OPINION: We have been out of our house since February 2011 waiting for it to be fixed. It is an old house on TC3 land. Initially the insurer said it was likely to be a rebuild, but now they are saying it will probably be repaired. Our builder says that it isn't worth repairing and it should be rebuilt. Can we insist on a rebuild? We would even be happy to build something smaller.
Insurance policies always give the insurer the option of whether to rebuild or repair a property.
One of the problems is that, because of the way insurance policies work, a decision made by the insurer to repair the property may make both you and the insurer worse off.
The insurer's obligation is to reinstate your home.
That means that if it is to be rebuilt it must reproduce all of the features including things like wooden floors, high ceilings, and attractive details like skirting boards and architraves.
This can be expensive and often would not be included in a modern home.
However, when considering whether to repair or replace, the insurer will compare the costs of rebuilding the old home with those features, with the cost of repair.
A further issue for owners on TC3 land is that the costs of rebuilding may be greater because of the increased costs of enhanced foundations; this means that in some cases a house on TC3 land is more likely to be a repair than a house with the same damage on TC1 land.
Some homeowners, like you, may be more than happy to accept a rebuilt home which is smaller, or does not have all the features of the old home rather than have their old house repaired at considerable expense (and time).
There are often ways around this problem.
Most insurers will agree to pay you the cash equivalent of their estimate of the cost of repairs (although there are risks in this).
Other insurers will agree to manage a rebuild of a smaller or cheaper building for you. One of the reasons for this is that there are fewer uncertainties in building a new house than in repairing an old one.
However, if the insurer insists on sticking to the policy then there is little that can be done. It is the insurer's choice whether to repair or rebuild a house, even if sometimes their decisions seem at odds with common sense. When deciding whether a house is a repair or a rebuild an insurer is making a financial decision and it is entitled to make the decision which is cheaper.
In practice, insurers will often decide to rebuild a house where the cost of repair is around 80 per cent or 90 per cent of the rebuild costs (because of the uncertainty of the costs of repair).
If an insurer starts a repair and costs get out of hand it will complete the repair even though it may exceed the rebuild costs.
Of course there could be no good reason for an insurer insisting on a repair even though the rebuild costs would be less - such a decision could only be taken in bad faith.
The other thing to look out for is that it is easier for insurers to cut corners on repairs. An insurer might seek to keep costs down, for example by not looking too closely at foundation damage, or by patching a driveway repair rather than reinstating to an "as new" condition. This would be in breach of the insurer's obligations under the policy.
Any comparison between the costs of rebuild and repair must be based on a proper and full repair. Of course the insurer is required to make its decision and settle the contract within a reasonable time. One of the real problems is that many insurers have not yet determined how they are going to settle their claim yet alone started the settlement process (whether by repair, rebuild or payment).
The real concern is that insurers are deferring taking action until something which affects the costs changes (such as changes to foundation designs for TC3 land being approved). This is not a proper basis for delay.
Do you have a legal question arising from how the earthquakes have affected you? Lane Neave partner Dr Duncan Webb has agreed to be an "agony uncle" on how the law applies to certain situations. Email questions for him to legal.questions@ laneneave.co.nz.
- The Press