What EQC pays to repair earthquake damaged retaining walls

Litigation

Many retaining walls were damaged in the Christchurch earthquakes. It can be difficult to understand what EQC has paid and how it was calculated.

As a general rule private insurance policies do not cover land damage.  Land cover under the Earthquake Commission Act 1993 can extend to retaining walls that are necessary to support the home, out-buildings or insured land.  Many retaining walls were damaged in the Christchurch earthquakes and in our experience it has been difficult to understand what EQC has paid and how the sum paid was calculated. 

We act for some landowners wishing to challenge the amount of EQC’s payment.  There is now guidance from the Court on this issue in Michalik v Earthquake Commission a decision of Justice Williams in the High Court at Wellington.  The case concerns damage to a retaining wall from landslip but the principles underlying the Court’s decision apply equally to damage caused by earthquake.

The facts were that Mr Michalik’s residential property suffered a landslip following significant rain.  A retaining wall on his property partially collapsed.  EQC accepted Mr Michalik’s claim for natural disaster damage but paid considerably less than the cost of reinstating the land and replacing the wall with a modern compliant one. 

Mr Michalik sought the full cost of replacing the retaining wall with a wall that complied with the relevant regulatory requirements.  He wanted a wall that was not only new but substantially better than its predecessor.  EQC argued that it was only obliged to pay a sum equal to the pre-slip value of the damaged portion of the retaining wall exactly as it was constructed and without any regulatory betterment.

The evidence for EQC was that they had applied a depreciated replacement cost approach in deciding what was payable to Mr Michalik.  EQC first estimated the present day cost of building the same wall.  It did not attempt to value a replacement wall that complied with modern requirements under the Building Act, rather, it estimated the cost of building a retaining wall that was as close as possible to the damaged wall and materials and design even though it would not comply with modern day regulatory requirements. 

The next step was to address depreciation by adopting the estimated life of the retaining wall and applying a straight-line depreciation calculation to the number of years it had been in use (in this case 37 out of 80 years).  In the case of partial destruction the depreciated replacement cost could be apportioned having regard to the area of the retaining wall that was damaged or at imminent risk.

Mr Michalik, who represented himself, disagreed with this approach and put forward some ingenious but flawed arguments.  He argued that under section 19 of the Earthquake Commission Act he was entitled to receive ‘the indemnity value of any property’ lost or damaged and that indemnity value could not be arrived at by means of a rigid formula. 

A depreciated replacement cost was not correct he said because retaining walls had an indefinite life span, that it was wrong to value the area of wall damaged because in effect the entire wall was no longer useful and the term ‘indemnity value’ should mean full replacement cost as there was no betterment in building a wall that complied with modern regulatory requirements as the new wall performed no greater function than the old.

The Court did not accept Mr Michalik’s arguments and concluded that the EQC’s approach was correct.  EQC’s view was consistent with the terms of the EQC Act, the relevant legislative history and generally applicable principles of insurance law.  The Judge noted also that Mr Michalik’s arguments rested on the factual contention that “a new wall of indefinite life replacing an old wall of indefinite life is no betterment”.  The Court rejected that contention for which Mr Michalik had called no expert evidence.  

In the Court’s view the costs of regulatory upgrades to retaining walls more naturally fell within the concept of replacement cover than indemnity cover.  Accordingly, Mr Michalik’s claim was dismissed and EQC was awarded costs.

The decision is controversial.  The Court found entirely in favour of EQC and rejected all of Mr Michalik’s arguments.  The result is that the amount payable by EQC for damage to retaining walls in most cases is likely to be considerably less than the actual cost of repair or replacement due to the need to comply with modern regulatory requirements. 

At least one law firm was planning to bring a class action against EQC in relation to retaining wall claims and has now decided to take no further action. 

It is to be noted however that Mr Michalik represented himself and the Judge has noted that he failed to call expert evidence in a number of areas that were required to support his arguments.  In the absence of such evidence the Judge had no option but to accept EQC’s approach. 

This is unfortunate and the Court would have been better served had there been legal counsel on both sides.  For residents in Christchurch the decision at least provides some certainty of approach and will allow for the resolution of a number of outstanding claims.

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