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Kelly/EQC/Southern Response- Court says Earthquake Caused Damage- not wind/flax bush

 Introduction

On 22 July 2015 the High Court (Mander J) released the 107 page judgment in C & S Kelly Properties Ltd v EQC & Southern Response Earthquake Services Ltd [2015] NZHC 1690.

This was the case where the primary issue was whether the damage to the foundations (floor differential 88mm) was caused by the earthquake(s).  EQC & Southern Response said that the earthquake(s) did not damage the foundations and the differential was caused by the wind, a flax bush and/or had existed since the house was built.

Summary

Mander J decided that Kelly had proved that the floor level differential was earthquake damage, so EQC and SR lost.  The judgment contains an excellent discussion about the obligations of EQC and also considers and comments on subsidiary issues such as:

  • The effect of EQC’s purported election to repair the house (it was too late so invalid);
  • Whether Kelly could recover money from EQC (yes);
  • Was a floor level differential “physical damage” for the purposes of the EQC Act (yes).

It also puts in place a process for the final determination of the remediation strategy to the house to be implemented by either at Kelly’s option EQC doing the work at whatever it costs or EQC/SR paying money for the work.

Kelly won on every issue, apart from not yet getting a foundation rebuild of the house.

House

C & S Kelly Properties Ltd own the house at 2b Vivian Street, Burwood.  It is located adjacent to the “red zone” and is “TC3”. It is about 100 years old on a piled foundation.  It was the family home of the company’s shareholders/directors Cameron and Suzy Kelly.  They lived there until the earthquake on 22 February 2011.

Earthquakes

After the September 2010 and February 2011 earthquakes Mrs Kelly notified EQC and SR of damage to the house caused by the earthquake(s).  The text of the file-notes made by SR of what Mrs Kelly told them were relied upon by Mander J in ultimately believing that the earthquakes caused the floor level differential.  The Kelly family left the house after the February 2011 earthquake and SR paid alternative accommodation.

EQC and SR each did detailed assessments over the next 4 years of the damage.  SR, via Arrow, originally assessed the house as a “rebuild”.  EQC originally said that the house required a foundation rebuild.  Up until about August 2014 EQC and SR accepted that the floor differential was to some extent caused by the earthquake.  Their remedial strategy was a “jack and pack” of the piles, however, there were real issues with this strategy by reason of piles that already contained packing.

In August 2014 EQC/SR changed their view to one that the earthquake(s) caused no foundation damage; apart from to 2 piles.  That was the position they adopted at trial with about 10 witnesses trying to support that position and the 10 previous EQC/SR people previously involved in assessing the damage as earthquake damage not giving evidence.

Claim

Kelly claimed that EQC had failed to settle its claim as soon as reasonably practicable, and that EQC’s proposed strategy would not restore the house to a condition substantially the same as, but not better or more extensive than, its condition when new, as required by the EQC Act.  It sought a monetary judgment for up to the statutory cap of $100,000 plus GST per event with the remedial costs apportioned 12% for September 2010 and 88% for February 2011.  Kelly claimed the balance of the remedial cost from SR.

EQC said it had elected to repair any earthquake damage and no grounds existed for Kelly to challenge that decision, so Kelly was not entitled to money.  Additionally it said that there was no foundation damage caused by the earthquake(s), part from to 2 piles.

SR said it was not liable because of the lack of foundation damage and that the claim against EQC was not over cap.

EQC

EQC originally at the hearing said that it could not be sued for money in an ordinary proceeding and that it could only be challenged by judicial review.  Part way through the hearing a Full Court of the High Court delivered its decision in Earthquake Commission v Insurance Council of NZ & ors [2015] 2 NZLR 381 that held that EQC could be for money in an ordinary proceeding.

EQC also said that its decision to repair could not be challenged.

