Fitzgerald v IAG New Zealand (2018) NZHC 3447
Insurers will welcome further confirmation from the High Court as to what is required when a policy agrees to repair a building to a “when new” condition.
The Plaintiffs’ house was damaged in the 2010/2011 Canterbury earthquake sequence. It was insured by IAG New Zealand Limited (IAG). The parties could not agree on a repair scope for damage to the foundations of the house and garage. The foundations had settled and cracked and the Plaintiffs contended that the whole foundation system needed to be replaced. This meant demolishing and rebuilding parts of the house. IAG contended that the foundations could be repaired through “jacking and packing” and epoxy injections. The Court was required to consider whether IAG’s proposed repair scope met IAG’s obligations under the policy.
The policy required IAG to meet the cost of repairing or rebuilding the house to a condition “as similar as possible to when it was new, using current materials and methods”. This is commonly known as a “when new” repair policy as opposed to an “as new” repair policy.
IAG submitted that “when new” was temporal in that it required equivalence with the original house (largely built in the 1920’s). IAG argued that it did not require exact equivalence, but that a “structural element’s original structural function must be reinstated and any aesthetic qualities restored”. The Court agreed with IAG’s interpretation.
Gendall J. held that the meaning of the phrase “when it was new” must be impacted by the state of the house when it was first built. “Otherwise there could be no meaningful difference between the phrases “as new” and “when new””. His Honour noted that the Court of Appeal (in East v Medical Assurance Society) had clearly found there was a difference between the two phrases and that, in this case, the repairs must put the house in the same condition as far as possible as it originally was. This meant that the foundations needed to provide the same level of functional support to the building as when they were new. He concluded that “there is no prima facie obligation on IAG to ensure that the foundations are at the same level as modern standards, although modern materials and methods are to be used to bring the foundations back up to their original standard.”
The policy also provided that IAG would pay for the cost of ensuring damaged items were repaired in accordance with such Government or local authority by-laws or regulations that may apply. In this regard the Plaintiffs claimed IAG’s repair proposal did not comply with the Building Act. IAG’s proposed remedial works were only required to re-level the floors and to address cracking damage to the perimeter beam and garage floor, which they claimed could be addressed by injection of epoxy resin into the cracks and then plaster coating over the top of the cracks. However, the Plaintiffs were concerned by the fact that the perimeter foundation is currently founded in top soil and that this does not comply with the Building Code. The Plaintiffs’ structural engineer maintained that the entire foundation needed to be replaced and supported at a greater depth on load-bearing ground. The Plaintiffs also claimed that epoxy injections would not reinstate the foundations so that they were compliant with the current building code.
The Building Act only requires the aspects of the house that are being repaired to be brought up to current compliance levels, and that elements that are not repaired may be left at the same level of compliance as they were originally. It was therefore IAG’s contention that the damage to the house did not require the foundations to be repaired. The packing to achieve floor levels was simply added on top of the “original functioning foundations”. Accordingly, IAG argued that the foundations (other than some internal piles which the parties all agreed needed to be replaced) did not need to be brought up to current standards. Further, IAG argued its proposed remediation strategy would ensure the foundations would operate at the same level as they did when new.
Gendall J found that IAG’s proposed remedial scheme was sufficient to put the foundations into “a condition as similar as possible to when it was new”. In his view, this would ensure that the foundations provided the same level of support to the house. He went on to comment that while this would not meet the current standards for a newly built home, the “when new” policy standard had been met.
His Honour did caveat his conclusions on the basis that they assumed that building consents (or where appropriate, exemptions) would be issued for IAG’s proposed repair works and ultimately any necessary code of compliance certificates would be provided. If the consents (or exemptions) and code compliance certificates which are required are not given for the foundation repair work, then His Honour accepted that the Plaintiffs’ proposed remediation would need to be carried out instead. In that event, IAG will bear the increased costs to the enhanced work to replace the whole house foundations as part of its obligations under the policy.
Comment from Virginia Wethey
“It is pleasing to see the Courts continue to take a pragmatic approach to the appropriate methods for repairing elements of properties where the items to be repaired have a functional purpose rather than an aesthetic one. The decision follows Parkin v Vero Insurance where the Court also agreed that it is acceptable under a “when new” policy to repair foundations by “jacking and packing” rather than a complete replacement.”