's liability is the lower of the cost of rebuilding the insured house at its present site or the cost of the other house. There is no requirement that the other house be “comparable” to the insured house.

  • (b) Under the terms of the insurance policy, is it Tower's choice:

    • (i) whether the claim is to be settled by paying the cost of buying another house?

    • Answer

    • No.

    • (ii) if settlement by Tower making payment is chosen, whether the payment is to be made based on the cost of rebuilding the insured house, replacing the insured house or repairing the insured house?

    • Answer

    • If Skyward buys another house, Tower must pay the lesser of the cost of the house or the cost of rebuilding the insured house on its present site.

• C We allow the cross-appeal. Tower is to pay Skyward costs and disbursements in respect of the High Court proceedings to be fixed by that Court.

• D In respect of the appeal and cross-appeal, Tower is to pay Skyward costs of $25,000 and reasonable disbursements to be fixed by the Registrar.

JUDGMENT OF THE COURT

REASONS

(Given by William Young J)

Table of Contents

	Para No
The appeal	[1]
Some more context	[4]
The insurance policy	[12]
The questions that we are required to resolve	[16]
Tower's interpretation	[18]
The High Court judgment	[19]
The approach of the Court of Appeal on the interpretation issue	[23]
Our approach	[24]
The general context	[24]
Difficulties with the wording of the policy	[31]
Does “replace” in cl 3 encompass the buying of another house?	[33]
Does the cl 4 limitation as to “what is reasonable, practicable or comparable with the original” apply to the other house which is acquired?	[39]
The costs cross-appeal	[45]
Disposition	[49]

The appeal

1 Skyward Aviation 2008 Ltd's residential property at 108 Kingsford Street, Burwood, Christchurch was affected by earthquakes on 4 September 2010 and 22 February and 13 June 2011. The property is within the residential red zone which was established in June 2011. Land and infrastructure in this zone have suffered such extensive damage that rebuilding and repair are not practicable in the short to medium term. The Crown, through the Canterbury Earthquake Recovery Authority (CERA), has acquired most of the insured red-zoned residential land pursuant to purchase offers based on the 2007 rating valuations. One of the options available to land owners was to sell their properties at the land value recorded in the rating valuations but to retain the right to pursue their insurers for physical damage to improvements. Skyward accepted this option. So it has sold the property for its 2007 rating land value and has claimed for physical damage to the improvements (principally a house and a sleep out) against the Earthquake Commission (EQC) and its insurer, Tower Insurance Ltd.

2 Skyward has since settled its claims against EQC. It has also settled with Tower in relation to the sleep out. There is, however, an unresolved dispute as to the house. Tower's position is that it has the right to choose from a variety of payment settlement options under the insurance policy and that it is entitled to discharge its obligations by doing no more than paying the cost of another — and not necessarily new — house elsewhere. In the High Court, 1 David Gendall J found in favour of Tower but his decision was reversed by the Court of Appeal. 2

3 Principally in issue before us is Tower's appeal against the Court of Appeal judgment. There is, however, also a cross-appeal by Skyward. The Court of Appeal, despite allowing Skyward's appeal, did not award it the costs of the High Court proceedings. 3 Skyward maintains that, having succeeded in the litigation, it ought to have been awarded costs in the High Court.

Some more context

4 The issue that we must resolve depends entirely on the construction of the insurance policy. But some further context may be of some assistance.

5 Skyward purchased the property in 2009 for $450,000. Under the 2007 rating valuation, the property was valued at $582,000, divided equally between $291,000 for the land and $291,000 for improvements. The value of the property (including all improvements) immediately before the earthquakes has been assessed at $492,000. 4 Both house and sleep out were rented to residential tenants. The house was insured under Tower's “Provider House (Maxi Protection) Policy” and the renewal certificate provided:

SUM INSURED FULL REPLACEMENT based on Area Sq Metres 210. Year Built 1900.

The sleep out had been built, as a garage, in 1989 and had been converted into a sleep out in late 2009 and early 2010. It was separately insured for full replacement value based on an area of 50m2. We infer that Skyward incurred some expenditure in respect of the garage/sleep out conversion.

6 Skyward gave Tower notice of its intention to accept CERA's offer of

$291,000 for the land. Tower did not object. Although it is not now suggested that the house should be repaired or rebuilt on the existing site, the notional costs of a rebuild operate as a cap on Tower's liability under the policy.

7 Skyward has so far received a total of approximately $788,000, being:

(a) $291,000 from CERA for the sale of the land; (b) $203,000 from EQC for house damage; (c) $128,000 from EQC and Tower in relation to the sleep out and other improvements; and (d) $166,000 from Tower for house damage. This last payment was made on a without prejudice basis.

8 Skyward says the house could be repaired (or rebuilt) on the site at a cost of

$683,000. Tower's corresponding estimate is $369,000. As we will see, if this latter estimate is right, the payments which Skyward has already received in respect of the

house ($203,000 from EQC and $166,000 from Tower) are sufficient to discharge Tower of any further liability under the policy. The litigation to date, however, has not focused on repair or rebuild costs. This is because Tower claims that its liability can be capped at a slightly lower figure

9 As we will see, one of the settlement options under the policy is for Skyward to buy another house and for Tower to pay the costs of doing so up to what it would cost to rebuild the insured house on its present site. On Skyward's case, it is thus entitled to buy another house and to be reimbursed for the cost up to $683,000. If its arguments and figures are correct, it is therefore entitled to be paid the difference between $683,000 and the $369,000 it has already been paid, around $314,000.

10 Tower maintains that the house to be acquired must be comparable to the insured house. As well, its position is that such a house need not be new. Tower contends that Skyward is entitled to no more than the cost of buying such a comparable house. It claimed that the cost of doing so would be only $365,000. If Tower's argument and figures are correct, then, on the basis of the arithmetic set out above, the payments which Skyward has received are sufficient to discharge Tower's obligations under the policy. We note in passing that that the $365,000 assessment is on the light side as it is based on a valuation of what Tower said was a like house being “a 100 year old second hand house only in average condition”. 5 Tower now accepts that, if not new, the replacement house must nonetheless be comparable to the insured house “as when new” and so will have been recently renovated and have no significant deferred maintenance.

11 More generally, Tower protests that settlement on Skyward's measure would be contrary to settled principles of indemnity because the company would recover around $1,100,000 in respect of a property which itbought in September 2009 for $450,000 and which had a pre-earthquakes market value which has been assessed at

$492,000 (which presumably allows for the added value associated with the costs incurred by Skyward converting the garage into a sleep out). 6

The insurance policy

12 The policy is in plain-English style and its provisions are not numbered. This makes forsome difficulty in terms of analysis and description. For ease of future discussion, we therefore reproduce the relevant wording in the...