The Court disagreed with EQC’s position.  The judgment states that if before work was started the remediation costs were likely to be over the cap it would be unreasonable and irrational for EQC to elect to repair at a cost greater than its statutory cap.  So its election was not sustainable.

Separately the Court said that EQC’s election to repair the Kelly house that was not made until September 2014, was too late, so was invalid.  The Court noted that at the latest EQC had all relevant information in October 2012.  The delay in the election also raised problems with EQC’s obligation under the Act to settle all claims as reasonably practicable.

The effect of the delay was that EQC’s election was ineffective and it was liable to pay money.

Foundation damage

In making a decision about whether the house foundation and floor system was damaged by the earthquake(s) the Court had to assess the divergent evidence presented for Kelly as against that for EQC/SR.

Kelly challenged the weight that the Court ought to give to the evidence of witnesses for EQC/SR who had a commercial relationship with EQC/SR.  The Court decided that the nature and scope of the commercial relationship ought to be taken into account in assessing the independence of witnesses.  This particularly affected the evidence of EQC employee, Paul Thompson, and past EQC employee and current contractor, Tim Day, each of whom was heavily reliant on EQC for income.

From the time of the earthquake(s) up until August 2014 EQC/SR accepted that the house foundation and floor system was damaged by the earthquake(s).  So did all of its assessors/experts.  EQC & SR did not call these people as witnesses, however, the Court decided it had no obligation to call them as witnesses.

EQC/SR instead used a new gang of experts that endeavored to give evidence in Court that there was no foundation/floor damage.  This evidence was weakened in cross-examination, particularly the evidence of EQC’s engaged geotechnical engineer, Anna Sleight, whose conclusions were based on unverifiable factors.

The EQC/SR evidence contrasted with the evidence of 10 lay people and Mr & Mrs Kelly who gave evidence about the condition of the floors before and after the earthquakes.  Each described an obvious change in the floor levels.  EQC/SR said that all of these witnesses had a mistaken impression caused by a heightened perception of damage since the earthquake(s).  Contemporaneous documentary records also supported the Kelly position.  These were SR file notes of what Mrs Kelly had told them about damage to the house after each earthquake.

The Court decided that all of the EQC/SR expert evidence did not displace the Kelly evidence from themselves and the other lay witnesses.  It was satisfied that the floor was damaged by the earthquake(s).  It also stated that the dislevelment of the floor was more than de minimis and had an impact on the amenity and utility of the house and its value so was physical damage under the EQC Act and insurance policy.

Remediation

Kelly suggested to the Court that remediation of the foundation required the replacement of the current foundation with a new foundation known as a “2A” foundation under the MBIE Guidance Document.  The Court was not satisfied that the Kelly witnesses had proven that the new foundation was currently required.  So what is required is for the parties to follow the solution suggested by the joint expert report of initially looking at relevel by jack and pack but replace where structurally or building code required.  The outcome of that process is currently uncertain.

 

Future

The Court said that Kelly now had a choice between two options of relief:

  • A cash payment $53,768.50 plus the additional costs of remedying the floor level differential;
  • EQC remediates the house and the floor level differential with the cost being the responsibility of EQC & SR.

The parties are to endeavor to agree the scope and cost of the remedial work.  If that is not achievable then the Court will convene a further hearing.

Costs

Costs are to be considered separately.  EQC spent significantly more money on unsuccessfully defending this claim than it would have cost it to simply pay cap for the damage.  As Kelly was essentially successful it is expected that it will receive a significant award of costs and disbursements.

Conclusion

Kelly succeeded on every issue in the hearing, apart from recovering for a rebuilt foundation.  It may still recover for that once the process of scoping the remediation of the earthquake damage is complete.

 

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Avonside Holdings- Southern Response Loses Again

By the judgment 22 July 2015 in Southern Response Earthquake Services Ltd v Avonside Holdings Ltd [2015] NZSC 110 the Supreme Court dismissed the appeal by Southern Response against the Court of Appeal decision of 1 October 2014.

