Earthquake Damaged Properties
The issue of standard of repair frequently arises in relation to the repair or replacement of residential buildings under the Earthquake Commission Act 1993 (“the Act”). Section 18 of the Act provides that any residential building is deemed to be insured against natural disaster damage for its replacement value. Section 2 defines “replacement value” as “replacing or reinstating a residential building to a condition substantially the same as, but not better or more extensive than, its condition when new. It also requires the standard to be modified as necessary to comply with any applicable laws. Applicable laws include both the Building Act 2004 and the Building Code. The standard of repair under the Act is broadly analogous to the standard of repair under insurance policies. Accordingly, leading cases that clarify and explain the standard repair under insurance policies are also relevant in determining the standard of repair under the Act.
Section 18 is expressly subject to Schedule 3 of the Act. Condition 9 of Schedule 3 provides that EQC may at its option replace or reinstate any residential building that suffers earthquake damage, but:
- EQC shall not be bound to replace or reinstate exactly or completely; and
- It only needs to undertake reinstatement of earthquake damage as circumstances permit and in a reasonably sufficient manner., and
This Condition has been relied on by EQC when assessing the standard of repair under the Act.
A key resource for EQC claims is the EQC fix website which can be found at www.eqcfix.nz. It records the provisions of an agreement and joint statement (“the Statement”) signed by EQC and the EQC Action Group. The Statement affirms that EQC’s obligation is to reinstate damaged residential buildings to substantially the same condition as when new, and the cost of applying within the applicable laws. The Statement also provides that where it is necessary for undamaged portions to be repaired or reinstated, those costs also need to be met by EQC.
The MBIE Guidance document entitled “Repairing and Rebuilding Houses Affected by the Canterbury Earthquakes” includes indicator criteria relating to when relevelling of a floor is required. Where damage was recorded as being less than the indicator criteria (floor level differentiation of less than 50mm and floor slopes of less than 1 in 200 between any two points at least 2 metres apart), on many occasions, EQC refused to carry out relevelling work or, if relevelling work was carried out, it did not bring buildings back to level. In the Statement, EQC agreed that the MBIE criteria did not replace or supplant the standard of repair under the Act.
The Condition 9 qualification has been relied on many times by EQC. There may be situations where it can validly be relied on, but it does not apply to claims that are cash settled. It would be inappropriate for EQC to invoke the Condition where claims are cash settled and EQC is not reinstating earthquake damaged properties. Further, reliance on the Condition where damage is being reinstated requires EQC to identify relevant “circumstances”. This could apply where building products and practices originally used in the construction of older properties can no longer be obtained.
Case Law on Standard of Repair
There is now a body of case law that has clarified the standard of repair.
In Turvey Trustee Limited v Southern Response Earthquake Services Limited, the Court considered the standard of repair in relation to an Edwardian villa. The villa contained native timber flooring, solid rimu doors, architraving and skirting and elaborate external joinery. The Court held that the insurer had to meet a test of equivalence and stated:
The insurer’s obligation under this policy is not an absolute one to pay for replacement of the existing structure. The primary constraint on that obligation is that the insurer is obliged to pay for building materials and construction methods that are in common use at the time of the rebuilding. That constraint, together with the comparative connotation of “as new”, conveys the sense of the new structure being the equivalent of the old, rather than a replication of the original. Adopting the approach to equivalence … it would be measured by size, functionality, relative quality and reasonably addressing the re-creation of character and appearance.
This statement is a useful starting point for clarifying the standard of repair under the Act. This statement was echoed by the High Court in O’Loughlin v Tower Insurance Limited where the Court said that a rebuilt house “does not have to be an exact replica in terms of its position on the site or dimensions. It has to be comparable to the original house as when new”.
In Rout v Southern Response Earthquake Services Limited, the insurer’s obligation to rebuild a residential dwelling was expressed as “meeting the cost of rebuilding … a replacement house…which is of a comparable size and condition to the existing house as when new and offering the same amenities.”
In East v Medical Assurance Society New Zealand Limited, the Court considered that the standard of repair was an approximate standard but, at the very least, any repairs had to meet contemporary standards for construction of residential buildings, using modern building materials and meeting minimum building requirements.
In Parkin v Vero Insurance NZ Limited, the High Court considered that the standard had to be applied contextually and with regard to a building’s future function, utility and value. The Court held that replacement insurance policies needed to adequately address each of those factors.
Any repairs to an earthquake damaged property should be based on expert assessment of damage, the definition of replacement value in the Act and the courts’ interpretation of that standard in the cases referred to above.
Meeting requirements of the Guidance developed by MBIE is insufficient without more to meet the standard of repair under the Act. Similarly, the occasions where EQC is able to validly rely on Condition 9 will be limited to incidents where EQC can point to qualifying circumstances. The Act and relevant case law require EQC to meet a test of equivalence with regard to size, functionality, quality, appearance, value and utility. The manner in which claims are settled by EQC does not affect the standard of repair.
The standard of repair remains the touchstone for assessing whether a proposed settlement of an insurance claim in respect of an earthquake damaged property is fair and reasonable in all the circumstances.
For further information or advice related to earthquake matters please contact one of our team of expert insurance lawyers specialising with expertise in earthquake claims;