A New Zealand court discussed the question whether the right of an insured to an indemnity on the basis of the ‘cost of rebuilding on the original site’ has any meaning where it is not possible to build on that site because it had been devastated by an earthquake. In these circumstances, the notional full replacement cost for rebuilding on the old site was taken as the measure of loss.
The Christchurch earthquakes in February 2011 destroyed the insured’s house and left the area red-zoned so that rebuilding was prohibited. The policy gave the insured the option to buy or build another house but capped the amount at the full replacement cost for rebuilding the damaged house on the original site to an “as new” standard. Because the house could not be rebuilt on the original site, the measure of loss was the notional full replacement cost on the original site. In assessing the notional costs it is necessary to disregard the fact that the rebuilding is not going to take place at the original site.
The court also rejected the insurer’s argument that because the house would be notionally rebuilt according to its original plans on the original site there was no need for the costs of architectural plans and engineering advice. The cap therefore included contingencies and professional fees.
The judgment is Avonside Holdings Ltd v Southern Response Earthquake Services Ltd.
The decision has been upheld on appeal by the New Zealand Supreme Court.