SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED v SHIRLEY INVESTMENTS LIMITED [2017] NZHC 3190

SOUTHERN RESPONSE EARTHQUAKE SERVICES LIMITED v SHIRLEY INVESTMENTS LIMITED[2017] NZHC 3190 [18 December 2017]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2016-409-1230[2017] NZHC 3190UNDER the Declaratory Judgments Act 1908 andPart 18 of the High Court RulesBETWEEN SOUTHERN RESPONSEEARTHQUAKE SERVICES LIMITEDPlaintiffAND SHIRLEY INVESTMENTS LIMITEDDefendantHearing: 30 October 2017Counsel: D J Friar and O M de Pont for PlaintiffN R Campbell QC and K J M Robinson for DefendantJudgment: 18 December 2017JUDGMENT OF THOMAS JTable of contentsIntroduction ............................................................................................................. [1]Background .............................................................................................................. [3]The proceedings ..................................................................................................... [11]The Policy ............................................................................................................... [16]Prior decisions ....................................................................................................... [18]Turvey Trustee v Southern Response ................................................................... [21]Avonside v Southern Response ............................................................................ [33]Tower Insurance Ltd v Skyward Aviation 2008 Ltd............................................. [66]Submissions............................................................................................................ [81]First declaration – are the costs of Enhanced Foundations and demolitionincluded in the calculation of an insured's entitlement under the buyanother house option? ........................................................................................... [85]Is there any difference between the cost to be paid by Southern Response forthe rebuild option as against the buy another house option? ............................. [89]Does this interpretation accord with the purpose of the Policy? ...................... [107](a) Windfall argument ................................................................................. [110](b) The Policy does not cover land ............................................................. [116](c) Impact on other policies ....................................................................... [118]Demolition costs ................................................................................................ [120]Second declaration – does the buy another house option include the cost ofbuying the land on which the house is situated? .............................................. [122]Result .................................................................................................................... [131]Introduction[1] The defendant, Shirley Investments Ltd, owns a house which was damagedbeyond economic repair in the Canterbury earthquakes in 2010 and 2011. ShirleyInvestments has made a claim under the insurance policy which covered the house atthe time of damage. It has elected to buy another house but the liable insurer, now theplaintiff, Southern Response Earthquake Services Ltd (Southern Response), andShirley Investments cannot agree on how the price for the replacement house is to becalculated under the policy.[2] Southern Response, noting that this issue affects a number of insureds, seeksthe following declarations:DeclarationSouthern Response seeks by way of relief, declarations under section 3 of theDeclaratory Judgments Act 1908 that:(a) the cost of rebuilding Shirley Investments' rental house on its presentsite under the buy another house option includes the cost of rebuildingthe existing foundations but does not include:(i) the cost of additional foundation work that is required toensure that rebuilding the rental house complies with thebuilding code; and(ii) the cost of demolishing the existing house.(b) the amount payable by Southern Response to Shirley Investmentsunder the buy another house option can be no greater than the cost ofShirley Investments buying another house and does not include thecost of buying the land on which the house is situated.Background[3] The property at 560 Madras Street, St Albans, Christchurch (the Property) wasowned by Jason Stapley at the time of the series of earthquakes which badly affectedChristchurch in September 2010, and February and June 2011.[4] At the time of the damage, the house on the Property (the House) was insuredby AMI Insurance Ltd under an AMI Premier Rental Property Policy (the Policy).Southern Response is now responsible for settling earthquake claims lodged by AMIpolicy holders for damage which occurred in the Canterbury earthquakes before 5April 2012.