September 03 2015
Canterbury’s red-zoned homeowners have recently received a boost following a Supreme Court decision¹. In Southern Response Earthquake Services Limited v Avonside Holdings Limited, Avonside’s property was damaged beyond economic repair and red-zoned following the Canterbury earthquakes. Avonside’s insurance policy stated that the insurer, Southern Response, would pay the cost of buying another house, including necessary legal and associated fees, provided that this cost did not exceed the cost of rebuilding the house on its current site.
Avonside elected to purchase another house and claimed the costs associated with a notional rebuild including the associated fees. The case related to whether or not there should be a sum for contingencies and professional fees when calculating the amount payable under the policy. Southern Response disputed that in the event that there was no actual rebuild, contingencies and professional fees should not be payable.
By their nature, contingencies are for items that cannot be defined in a building contract. These sums are usually under the control of an architect or engineer and may be expended or deducted under that person’s authority. Professional fees cover the costs of engineers, designers, surveyors and project managers. In this case, each amount was measured at 10% of the total cost of rebuild.
In deciding whether or not contingencies and professional fees should be added to the cost of rebuilding the Supreme Court stated, “The amount payable under the policy can be no more than the cost of rebuilding the house on its present site. The exercise that is required is to estimate the actual cost of rebuilding the house on the site.” The Supreme Court went on to say that the fact that in this instance the rebuild was notional, rather than actual, does not affect the inclusion of the allowances for risks usually encountered. The Supreme Court agreed with Avonside and held that both contingencies and professional fees should be included when calculating the cost of rebuilding a house, even if that rebuild is notional.
¹ Southern Response Earthquake Services Limited v Avonside Holdings Limited  NZSC 110