High Court rules on damage, disproportionate reinstatement and repeat claims

An insurer agrees to cover the cost of reinstating damaged property back to its condition when new. But what is damage? What happens if the proposed reinstatement is a disproportionate solution? And how many bites at the cherry does an insured get? A new judgment from the New Zealand High Court addresses all three issues.

The case concerned a building occupied by the Rendezvous Hotel in Christchurch, now rebranded as the Fable Hotel. The building was damaged in the earthquakes. The owner sought expert advice and undertook a $16 million repair, which the insurer covered.

The owner then sold the hotel. The new owners became concerned that they’d been “sold a lemon”, sought a peer review of the repairs, and brought additional claims against the insurer.

The first new claim related to active links in the steel beams. Active links are designed to be sacrificial – they deform during an earthquake to protect the rest of the building. While the insurer covered 41 of the active links as part of the original owner’s claim, the new owners claimed more should be covered.

The new owners relied on expert evidence that all of the links “will inevitably have” suffered “some degree” of deformation in the earthquake, given their role. While the Court accepted that this was “likely”, it said that the new owners had failed to prove the degree to which the remaining links had deformed, and therefore that any deformation was material. As a result, they failed to prove damage.

The new owners’ second claim was that the lift shafts had bowed, giving the lift cars less than the recommended clearance. While the Court accepted that the cars were “operating perfectly”, it found that the shafts were still damaged. This was because, if the new owners ever needed to replace the cars, they would need to do so with slightly smaller custom-built cars to achieve the recommended clearance. This would be less than what they had before the earthquakes.

The new owners’ proposed repair was to realign the lift shafts, cutting through floor slabs and structural steel, in a repair that would take years, cost a significant amount, and be highly disruptive to the hotel. The Court acknowledged this, but somewhat surprisingly ruled that the proportionality of the proposed repair was irrelevant.

Finally, the insurer argued that the new owners were estopped from bringing these new claims, as the insurer had already paid out on a comprehensive repair strategy by the original owner. The Court rejected this, saying that in the absence of a formal release, the new owners could keep coming back for more.

There’s something for both insurers and insureds in this judgment: insurers will like the test for damage to the active links, but insureds will like the test for damage to the lift shafts, the rejection of proportionality in relation to repairs, and the dismissal of the estoppel claim.