[5] In March 2011, Mr Stapley made a claim under the Policy for damage to theHouse and on 20 December 2011 Southern Response informed him it considered ituneconomic to repair the House. In March 2013, Mr Stapley made an election underthe Policy to rebuild the House on the same site.[6] Following a geotechnical investigation and assessment of the Property, the landwas assessed as having a predicted future land performance consistent with what isknown as Technical Category 3 (TC3 land). Geotechnical engineers thereforerecommended that, to comply with the building code, one of the enhanced foundationoptions for TC3 land would need to be used if the House were rebuilt, as set out in theguidance issued by the Ministry of Business, Innovation & Employment: Repairingand rebuilding houses affected by the Canterbury earthquakes. The assessmentidentified a number of viable enhanced foundation solutions for the Property,including deep site ground improvement with a TC2 surface structure (such as a waffleslab).[7] It is not in dispute that, if the House is rebuilt on the Property pursuant to thePolicy, Southern Response will be required to pay the reasonable cost of groundimprovement and a TC2 waffle slab.[8] Shirley Investments bought the Property in December 2014 and took anassignment of the rights under the Policy. It advised Southern Response in February2015 that it wished to change the election under the Policy and instead chose the optionto buy another house in a different location (the buy another house option).[9] The dispute between the parties is as to the amount Southern Response mustpay Shirley Investments under the buy another house option, specifically whether theamount payable should include both the cost of the enhanced foundations and anamount which would have been required to demolish the House in order for a notionalrebuild to take place.[10] There was also an issue between the parties as to whether Southern Responsewas obliged to pay more than the cost of the house at the other location or whether anymoney could go towards the cost of buying the land on which that other house wassituated. That issue is no longer live as between the parties.The proceedings[11] Because Southern Response has a number of similar claims pending, itconsiders this a significant issue and seeks two declarations.1 First, that the amountpayable under the Policy to Shirley Investments under the buy another house optiondoes not include either the notional cost of enhanced foundations for a new house onthe same site and/or the cost of demolishing the House. Secondly, that the amountpayable by it can be no greater than the cost of Shirley Investments buying anotherhouse which does not include the cost of buying the land on which that house issituated.[12] The application is made on the basis Southern Response interprets the Policyas it applies to the buy another house option to mean:(i) the cost of enhanced foundations for the purpose of complying with thebuilding code (Enhanced Foundations) is additional;(ii) the cost incurred for the purpose of complying with the building codeis payable only if it will be incurred;1 Declaratory Judgments Act 1908, s 3.(iii) where the insured elects to buy another house, the insured will neverincur the cost of building Enhanced Foundations;(iv) the cost of Enhanced Foundations would consequently be a windfall tothe insured; and(v) Southern Response is not required to pay the cost of EnhancedFoundations where the insured elects the buy another house option.[13] In relation to the costs of demolition, Southern Response's position is:(i) it has rights of salvage in relation to the House and is entitled to removeit from the Property to realise those rights; and(ii) where it exercises its rights of salvage, the costs of demolition will notbe incurred by the insured and so are not payable to them.[14] Shirley Investments' position is that the sum payable by Southern Responseunder the buy another house option includes the costs of Enhanced Foundations forrebuilding a new house on the existing site and demolishing the house. It says, havingelected to buy another house:(i) quantification of the cost of rebuilding the House on its present sitemust be estimated;(ii) in that estimate, costs cannot be excluded merely because the rebuild isnot going to happen and costs will not be incurred;(iii) the costs which would be incurred in rebuilding the House on its presentsite include the cost of Enhanced Foundations and demolition of theHouse; and(iv) the quantification of Southern Response's liability under the buyanother house option must include the estimated costs of EnhancedFoundations and demolition of the House.