It confirmed that in calculating the rebuild cost of a house under the Southern Response insurance policy for the buy another house option, 1c.ii, a reasonable estimate for professional fees and contingencies should be included in the sums payable, as if the house is actually being rebuilt.

Both Courts were unpersuaded by the Southern Response argument that because the house was not actually going to be rebuilt there were no risks and so no contingencies.  That argument lacks common sense.

The estimate that is required is to estimate the actual cost of rebuilding the house onsite.  The Court of Appeal had held that this included any work now required by the Building Code.  The Supreme Court did not overturn this finding.

The Supreme Court held that the Court of Appeal was correct in its determination that based on the evidence a 10% allowance for each of professional fees and contingencies was appropriate.  Those numbers also accorded with standard/usual quantity surveying practice.

Both Courts held that the evidence of Stewart Harrison from Harrison’s quantity surveyors ought to be preferred over that of the Southern Response witnesses.

The effect of this decision is that there can be no objection by Southern Response to the inclusion of 8% Preliminary & General; 10% margin, 10% contingency and 10% for professional fees in any rebuild costing.  Additionally, other costs that may be required to now comply with the Building Code, such as enhanced foundations must also be included and are be payable under clause 1c.ii.

Southern Response’s handling of this claim was consistent with and symptomatic of the its inflexible attitude to claim resolution that is inconsistent with common sense and commerciality.  On this claim alone it cost itself an extra hundreds of thousands not including its legal fees.

Here is the link to the stuff commentary.

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Floor levels

Here is a link to a story from Radio NZ about the hearing on Christchurch plan proposals, particularly about required floor levels.  Here is the  link to the website for the Independent Hearings Panel and here is the link to the actual panel decision.

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Multiple events and proof of loss/damage

The Courts have confirmed the ability of insureds to recover for separate damage to insured buildings in separate quakes even where the total recovery then exceeds the sum insured under the policy.  This has caused issues about proving the extent of the damage in each earthquake and remedial scope/costs.  In Vero Insurance New Limited v Morrison & anor [2015] NZCA 246, 16 June 2015 the Court of Appeal considered the use of a model based on ground shaking as a method of allocating damage and repair costs.  The industrial/commercial building at 23 Heathcote Street, Woolston was insured by Vero Insurance for $4,004,300 per event.  It was damaged in the Canterbury earthquakes.  The building continued to be functional and tenanted after the quakes, so was not destroyed for the purposes of the policy.  Vero paid $79,881 for damage in the September 2010 earthquake and the sum insured of $4,004,300 for the February 2011 earthquake.  It considered that the June 2011 earthquake did not increase the repair scope.  The owners via Risk Worldwide sought to recover $10,042790.83.  Th Court decided that the Risk Worldwide model was not as reliable as actual inspections and not of great assistance because it did not include liquefaction damage as part of its inputs.  So the Court accepted the Vero amounts for September and February 2011, but sent the claim back to the High Court to reassess the small amount of damage for June 2011.

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MAS v East – Need to incur the cost(s) of rebuild/repair

In Medical Assurance Society of NZ Ltd v East & ors [2015] NZCA 250, 17 June 2015 the Court of Appeal allowed the appeal by MAS against a High Court (Whata J) decision on the timing of payment of replacement cost and dismissed it on the standard of the work.

The owners’ house was damaged in the February 2011 earthquake.  The concrete slab had a floor level differential of 44mm and areas of the slab had a slope greater than .5%.  The owners proposed underpinning the slab and MAS proposed relevelling by LMG.  The owners engaged Risk Worldwide.  They sought a judgment for remediation costs of $3.096M (rebuild).  Risk Worldwide was to be paid 35% of any amount recovered above $1.4M.  The $3.096M was based on a quantity surveyor’s estimate (QS Red- Brian McMorran).  The Court noted that the QS estimate contained significant errors and the correct estimate was about $1.5M.

