Full replacement value and under-insurance
In the Myall v Tower case, the Supreme Court recently declined leave to appeal on the lower courts’ approach to floor area underinsurance and professional fees, despite identifying mistakes in the decisions of the High Court and Court of Appeal. The Myall line of authorities provides useful guidance for insureds, insurers and their experts.
Mr Myall owned a historic building which he insured with Tower Insurance Limited under a full replacement policy. He declared an insured floor area of 650m2. The building was in fact much larger, measuring some 799m2. It was damaged beyond repair in the Canterbury earthquakes and Tower elected to pay full reinstatement value in lieu of carrying out reinstatement works. We discussed the High Court’s decision in issue 10 of Cover to Cover.
The Court of Appeal’s decision
The meaning of full replacement value
The Court of Appeal considered the meaning of full replacement value where an insurer elects to pay rather than reinstate. Where Tower elected to reinstate its obligations were limited to commonly used building materials and methods. Furthermore, Tower was not obliged to reinstate, the property exactly to its original specifications. Mr Myall argued that these limitations only applied in relation to actual reinstatement and not where Tower elected to pay reinstatement value.
He declared an insured floor area of 650m2. The building was in fact much larger, measuring some 799m2.
The Court found that Tower’s assessment of its payment obligations did not differ depending upon its election:
- the primary obligation to pay the cost of rebuilding under the policy requires that the building be rebuilt as new, rather than “as when new”;
- the introductory words “in all cases” indicates that the above limitation applies regardless of the election Tower makes; and
- the basis of settlement provisions must be read together to ascertain and apply the insurer’s promise which assumes that current materials and practices would be employed.
Apportionment for under-insurance
Mr Myall argued that the High Court’s pro-rata approach to underinsurance assumed that all costs vary with scale, when in reality some costs are fixed. For example, Mr Myall argued that costs associated with bathroom fittings and internal wiring would not vary if the area to be rebuilt was 799sqm and not 650sqm. Tower accepted that scaling was not the only available way to adjust for underinsurance, but that it depended upon the circumstances. Tower gave the example of an insured who insured for an area which was originally accurate but they then added an extension and did not tell the insurer. The Court of Appeal accepted that in such a scenario the insurer may exclude the extension when calculating the full replacement value. In the present case, scaling was the most practical and accurate method of adjustment and therefore the Court was not persuaded to depart from the High Court’s approach.
The Court of Appeal determined that the objective must be accurately calculating full replacement value. Scaling assumes that costs are variable based on the reduction in floor area, but that assumption is capable of being displaced. The Court of Appeal agreed with the High Court that fixed costs should not be taken into account in this case as the underinsurance was 20%. This was a substantial reduction and therefore it was open to the High Court to conclude that the house would be built with fewer rooms to maintain its “stately interior proportions”. For a small house, however scaling would not be appropriate as the cost of a single kitchen and bathroom was relatively fixed.
Costing of tiles
In quoting for the cost of replacing the tiles, Tower relied on invoices obtained from Mr Myall during 2004 renovations and made an allowance for labour and inflation. In contrast, Mr Myall’s estimates were based on “usual local rates”. The Court of Appeal preferred Mr Myall’s approach of deriving costs from actual current supply rates. This reinforces the need to support cost estimates with actual quotes where possible.
Other points addressed in the Court of Appeal
The Court of Appeal agreed with the High Court that:
- polyurethane coated exposed wood is an acceptable substitute for waxed wood;
- Tower was not required to replicate concrete block walls through the entire home as brick veneer walls would look the same externally and internally. It would not be reasonable for Tower to pay for concrete blocks for the modest aesthetic advantage when the use of concrete block would have flow on effects for the foundation;
- it was reasonable to take a “risk analysis” approach to professional fees (architects, engineer’s, surveyor’s and landscaper’s fees) as the goal in estimating professional fees was to determine the insurer’s payment obligation rather than simply reflecting an estimate that would be adjusted as the project evolves; and
- Mr Myall’s expert’s contingency allowance of 10% was orthodox.
The Supreme Court
Mr Myall sought leave to appeal to the Supreme Court on the issues of the appropriate allowance for professional fees and the correct apportionment for underinsurance. The Supreme Court declined to grant leave, holding that both issues were very particular to the dispute and the evidence and neither gave rise to questions of public or general importance. The Court came to this view despite errors in the decisions of the High Court and Court of Appeal:
- the High Court had mistakenly attributed Mr Myall’s expert’s concession as to the reasonableness of Tower’s assessment of architect’s fees to professional fees overall, despite the fact that they comprised only 75% of the overall professional fees;
- the Court of Appeal mistakenly assumed that evidence given in respect of contingencies was referable to professional fees; and
- one of the Court of Appeal’s reasons relied upon the error in (a) above.
The Court did not disturb the lower courts’ findings on the appropriate adjustment for underinsurance, recognising that both courts had acknowledged that different approaches would or might be appropriate in different circumstances.
Lessons for insurers and insureds
The Myall decisions reinforce the approach to insurance entitlements for historic buildings, professional fees and “floor area” underinsurance. While straight line apportionment ruled the day, insurers will need to give careful consideration to whether that is an appropriate method to adjust for underinsurance in each case. Furthermore, insureds and insurers should take care to ensure that estimates are based on actual current supply rates when costing for the reinstatement of certain items.
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