[15] In respect of the second declaration sought, Southern Response's position isthe amount payable under the buy another house option can be no greater than theactual cost of buying another house and does not include the cost of buying the landon which the house is located. Shirley Investments considers the cost of buyinganother house includes the cost of buying the land on which the house is located.The Policy[16] The relevant sections of the Policy and the way it is set out are:What this policy covers page 2–6page 2–3cover for yourrental house if it isdamaged ordestroyedpage 3cover for additional costs• architects' and surveyors' fees• demolition and debris removal• compliance with building regulations• removal of rental house contentsearthquake top-up coverour definition of 'rental house'property covered by thispolicya. This policy covers residential dwellingsthat you own for the purpose of lease undera tenancy agreement. It does not covercommercial buildings, caravans ortemporary structures.property not covered bythis policya. The following do not form part of yourrental house and are not covered by thispolicy:– any land, earth or fill.what is covered by this policycover for your rental houseYour rental house is covered for any unforeseen and sudden physical lossor damage that is not excluded by this policy.1 What we will pay a. We will pay to repair or rebuild your rentalhouse to an 'as new' condition, up to thefloor area stated in the Policy Schedule.b. We will use building materials andconstruction methods in common use at thetime of repair or rebuilding.c. If your rental house is damaged beyondeconomic repair you can choose any one ofthe following options:i to rebuild on the same site. We willpay the full replacement cost ofrebuilding your rental house.ii to buy another house. We will paythe cost of buying another house,including necessary legal andassociated fees. This cost must not begreater than rebuilding your rentalhouse on its present site.iii a cash payment. We will pay themarket value of your rental house atthe time of the loss.d. If your rental house is damaged and can berepaired, we can choose to either:i repair your rental house to an 'as new'condition, orii pay you the cash equivalent of thecost of repairs.cover for additional costsWe will pay for the following additional costs.1 Professional fees a. We will pay the reasonable cost of anyarchitects' and surveyors' fees to repair orrebuild your rental house. These expensesmust be approved by us before they areincurred.2 Demolition anddebris removala. We will pay the reasonable cost ofdemolition and debris removal. Theseexpenses must be approved by us beforethey are incurred.3 Removal of rentalhouse contentsa. We will pay the reasonable cost ofremoving your rental house contents fromyour rental house when this is necessary tocarry out repair or reinstatement of yourrental house.4 Compliance withbuilding legislationand regulationsa. If additional work is required to ensure thatthe repair or rebuilding of your rental housecomplies with the building code, we willpay the reasonable costs of the additionalwork.b. We will not cover any additional workrequired:i if a notice has been served requiringcompliance with the Building Act1991 or the Resource ManagementAct 1991 before the loss or damageoccurred, orii if your rental house did not complywith the relevant governing buildingcontrols when it was built or at thetime of any alteration, oriii to any undamaged part of your rentalhouse, whether or not it complieswith the building code.cover for earthquake damageIf the Earthquake Commission agrees to pay a claim for loss or damage toyour rental house, we will provide Earthquake top-up cover for loss ordamage not covered by the Earthquake Commission.1 Earthquake top-upcovera. If your rental house is damaged byearthquake, natural landslip, tsunami,volcanic eruption or hydrothermal activity(as defined by the Earthquake CommissionAct 1993 and any amendments) we will paythe difference between the maximumamount payable by the EarthquakeCommission and:i the cost of repairing or rebuildingyour rental house, orii the sum insured stated on the PolicySchedule,whichever is the lesser.b. Cover is provided on the same basis as'Cover for your rental house' on page 2.c. This cover does not include any excess youmay have to pay to the EarthquakeCommission.d. You will not have to pay any excess to us.[17] Particularly at issue in this case is the relationship between "cover for yourrental house" and "cover for additional costs".Prior decisions[18] Southern Response and Shirley Investments each maintain I am bound by priorCourt of Appeal and Supreme Court decisions but each has a different interpretationof those decisions. The first step in my decision is therefore to analyse those decisionsto ascertain whether, and the extent to which, they are binding.[19] The cases involve a High Court decision, Turvey Trustee v Southern Response,2High Court, Court of Appeal and Supreme Court decisions in Avonside Holdings Ltdv Southern Response Earthquake Services Ltd,3 and Court of Appeal and SupremeCourt decisions in Tower Insurance v Skyward Aviation.42 Turvey Trustee Ltd v Southern Response Earthquake Services Ltd [2012] NZHC 3344, (2013) 17ANZ Insurance Cases 61-965.3 Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2013] NZHC 1433[Avonside HC]; Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2014]NZCA 483, (2014) 18 ANZ Insurance Cases 62-040 [Avonside CA]; and Southern ResponseEarthquake Services Ltd v Avonside Holdings Ltd [2015] NZSC 110, [2017] 1 NZLR 141[Avonside SC].4 Skyward Aviation 2008 Ltd v Tower Insurance Ltd [2014] NZCA 76, [2014] 2 NZLR 713 [SkywardCA]; and Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 185, [2015] 1 NZLR341 [Skyward SC].