Grant Shand Barristers & Solicitors - August 2015

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EQC & Insurance Newsletter #7 - August 2015
This newsletter includes commentary on two recent Court decisions released on 22 July 2015 that affect the liability of EQC and insurance companies.  We did both of the cases.  We also introduce our newest staff member, Sarah Farnell.
Kelly v EQC & Southern Response- The wind and the flax bush did it …Not
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. 
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:
  1. The effect of EQC’s purported election to repair the house (it was too late so invalid);
  2. Whether Kelly could recover money from EQC (yes);
  3. 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.
C & S Kelly Properties Ltd owns 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.
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 for alternative accommodation. 

Ever the next 4 years EQC and SR each did detailed assessments 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(s).  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.
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 costs from SR.

EQC said that 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), apart 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 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 sued 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 soon 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.
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.
The Court said that Kelly now had a choice between two options of relief: 
  1. A cash payment $53,768.50 plus the additional costs of remedying the floor level differential;
  2. 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 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.
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.
Southern Response v Avonside Holdings Ltd
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.


Sarah Farnell

Sarah graduated with an LLB /BSc (Psychology/Biology) from the University of Auckland in May 2015.

Before joining the team at Grant Shand Barristers and Solicitors, Sarah worked for a number of years at a commercial Law Firm in Ponsonby, Auckland.



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