Fitzgerald v IAG New Zealand Limited [2018] NZHC 3447 [20 December 2018]


The High Court recently grappled with two thorny questions arising out of the Christchurch earthquakes:

  1. What do “when new” vs “as new” policies require of insurers?
  2. What repairs are required to earthquake damaged rubble foundations?

The Court’s decision gives some guidance to insurers and insureds on these points.

The House: 1920s Construction

The Fitzgeralds own a 1920s house in Canterbury. As was common and acceptable at that time, it was built on rubble perimeter foundations. Rubble foundations are a mixture of concrete, brick and masonry into which piles are placed. The house is then built on the piles.

In 1998 the Fitzgeralds added a sunroom with reinforced concrete slab foundations and a garage with unreinforced concrete slab foundations. Both connected with the original house.

The Fitzgerald’s IAG insurance policy was triggered by damage to the house caused during the Christchurch earthquakes.

The Earthquake Damage

The earthquakes disleveled the house and caused cracks in the foundations.  It was agreed that damage was caused both by the earthquakes and historic reasons, such as settlement.

The floor dislevelment was:

  1. Within the house: 58mm
  2. Perimeter foundation: 30mm
  3. Garage: 22mm
  4. Sunroom: 20mm

Newly built houses are permitted to be 20mm out of level.

The Claim

The Fitzgeralds argued that the rubble foundations could not be repaired to current Building Code standards so IAG was required to completely replace them. They argued that if the rubble foundations had to be replaced, so did the sunroom and garage foundations so that they would “tie in” together in compliance with the Building Code. Replacing all the foundations would require demolition of significant parts of the house that were not damaged by the earthquakes.

IAG argued that “jacking and packing” the perimeter foundation would meet its repair obligation. It also proposed epoxy repairs to any cracks in the foundations.

The parties agreed the scope of repairs for all other damage, but the High Court was required to resolve this dispute over foundation repairs, which it did, kind of …

What do “When New” vs “As New” Policies Require of Insurers?

The IAG policy required it to:
“[repair] … the home to a condition as similar as possible to when it was new, using current materials and methods”

Rather than
“[repair] … the home to a condition as similar as possible to [as new], using current materials and methods”

The Court considered that there had to be a meaningful difference between “when new” vs “as new” in insurance policies. It held that the difference was that “when new” meant that IAG had to repair the property to the standard that it had been in when it was built, without having to return it to its identical as built state. It characterised “when new” as a “temporal standard”. “As new”, it held, was a “quality standard”. So, if IAG’s proposed repair returned the rubble foundations to “the same level of functional support to the building as when they were new”, it would have met its policy obligations

Do repairs have to comply with the Building Code?

IAG’s policy also required it to “pay any cost of compliance with Government or local authority by laws or regulations”. The Court considered s112 Building Act, which governs repairs to building elements.

The Court held that s112 required IAG to ensure any repairs resulted in the building element being repaired to current building compliance levels. However, if the element was not being repaired it could be left at previous compliance levels.

The Fitzgeralds argued that the IAG proposal for repairs to the rubble foundations could not result in compliance with current Building Code standards. Therefore, to meet its obligation to pay “any costs of compliance”, IAG would have to replace the rubble foundations as they (the Fitzgeralds) proposed in their scope of work.

There was dispute over whether the IAG proposal for repair was “repair” of the rubble foundations. The Court appears to have decided that the structural function of the rubble foundations was not being repaired. Instead the piles in the foundations were being repaired. Therefore, the Court held, relying on MBIE guidance for earthquake repairs, that the evidence indicated IAG’s repair would obtain Building Consent, so would likely ensure compliance with current Building Code standards:

[70] I find that IAG’s proposed jacking and packing (when combined with the epoxy resin injections) will be sufficient to put the perimeter foundations into “a condition as similar as possible to when it was new” being when it was largely built in the 1920s. This will ensure that the foundations provide the same level of support to the house. While this would not meet the current standards for a newly built home, I consider that it does meet the “when new” policy standard required for repairs to houses of this era, as indicated by MBIE’s guidance.

Having held that the perimeter foundation did not need to be replaced, the Court found that there was no need to replace the sunroom or garage concrete slabs. The sunroom slab had not been damaged in the earthquake. The garage had differentially settled by only 22mm, 2mm outside construction tolerances for new houses. The Court considered the damage de minimis.

The result

Instead of issuing a declaration that the house could be repaired using IAG’s scope of works, the Court declared that the IAG repair would likely comply with the policy but only if a Building Consent could be obtained, failing which the Plaintiff’s repair strategy was to be implemented. This decision, which leaves open areas for dispute, may create further difficulty between two parties that have been unable to resolve their differences.

What problems does this decision solve?

This judgment is a useful decision on the practical difference between “when new” vs “as new” polices. For “when new” policies it indicates that if a repair strategy could obtain Building Consent and would return the house to what it was “when new”, it would meet the insurer’s policy obligations. If the dispute between insured and insurer is whether a proposed scope of repair would obtain Building Consent, a possible method of resolution would be to obtain a Building Consent. If the proposed scope of works obtains Building Consent and would return the house to its state “when new”, the dispute might be resolved without resort to the Courts.
The decision also provides some guidance on the relevance of MBIE guidelines to earthquake disputes. The Court relied on the June 2018 MBIE guidelines when assessing the IAG scope of repairs as likely Code compliant. This gives some confidence to parties that relying on the MBIE guidelines when developing a scope of repairs is likely to find favour with the Court when it comes to resolving disputes over earthquake repairs.