Andrew Hooker explains how the courts are helpful in sorting out insurance disputes, but only after appeal from faulty lower court decisions

Many of the disputes with insurance companies following the Christchurch earthquakes relate to what the insurance companies have to pay, rather than whether the claim is covered.

And while the cases arise out of the earthquakes, they are helpful in deciding how insurance companies have to settle claims in all manner of circumstances.

So whether your house is wrecked by earthquake, storm or fire, the recent cases will be very important in clarifying what you will get. 

The first interesting case was an early decision called Turvey Trustee Limited v Southern Response.

That was a case where Southern Response managed to convince the Judge that features in a period-type house that were not being utilised did not have to be replaced.

So even if your beautiful Edwardian style villa was destroyed, the insurance company would not necessarily have to replace such items as native timbers, where those timbers were perhaps painted over or covered up in some way. 

In that case, it does not appear that there was any evidence given to the Judge about the inherent value of such features, and so the case is confined to its facts. 

Another issue relates to whether the insurance company has to rebuild your house or whether it can force you to simply buy another house in a different location.

It is common for house policies to provide three options for settlement of claims:

(1)   Cash payment of the present day or indemnity value of the house;

(2)   Rebuilding or repairing a house;

(3)   Paying to purchase another house, perhaps at a different location.

The policy in question said that “in all cases” the insurer would have the option whether to make payment, rebuild or replace or repair the house. So the insurer argued that it could insist that its customers bought another house at a different location, rather than actually rebuilding where the destroyed house was.

When the client challenged this, the High Court the Judge ruled that the insurer had the option to force its customer to buy another house, rather than repair the existing house even within the sum insured.

This produces the most unusual consequence that an insurance company could force the insured to essentially move house, and buy another “second hand” house at a different location, rather than pay to repair the house or rebuild it at the location, even though the policy promised new for old. The judgment was never appealed, and so this unusual situation prevailed. 

In a case in 2013 the insurer ran the same argument. It argued that it had the sole option to rebuild, repair or replace the house. In the High Court, the Judge again accepted this argument. 

This led to the somewhat bizarre result that the insurer was entitled to force its customer to buy another house at a different location, whether its client wanted to move or not.

Luckily, the customer appealed, and the Court of Appeal emphatically rejected this argument. 

The Court of Appeal took a common sense approach, ruling that the policy holder must have decision as to which option was chosen, and the insurer could not force the policy holder to buy another house.

The Court of Appeal reasoned that as the insured party owned the property the insurance company should not have any say in the policy holder’s decision about how to reinstate the property.

While the policy allowed the insurer to insist on repair (rather than cash) in certain circumstances, the Court of Appeal rejected any argument that this allowed the insurer to control what happened in every case. If that was the case, the insurer may have been entitled to insist on paying the present value of the house, rather than the full replacement, and that could never have been intended. 

It would seem most unlikely that any person who brought an insurance policy from any insurance company could have expected that, if their house burnt down, the insurance company could simply insist on buying another house, rather than rebuilding or even repairing it. But two High Court Judges accepted this argument, and no doubt the insurer settled a number of claims on that basis. 

It is heartening to see that the Court of Appeal is prepared to look at the “big picture” and interpret the policy in the way most people would have expected the policy to work. 

The question therefore has to be asked, what about all the people whose claims were settled on the “buy another house” option who now find that they had no obligation to accept such a settlement?

Given that the Court of Appeal has ruled that insistence by the insurance company on this option was legally wrong, should the insurance company now revisit these claims and offer to settle them as the Court of Appeal has ruled the policy clearly intended.

That no doubt will be a matter for the conscience of the insurance company to decide.

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