Interpreting replacement value - Tower v Skyward

Litigation

In this case, the insured (Skyward) owned an earthquake damaged property within the red zone. Skyward accepted CERA’s offer to purchase the land, leaving Skyward to take up the matter of its earthquake damaged 1900’s villa with Tower Insurance. The outcome may surprise you.

The Supreme Court has released its judgment concerning an insurer’s payment obligations under a full replacement policy in Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185.

In this case, the insured (Skyward) owned an earthquake damaged property within the red zone.  Skyward accepted CERA’s offer to purchase the land, leaving Skyward to take up the matter of its earthquake damaged 1900’s villa (& sleep out) with Tower Insurance.  Excluding the land value, the pre-earthquake value of the house was $291,000. 

Skyward had a full replacement ‘new for old’ Tower insurance policy.  As Skyward had sold the land, the parties did not have the option to rebuild or repair the house.  Instead a payment was required to settle the claim, but the question was, how was the payment to be calculated.

Tower claimed it was only obliged to pay the cost of a replacement house which Tower itself approved that was comparable to the insured 1900’s villa.  It claimed a comparable house could be obtained for $365,000.  Skyward on the other hand said that they could choose to purchase any replacement house, and that they were entitled to receive a sum equivalent to what rebuilding the insured house would cost.  The cost to rebuild or repair the house was $686,542.

Three main questions were put to the Court for determination, and extensive arguments were made by counsel as to the appropriate interpretation of the policy.  In summary, the Court gave judgment that:

  • Skyward was free to choose to purchase any house as a replacement;

  • Skyward was entitled to receive payment for the lesser of:

    The cost of its chosen replacement house; or

    The cost of rebuilding/replacing the insured 1990’s villa.

This meant that if Skyward elected to purchase a replacement house for $800,000, it would receive $686,524 from Tower.  Alternatively, if Skyward purchased a replacement house for $450,000, it would receive only $450,000.

Either way, Skyward was entitled to purchase a property which was considerably more valuable than the house that it originally insured.  The Court found that this was not a windfall for Skyward, rather it was simply what the insurance policy provided for.

We recommend people seek advice in their negotiations with their insurers to ensure that they receive their full entitlements under their policies.  Had Skyward accepted the insurer’s position rather than challenge it in Court, Skyward would have lost out on value of up to $321,524 that it was entitled to under its policy. 

While this case provides helpful guidance as to the interpretation of this Tower policy, insurance policies differ and each must be considered on a case by case basis.  We recommend that our clients also seek advice from our team to ensure they obtain the maximum they are entitled to receive under their policies.  Please don’t hesitate to contact our Insurance Team with any queries or to make an appointment.

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Copyright © Cavell Leitch. All rights reserved. Redistribution is only permitted with express written permission. For enquiries please contact us. This article by its nature cannot be comprehensive and cannot be relied on by clients as advice. It is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Cavell Leitch for advice specific to your situation.