Tower Insurance Ltd v Skyward Aviation 2008 Ltd

JurisdictionNew Zealand
CourtSupreme Court
JudgeWilliam Young J
Judgment Date15 December 2014
Neutral Citation[2014] NZSC 185
Docket NumberSC 41/2014
Date15 December 2014

[2014] NZSC 185

IN THE SUPREME COURT OF NEW ZEALAND

Court:

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

SC 41/2014

BETWEEN
Tower Insurance Limited
Appellant
and
Skyward Aviation 2008 Limited
Respondent
Counsel:

R B Stewart QC and M C Smith for Appellant

N R Campbell QC and K P Sullivan for Respondent

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.

The issues were: if an insured party's claim was to be settled by Tower paying the cost of buying another house, how was the amount payable calculated; whether under the policy it was Tower'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.

Held: The insurance policy was for full replacement value and proceeded on the basis of replacement on a new for old basis. A replacement value policy covered the impact of depreciation and increased building costs. The cost of rebuilding a house that was approximately 110 years old considerably exceeded the indemnity value of the house immediately before the earthquakes. It was for this reason that the indemnity principle was a slightly awkward phrase in the context of a replacement policy.

Replacement value insurance created heightened moral hazard. The associated risks of this could be mitigated by insurers in various ways, including by policies (a) providing insurers with the option of reinstating the property, and (b) limiting replacement value recovery to reimbursement of expenditure incurred by the insured. In the latter case, it was open to an insurer to require actual reinstatement or replacement by the insured, on a new for old but otherwise like for like basis, as a precondition for paying out anything above indemnity value. Options (a) and (b) in cl 2 of the policy proceeded on this basis.

Strict pre-conditions on the ability of an insured to achieve replacement value recovery limited the incentive for fraudulent claims but could also be irksome for an honest insured who, for instance, might not wish to replicate what had been lost. Clause 2 was therefore expressed in terms which were not predicated on the new house being a like for like replacement for the insured house, so as to make it easier rather than harder to obtain replacement value for its loss.

Tower accepted that the “replacement” house, if not new, had to have been recently renovated and have no significant deferred maintenance. However Tower's approach would compromise Skyward's ability to obtain replacement value recovery on the new for old basis contemplated by the policy. This was inconsistent with:

  • a) the scheme of options (a), (b) and (c), which were addressed to moral hazard rather than intended to enable Tower to convert what was sold as a replacement value policy into something akin to an indemnity value policy; and

  • (b) option (c), which was to enhance, rather than diminish, the ability of an insured to obtain replacement value recovery.

Tower argued that if the insured repaired or rebuilt the house on the site, replaced it on another site or bought another “replacement house”, and was later reimbursed by Tower for the associated costs, Tower had thereby rebuilt, replaced or repaired the house for the purposes of cl 3. This was not consistent with the wording in clause 3. If Tower declined to rebuild, replace or repair the insured house and the insured then did so, it was the insured who had replaced the house and not Tower. And when Tower reimbursed the expenditure incurred by the insured, this was by way of discharge of its obligation “to make payment”.

As well, the language of cl 3 conferred on Tower a single option, to decide either to make payment or to rebuild, replace or repair. There was nothing in the language of the clause to suggest that Tower had the double option, first to determine whether “to make payment, rebuild, replace or repair” and, then, if it had chosen to “make payment”, the further ability to decide which of the cl 2 payment options was adopted.

Tower's argument was also not consistent with the language of cl 2. Unless the house was damaged beyond economic repair, the only options available were option (a) replacement value of the house at its situation, and option (d) present day value. In this situation the choice was for the insured. Where the house was damaged beyond economic repair, the insured could choose present day value by deciding not to take any of the steps that engaged options (a), (b) and(c). In these situations, it was perfectly clear that the option which applied was decided by the insured.

If the house was damaged beyond economic repair, all four options were available. Clause 4 proceeded expressly on the basis that it was the insured who chose. Further the language of the proviso to cl 2 — “only allow you to rebuild on another site or buy a house” — was inconsistent with Tower deciding whether to rebuild on another site or buy a house. The proviso was completely surplus to requirements on Tower's approach because the insured then could never exercise options (b) and (c) without Tower's consent.

Tower's approach went beyond what was necessary to address moral hazard concerns. More generally still, Tower's interpretation would result in an insured's entitlements being distinctly less than what the policy appeared to envisage. On Tower's interpretation it could, by withholding payment of anything more than present day value, force the insured instead to buy the cheapest non-new house which was comparable to the insured house and in this way achieve'replacement’ for a cost that might be appreciably less than the replacement value of the house. As well, it was implicit in Tower's argument that it either chose the replacement house or had a practical right of veto (subject of course to review by courts) of any house which the insured would like to buy.

Tower's approach would give it the right (subject only to arguments about reasonableness) to insist on the replacement house being in another suburb or even city, despite close connections (for instance as to schooling) that the insured might have with the locality in which the insured house was situated.

In a case where a house was damaged beyond economic repair and where Tower had decided not to rebuild or replace the house, Tower's payment obligations under cl 2 were determined by the choice which the insured made as to whether to rebuild the house or replace it on another site or buy another house.

Practical and policy considerations strongly pointed away from Tower's interpretation of the policy that its liability to pay under option (c) was not triggered by the purchase of a house unless it was comparable to the insured house. It might be that a house which was comparable to the insured house did not exist. If this was so, Skyward could be denied replacement value recovery during a vain search for such a comparable house. The comparable house approach of Tower as first advanced — by reference to a 100 year old house in only average condition — would produce an outcome that would be consistent more with an indemnity than a replacement value policy.

If the insured chose to buy another house, the only cap on the cost that Tower had to meet was that it would not exceed the cost of rebuilding the insured house at its present site and there was no requirement that the house which was bought be “comparable” to the insured house.

Appeal dismissed. Tower's liability was the lower of the cost of rebuilding the insured house at its present site or the cost of another house. There was no requirement that the other house be “comparable” to the insured house. It was not Tower's choice whether the claim was to be settled by paying the cost of buying another house.

Treating the litigation as a test case provided a reason for the High Court not awarding Tower costs because the litigation had been very much for its purposes (as addressing issues it plainly faced with a number of claimants). But from the point of view of Skyward, the dispute had a one-off character and, with Skyward having been successful, there was no good reason why costs should not follow the event.

Cross appeal allowed.

JUDGMENT OF THE COURT
  • 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...

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