The Canterbury earthquakes have created many new scenarios that insurers have to interpret and respond to, including land zones and notional builds.

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1 Legal Precedents The Canterbury earthquakes have created many new scenarios that insurers have to interpret and respond to, including land zones and notional builds. The High Court has heard several cases involving residential earthquake claims and these are summarised here so that you can learn from these outcomes. Each case involves slightly different circumstances and not all of the cases involve Southern Response (and therefore AMI policies), so the outcomes may not be applicable to your claim. In each case, the outcome will affect the way we interpret the AMI policy in the future. Turvey Trustee Limited v Southern Response [2012] NZHC 3344 The house involved was an Edwardian style villa. The policyholder elected to rebuild on another site. Some of the costs of constructing the house to meet current building standards at the new site were different to what the costs would have been at the original site. The AMI Premier House Policy provided: As part of the main coverage clauses: We will pay to rebuild your house to an "as new" condition. We will use building materials and construction methods in common use at the time of rebuilding. 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. UnderCover for additional costs: If additional work is required, we will pay the reasonable costs for compliance with building legislation and rules. What was the meaning of "rebuild your house to an as new condition using building materials and construction methods in common use at the time of rebuilding"? How should "additional costs" should treated when the rebuild was on a different site to the original?

2 "As new"means the new structure will be the equivalent of the old. Southern Response is not required to replicatethe original. Factors to take into account in settling on an equivalent house are the size, functionality and relative quality of the original house. There also needs to be a reasonable recognition of the character and appearance of the original. "Materials and construction methods in common use at the time of rebuilding" also involves an assessment of what would be equivalent in a modern setting. Southern Response does not have to replicate a precise item or method used in construction 80 or 110 years ago if an equivalent material or method is used predominantly today in comparable rebuilding situations. If additional work has to be done at the new site, for example, enhanced foundations,southern Response will meet reasonable costs to the extent they are necessary to comply with the current Building Act and codes as those costs are actually incurred at the new site. The case also considered how features such as polished rimu floors should be treated. The outcome was that if damaged rimu floors are in a polished or finished state, not permanently covered by carpet, and a feature of the house, then Southern Response will replace them with rimu or an equivalent hard wood. Southern Response is not obliged to do the same if the rimu floors are covered with glued carpet or tiles, or are unable to be used as flooring without work or expense. O'Loughlin v Tower [2013] NZHC 670 The insured house was located within the residential red zone declared by CERA. Tower believed the house was repairable and wanted to make a cash payment based on its assessment of repair costs. The insured wanted to purchase a replacement house. Under the insurance policy Tower was obliged to pay the costs to rebuild, replace or repair the insured house"to the same condition and extent as when new". Although the Tower policy wording is different to the AMI policy wording, some aspects of the decision are still applicable to how Southern Response assesses and settles claims. Did the declaration of the residential red zone by CERA mean the insured was entitled to full replacement cover even though Tower said the house was repairable? What was Tower's obligation under the policy? The creation of the red zone did not mean the plaintiffs were entitled to be paid the full replacement value of their house. The repair proposed by Tower was not sufficiently certain to be acceptable.

3 Tower had elected to make a payment rather than do the proposed repair work. Tower was therefore obliged to make a payment based on either a rebuild of or replacement for a comparable house, to the same condition and extent as when new, on good ground in Christchurch. This calculation was essentially a notional rebuild cost on a notional good site. The replacement house needed to be of comparable size and condition as the existing house when new, and offer the same amenities. It did not need to be an exact replica of the original house. McLean v IAG Limited [2013] NZHC 1105 The insured chose not to rebuild or replace their house. The insurance policy provided that where the insured chose not to rebuild or replace the house, NZI was liable to pay the "present value" of the home. "Present value" was defined as"the reasonable cost to repair or replace, less an allowance for depreciation based on age, condition and deferred maintenance".the NZI policy wording was different to AMI's house policies because the professional costs were treated as part of the main assessment of loss covered under the policy. AMI's policies treat professional costs as a separate calculation based on costs actually incurred. TheTurveycase referred to above is more applicable in the case of AMI's policies. What was the meaning of the "present value" of the home under the specific insurance policy involved? Did the "present value" of the home include professional costs such as architects, engineers, surveyors, building consultants, legal and council fees? "To replace" meant "to put back in place," so the reasonable cost to replace the home in that sense would normally involve professional and other fees. There was nothing in the policy to exclude them from the scope of "reasonable costs". The settlement clause in the policy expressly linked fees with the insured's loss because it said: "the most we will pay for any loss caused by an event,inclusive of fees and other costs, is the sum insured". The quantification of present day value was therefore an assessment of the cost of physical replacement of the home in the post-earthquake context, allowing for depreciation. The "present value" of the home included professional costs such as architects, engineers, surveyors,building consultants, legal and council fees to the extent they would be incurred to enable replacement of the house. The Court noted the difference between the NZI policy wording and the AMI policy wording.

