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Full replacement insurance - the devil is in the detail

By Andrew Steele - 25 Jun 2015

This week the Supreme Court granted an insurer leave to appeal in the case of Southern Response Earthquake Services Limited v Avonside Holdings Limited. This litigation concerns arguments around what costs can be included in estimating the full replacement cost.

Avonside Holdings Limited (AHL) own a rental property in Christchurch. The house was damaged in the earthquakes. As the property is within the "red zone" AHL cannot rebuild on that site. Fortunately for them their policy with Southern Response provides that the insurer will cover the cost of purchasing another property. The policy says that the insurer will not pay more than the full replacement cost of the original house on its original site.

The owner's position is that the costs of rebuilding the property on its current site should be estimated in the usual way, including a contingency for any unforeseen costs (10% on top of the estimated rebuilding costs) and additional costs such as architects' and engineers' fees. The insurer disagreed. The insurer persuaded the High Court that this was a "notional rebuild" as the house was not actually going to be rebuilt. Therefore, there was no need to take into account things like contingencies and professional fees which were categorised as additional costs under the insurance policy. This left the homeowners with a much smaller sum to go shopping for a new property.

In October last year the Court of Appeal overturned the High Court's decision and ruled that the full replacement cost should include professional fees such as architects' and engineers' fees and a sum for contingencies. If the insurer had intended to limit the estimate to exclude those items, then that could have been done in the wording of the policy.

Sadly the dispute isn't over yet for the owners as the Supreme Court will consider the insurer's appeal later this year.

We act for a number of clients in Christchurch who are still in dispute with insurers and the EQC.

Please contact Andrew Steele for assistance in relation to Christchurch claims or other disputes with insurers.


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