A Floored Decision - Lessons from an insurance claim court decision

Article Published : 02.03.2013
We encourage people to seek legal advice if they find themselves in a significant dispute with their insurer as to the scope of their replacement cover.
Michael McKay

Picture this.  Before the recent earthquakes, a house is constructed out of rimu and other materials.  The rimu in the doors and skirting is visible, but the rimu in the floors and joinery has been hidden by carpet and other materials.  

The house is significantly damaged in the Christchurch earthquakes and the insured elects to rebuild their house ‘as new’, as permitted entitled under the relevant insurance policy.  Can the insurer replace the rimu with chipboard (or other materials of a lesser quality than rimu)?  Is the insurer required to rebuild the house like for like and install new rimu, even if the rimu would be hidden? 

The High Court recently addressed this question in Turvey Trustee Limited v Southern Response Earthquake Services Limited. In essence, the Court found that each case depends on its own individual facts and, in this case, the outcome depended on whether the rimu was visible in the house as it stood before the earthquakes.

The decision

The insured held the most comprehensive of three forms of cover then offered by AMI Insurance Limited.  The policy provided that the insurer was required to “rebuild your house to an as new condition using building materials and construction methods in common use at the time of rebuilding”.  

The insurer’s obligation under this policy was not an absolute one to pay for replacement of the existing structure.  The new structure will be an equivalent of the old, rather than a replication of the original.  

The threshold for “common use” is relatively low, Michael says.  “The insurer was not required to use outdated construction methods or rare materials that would now be more expensive in relative terms than more recently introduced methods or materials.”  A proposed building material is likely to be “in common use” if it is reasonably available and reflects an aspect of appearance or functionality that was distinctive in the original house.

In this case, the Court noted that the native timber flooring was distinctive, namely its pleasing appearance as uncovered, finished timber.  Where the timber was exposed at the date of the earthquake, it could be included in the new house.  Where the timber was covered at the date of the earthquake, the distinctive appearance of the native timber was not being utilised and the insurer was entitled to replace the timber with the same material or its nearest equivalent in common use.  

What does this decision mean for you?

This decision concerned the interpretation of one AMI insurance policy, particularly as it is applied to the replacement of native flooring.  While each case will be determined on the relevant policy wording, Turvey Trustee Limited is likely to provide guidance in the interpretation of other insurance policies.   

It will not always be clear whether the use of particular building material or feature in the original house for was largely functional, rather than aesthetic (and therefore capable of being substituted by another material in common use in the present day).  

“Some disputes may arise where a floor, skirting board, or other item was covered with carpet or paint, which could have been removed.  If a modern building equivalent is used in those circumstances, the insured appears to have lost the opportunity to restore the original material to its former glory,” Michael adds.

“We encourage people to seek legal advice if they find themselves in a significant dispute with their insurer as to the scope of their replacement cover.  If an insured considers that their insurance broker inaccurately described the scope of their building replacement cover at the time of placing their policy, they may have a claim against that insurance broker.  As a minimum, the insured will need to establish that they relied on the relevant insurance broker’s advice to their detriment.”

Going forward

Some insurers have changed the wording of the building replacement clauses for policies placed in 2013.  “We have seen an insurance policy which caps replacement cover to a ‘sum insured.  This is a significant change to the risk associated with replacement cover,” he adds. Under this type of policy, the insured may need to top-up the insurance moneys in the event of future damage, if the cost of replacing an insured building “as new” exceeds the sum insured (or rebuild to a lower quality).  It pays to read the policy wording carefully and seek advice as to the effect of the policy if in doubt.