The Court decided that the owners were only entitled to be paid the costs of restoring the house once they had incurred those costs which could be by the entry into a build contract.  It also decided that the house must be restored to the standard required when the work was done and not the standard as to when the house was built as suggested by MAS.

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Class actions – EQC & Southern Response

Class actions against EQC and Southern Response have been the subject of media attention in the past 3 years.  This has intensified recently with the proposed class action against Southern Response.  Here is the link to Grant Cameron’s page.  Here is the Southern Response page about the proposed class action.  There is no specific mechanism, or rule(s), by which there can be a “class action” in NZ.  Rules proposed in 2008 have never been implemented.  Recently the Court(s) have shown a willingness to permit representative actions under r4.24 of the High Court Rules.  This has enabled the “Feltex” and “Bank fees” proceedings.  The “Feltex” proceedings failed in the High Court and the Court ordered the representative to pay costs in excess of $5M to the successful defendants.  One or more person(s) sues as a representative of a group of person(s) having the same interest either with the consent of all affected people or with the permission of the Court.  Class actions are usually accompanied a “no win no fee” arrangement and a “litigation funder” that funds the costs of the process for a % recovery of any proceeds.  Insureds considering the class action need to consider whether the % foregone is a reasonable fee for what is done taking into account the current position and  what other service providers may charge for a similar work/outcome.  I expect Southern Response to fight the class action process hard and challenge every part of it.  So it is difficult to see how long the process may take.  Insured homeowners need to be conscious of the 6 limitation period for suing in the Court.

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CERA new red zone proposal

CERA has released its draft red zone recovery plan.  Here is a link to it.

Taking into account the five key criteria the Chief Executive’s preliminary views on the quantum of the new Crown offers were as follows:

• For all vacant red zone land: a new Crown offer at 100% of the 2007/08 rateable land value.

• For all insured commercial red zone properties: a new Crown offer at 100% of the 2007/08 rateable land value and 100% of the 2007/08 rateable improvements value for the insured improvements, if the insurance benefits are transferred to the Crown. Alternatively the owners may choose not to accept any payment for the improvements and keep the benefits of their insurance claims.

• For all uninsured improved red zone properties: a new Crown offer at 80% of the 2007/08 rateable land value. This takes into account the need to balance health and wellbeing needs and a timely recovery process with insurance status and precedents, costs to the Crown and fairness and consistency. No payment should be made for uninsured improvements. The owners could choose to relocate, salvage or sell any uninsured improvements, or they could elect for the Crown to demolish the improvements. The Crown would meet the demolition costs.

Comments on the proposal were required by 9 July 2015.

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EQC Act reform

Discussions begin on reform of EQC Act

Minister Responsible for the Earthquake Commission (EQC), Gerry Brownlee, and Associate Minister of Finance, Steven Joyce, say the Government has developed a number of proposals to reform the EQC Act, which are being released for public discussion today.

“These reforms are designed to ensure the EQC scheme remains focussed on insuring homes; resolves the difficulties experienced in Canterbury with the interaction of land and building cover; better integrates EQC and private insurers’ claims handling processes; and ensures the ongoing financial sustainability of the scheme,” Mr Brownlee says.

“We also propose keeping EQC’s role in supporting research and education about New Zealand’s natural hazards and how to reduce their impact.”

“This work helps build community resilience by reducing the loss and disruption caused by natural hazards,” Mr Joyce says.

“We believe the proposals in the document we are releasing today will, if implemented, better position homeowners, EQC and private insurers to plan for and recover from future natural disasters.”

