Expert Opinion: Insurance pay out cannot be drip fed

Expert Opinion: Insurance pay out cannot be drip fed | Insurance Business

Expert Opinion: Insurance pay out cannot be drip fed
The case of East v Medical Assurance Society (MAS), decided on by the High Court on 22 December 2014, is an important case for a number of reasons, according to Lane Neave partner Dr Duncan Webb and solicitor Robin Kay.

It provides useful guidance on:
  • When an insurer who is paying cash must pay in advance of the reinstatement works;
  • Whether a homeowner must use funds paid out on a reinstatement basis for reinstatement;
  • What is meant by “as new” in a policy in terms of quality of repair and building standards; and
  • What degree of certainty is required that foundation repairs will be strong and durable;
  • The importance of Building Standards in reinstatement design.
The Easts’ home was damaged in the earthquakes and they wished to repair it – they had replacement value cover under a policy of insurance with the Medical Assurance Society (MAS).  MAS advised that it would make payments for the necessary repairs as the costs of repairs arose, rather than pay upfront.  The Easts argued that payment should not be staged.

There was also a dispute between the parties as to what foundation repair was required to restore the property to an “as new” condition.  The Easts believed that underpinning was required, whereas MAS did not.

The Court decided that MAS had to pay the estimated cost to repair in advance and rejected MAS’ position that payments for repairs fell due only when the actual cost of the repairs arose.  The policy wording that MAS would “cover the cost” of the repairs did not mean MAS’ obligation to pay was only triggered when the costs are actually incurred or just about to be incurred and were subject to an incremental approval basis.  The Court took a practical approach, rejected the suggestion that MAS had a right to approve invoices before paying, and said:

Different words are needed to place such a strict and cumbersome fetter on the prima facie right to replacement value compensation.

The Court commented that the objective of the policy was to compensate the Easts for their harm and that harm included protecting them from the cost of repair. Further, MAS’ liability to compensate arose on the occurrence of a qualifying damaging event, in this case the earthquakes.
While the starting place of the liability of the insurer will be the actual cost of reinstatement, some caution is needed. The Court noted that quantum of replacement value is to be objectively assessed. In particular the claimed costs must be reasonable and they were to be based on the size of the Easts’ home.

MAS’ proposal to stage repair payments was also criticised by the Court, as there was no mechanism in the policy providing for the incremental assessment and approval of costs by MAS and there was nothing in the policy to alert the Easts that they would have their compensation fettered in that way.

As a word of caution it was also noted that in making a claim a homeowner must act without fraud or bad faith.  In particular, if funds are paid on the basis that reinstatement will occur and the funds are not used for reinstatement this may be a fraud which may give the insurer rights to the return of the funds.

MAS argued that the standard to which the property was to be repaired was “as new in 2007”. The Court disagreed, saying that “as new” naturally implies rebuild or restoration of the home in accordance with contemporary standards. This is reinforced by the obligation to meet current statutory requirements. This finding was based on the words of the policy which used the words “as new” and not “when new” which was found in an earlier policy document.

The issue of foundation repair can be particularly problematic as the effectiveness of a repair may not be known immediately and any lack of durability may take some years to manifest itself. In this case the homeowner was concerned that the repair method proposed by MAS would be inadequate. There was differing geotechnical evidence on the strength of the underlying soil and therefore a difference as to the proper method for foundation repair (and in particular whether deep foundations/underpinning or ground strengthening was required).

Of interest is the rejection by the Court of the suggestion that the homeowner was being “super conservative” in seeking a solution that included underpinning of foundation repair. The Court found that it had to be shown on a “balance of probabilities” that any proposed foundation solution would meet current requirements of building standards and the Building Code. This is important. In some cases homeowners want to be “certain” that a solution will meet particular standards.  The Court here has made it clear an insurer must not provide a solution which will certainly meet standards – rather it must be one which will more likely than not meet those standards. While this may appear disappointing for some homeowners, in fact it has two benefits. First it gives an actual standard against which to test an insurer’s approach. Second, the building standards are rigorous and a design which will more likely than not meet those standards is in fact a relatively high threshold to reach.

Building Standards are agreed minimum specifications which are, in identified situations, accepted as meeting the requirements of the Building Code. It was argued by a MAS expert that the Building Standards are a guide only and need not be adhered to. While it is true that solutions other than those set out in a Building Standard may meet the Building Code, the importance of Building Standards was identified by the Court in rejecting the suggestion that such Standards were not of relevance to developing a repair and saying that: "[Building Standards] are strong guides and an objective reference point for the purposes of assessing what is required to achieve substantially the same as the new standard. Owners are statutorily required to ensure that building work carried out by the owner complies with the building consent or if there is no building consent with the building code."

This is useful for homeowners who can now point to such Building Standards as a very important consideration in any reinstatement design.