Southern Response v Avonside Holdings – The final word on contingencies in insurance settlements

Litigation

Too often the cash settlement amount offered by insurance companies is less than what the homeowner is entitled to. This was demonstrated in the recent decision - Southern Response v Avonside Holdings.

The Supreme Court has issued the final word in the litigation between Southern Response and Avonside Holdings. The issue in question was whether Southern Response was required to include a sum for contingencies and an allowance for professional fees in its settlement offer in a situation where the home owner was not rebuilding their home, but instead buying another house.

To recap, Avonside’s property was damaged in the earthquakes of 4 September 2010 and 22 February 2011. The house was damaged beyond economic repair and Avonside elected to purchase another property as it was entitled to do under the policy. The policy provided that the costs of the replacement property can be no more than “rebuilding your rental house on its present site”.

Allowance for contingencies

The High Court held there should be no allowance for contingencies because as it was a ‘notional rebuild’, the unexpected events which the contingency sum was to provide for would not occur.

The Court of Appeal disagreed. It held that contingencies must be included, and that there should be no distinction drawn between an actual rebuild and a ‘notional rebuild’. The policy required the insurer to pay an allowance for contingencies “as if the house is actually being rebuilt” and it did not matter that the unexpected events, which the contingency sum was to provide for, would not occur.

The Supreme Court has upheld the Court of Appeal’s decision in relation to contingencies and confirmed that Southern Response was required to estimate the actual cost of rebuilding the house on the site.

In determining what these actual costs would be, an allowance for risks that might generally be encountered during an actual rebuild was required.

Allowance for professional fees

The Supreme Court upheld the Court of Appeal’s decision in relation to professional fees also. It confirmed that professional fees were to be estimated in the same manner as contingencies, that is: “to estimate the actual cost of rebuilding on the site”.

What does this decision mean for you?

With insurers’ increasing preference to seek a cash settlement of insurance claims, it is crucial to ensure that homeowners receive everything that they are entitled to under the terms of their policy, and that they obtain sound advice on the terms of any settlement offered. In Avonside’s case, it was entitled to an amount significantly more than what its insurer had offered.

Please contact our Litigation Team who are experts in insurance law for assistance with all of your insurance queries. Please call Susan Dwight on +64 3 339 5631 or email susan.dwight@cavell.co.nz.

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