The proposals in the preferred reform package are intended to work together to strongly focus EQC on insuring New Zealander’s homes, and to improve the experience for claimants.  In summary the proposals are:

  • EQC to exit from contents insurance: private insurers are willing to take on this business.  Leaving contents insurance to private insurers will enable EQC to focus on insuring homes and will eliminate uncertainties and friction regarding EQC contents claims.
  • Extending EQC building cover to include more site-works and access-ways to the building: this closely reflects private insurer practice in commercial claims.  It would largely remove the uncertainties and friction caused by the interaction between building and land cover by including in EQC building cover any siteworks (land works) necessary to repair or reinstate the building, and access to it.
  • Increasing the cap on EQC building cover from $100,000 +GST to $200,000 +GST: Increasing the cap by this quantum recognises that costs which are presently part of EQC’s land cover will become part of EQC’s new building cover.  It is expected that increasing the cap will lead to lower premiums being charged to homeowners by private insurers.  This will also reduce the interaction between EQC and private insurers on over-cap claims by about two-thirds.  Over-cap claims have been a major point of friction and uncertainty for claimants in Canterbury.
  • Limiting land cover to situations where rebuilding is not practicable: this will ensure that homeowners continue to receive insurance for the land if their home cannot be rebuilt on its original site and they are forced to buy another home elsewhere.  EQC would no longer provide cover for land damage that has not caused damage to the house itself, for example undulations to land around the house.
  • Requiring claimants to lodge their EQC claim with their private insurer: this will reduce uncertainty for claimants and is expected to improve their claims experience.  Insurers will need to validate the claimant’s status before forwarding the claim to EQC, thus reducing the current information churn between the claimant, EQC and insurers.  If this claims lodgement proposal works as intended, and agreements are reached between EQC and insurers, insurers will over time take an even greater role in the claims management process.
  • Technical improvements in drafting core elements of the legislation: this should improve the experience for claimants by increasing clarity about what the EQC scheme covers.

The review is forward looking and will not have any impact on the handling or outcome of existing EQC claims.  Mr Brownlee says the Government welcomes public submissions on the proposals.

“Ministers will carefully consider submissions before making decisions on a reform package.  That package will then form part of a Bill which we expect to introduce to Parliament in early 2016.”

Submissions can be made using the submission template available at:www.treasury.govt.nz/publications/reviews-consultation/eqc.  Submitters can open and save their own copy of that template, make submissions on any of the proposals they wish, and email it to submissions.eqcreview@treasury.govt.nz

The deadline for submissions is 5:00pm on Friday 11 September 2015

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Insurance Settlement Agreement Not Set Aside

In Prattley Enterprises Ltd v Vero Insurance NZ Ltd [2015] NZHC 1444 the High Court (Dunningham J) considered a claim by Prattley to set aside the insurance claim settlement agreement it entered into in August 20111 with Vero Insurance for damage to its building known as “Worcester Towers”.  The building at 103-105 Worcester Street, Christchurch was damaged in the earthquakes on 4 September 2010, 26 December 2010 and 22 February 2011.  It was “red stickered” and demolished in September 2011.  In August 2011 Prattley entered into an agreement with Vero to settle the insurance claim(s) at $1,050,00 plus GST.  Later Risk Worldwide became involved and prosecuted the Prattley claim(s) seeking a further $6.5M based upon a claim to the sum insured of $1.6M per event.  The insurance policy was an indemnity insurance policy.  The Court decided that indemnity value was calculated as the market value and the insured did not intend to reinstate the building.  The Court decided that Prattley could not recover anything for the September 2010 and December 2010 earthquakes because it had not spent any money on repairing that damage.  So, its insurance policy entitlement of market value was actually less than the amount it received under the settlement agreement.  The effect of this decision was that strictly the Court did not have to consider the argument to set aside the settlement agreement, but it still did so.  The Court decided that Vero had acted fairly and that Prattley had in any event relied on its own advisers before agreeing to the settlement.  There were also no breaches of the Fair Trading Act or Contractual Mistakes Act and the agreement was a binding settlement agreement.  Vero indicated that it woull seek indemnity costs against Prattley and would look to Risk Worldwide for payment if Prattley did not pay.  The costs issue will be considered separately.

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