4 Avonside Holdings v Southern Response [2013] NZHC 1433 The policyholders owned a rental property in the residential red zone. Both parties accepted that the house had been damaged beyond economic repair. The policyholders elected to sell the land to the Crown, and therefore the option to rebuild onsite was not available to them. At the time of the hearing, the policyholders had not yet elected to either rebuild on another site or buy another house. The AMI Premier House Policy provided. As part of the main coverage clauses: We will pay to rebuild your house to an "as new" condition. We will use building materials and construction methods in common use at the time of rebuilding. 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. Alternatively 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. UnderCover for additional costs: We will pay the reasonable cost of any architect's and surveyor's fees to repair or rebuild your house. These expenses must be approved by us before they are incurred. We will pay the reasonable cost of demolition and debris removal. These expenses must be approved by us before they are incurred. If additional work is required we will pay the reasonable costs for compliance with building legislation and rules. How should the notional cost of rebuilding the insured house be calculated? How should cost elements such as builder's margin, demolition, contingencies, professional fees, and replacement of external works be treated?

5 The cost to rebuild the house was to be calculated on a notional basis. The builder's margin should be calculated at the rate of 8-12% (in this case 10% was allowed), and applied to preliminary and general items. No contingencies are payable under a notional rebuild calculation, as there are no unknowns in a notional rebuild. The amount to be paid for external works items is the cost of replacing external works damaged beyond repair and the cost of repairing external works items which are repairable and reusable. Demolition costs are paid undercover for additional costsif they are actually incurred, and do not form part of the notional cost to rebuild the house. Professional fees for a notional rebuild are to be calculated on the basis of fees that would necessarily be incurred to replace the home (essentially those that would be incurred in order to obtain a building consent). The Court accepted Southern Response's allowance of $29,000 (based on evidence provided) for geotechnical, consent application, engineering and drafting fees. Design fees based on an architect designing an entirely new house from scratch were not allowed as they would not be incurred. This case is currently before the Court of Appeal, pending determination of an application by the policyholder for an extension of time to appeal. Rout vs Southern Response 2013 NZHC 3262 The Rout case is only authority for the proposition that houses subject to a Consent Notice must be restored to their previous height, in recognition of Council having previously imposed this requirement on the land owner for safety reasons. In the Rout case the house had sunk differentially and needed to be re-levelled. The judge found that in the specific circumstances, if the house floor was going to be re-levelled it would also need to be raised to its overall pre existing level. The reasons for those comments were specific to the facts of the case and do not apply generally. We are aware that Rout is being treated as authority for the proposition that insurers are generally obliged to pay for the cost of houses to have floor levels restored to their preearthquake level. That is not the case. A consent notice like the one on theroutcase records an agreement between the Council and a property developer about specific requirements applying to new sections in a sub division. The consent notice is registered on the titles within the subdivision and applies on a continuing basis. In the Rout case the consent notice required the Routs floor level to be 11.4 m RM. The Judge also decided that the reason for the requirement was for safety reasons.

6 The decision therefore will only be relevant to a very limited number of properties with these specific features. Southern Response will not agree to raise floor levels in any other case when it is only carrying out repairs to foundations as part of fixing the earthquake damage to the home. In addition, it is important to note that in Rout, the Court accepted that the Flood Management Area floor level heights do not apply to repairs but to new builds only. The effect of global settlement caused by the Canterbury earthquakes is an issue with which all insurers and EQC are grappling and which needs resolution. In the meantime, Southern Response maintains that global settlement is a land issue and unless interpretations change, in only very limited circumstances will we accept that we are obliged to raise floor levels in addition to re-levelling differential settlement to repairable foundations.