[20] I will begin with the Turvey and Avonside decisions as they concern AMIpolicies.Turvey Trustee v Southern Response[21] Turvey addressed AMI's policy for owner-occupiers (whereas the Policycovers rental property) but was likewise the premier cover policy. The claimconcerned earthquake damage and at issue was the relationship of "cover for yourhouse" and "cover for additional costs", the latter setting out the same four categoriesof cover for additional costs with identical wording as in the Policy.[22] The clauses under "cover for your house" were also identical to those in thePolicy relating to "cover for your rental house" although contained a fourth option toapply if the house were damaged beyond economic repair, allowing the insured torebuild on another site, saying:5We will pay the full replacement cost of rebuilding your house on another siteyou choose. This cost must not be greater than rebuilding your house on itspresent site.[23] The plaintiff in Turvey elected to rebuild on another site.[24] The High Court was asked to determine two questions. The first concerned themeaning of the insurer's obligation to rebuild to an as new condition using buildingmaterials and construction methods in common use at the time of rebuilding. Thatwas a live issue because the damaged house included distinctive early 20th Centuryfeatures. The second concerned the calculation of the cost cap on rebuilding. It istherefore relevant to the present case given the wording of the cost cap was identicalto the wording of the cost cap under the Policy except the Policy refers to a "rental"house.[25] On the second question, the High Court recognised the reality that homeowners who had suffered irreparable damage in the areas of Christchurch worst hit bythe earthquakes were likely to seek to rebuild in other areas. The worst hit areas werelikely to be rated more highly in terms of geotechnical requirements for foundations5 Turvey, above n 2, at [4].of new structures, leading to the prospect that rebuilding in the worst hit areas wouldinvolve higher costs for building code compliance than new building away from theworst hit areas. The High Court concluded the insurer's liability was to compensatefor additional costs of rebuilding to the extent occasioned by the need to comply withthe current building code as those costs were actually incurred at the new site.[26] It is evident from the judgment that the arguments put forward in respect of thesecond question, which is primarily at issue in this case, were the same as thosepresented before me. That is, the insured argued the calculation of a notionalrebuilding of the house on its original site could not be completed realistically withoutincluding an allowance for the additional costs involved in upgrading or altering theoriginal construction to make it code compliant.6 For the insurer, it was argued thatquantification of this aspect was recognised as a category of costs additional to thecost of constructing the equivalent structure using methods and materials in commonuse.7[27] Dobson J reasoned as follows:[44] The structure and wording of the policy supports the insurer'sapproach to quantification of this additional cost. The quantification exercisebegins with an election by the insured as to which of the four options availablein clause 1c the insured will rely on in pursuing its claim. If that election is toclaim under 1cii (as here), then the insurer is not liable for a cost greater thanthat of rebuilding the house on its original site. That does introduce a notionalexercise of assessing the extent of that cost. Separately from that, additionalcost liabilities acknowledged by the insurer are in respect of costs that may ormay not in fact be incurred. The most logical approach to quantifying anyadditional costs is to assess what additional costs are in fact incurred in theparticular circumstances following the insured's election. In the present case,the insurer will ascertain the extent of additional work required in the processof rebuilding on a new site, in order to comply with provisions in the BuildingAct and codes that the existing structure did not comply with before becomingirreparably damaged.[28] Dobson J considered the approach contended for by the insured would haveintroduced an additional artificiality which was unnecessary. He also identified theprospect of that approach enabling the insured to claim a windfall through receipt ofmoney in respect of an additional cost which the insured would not in fact incur if6 At [41].7 At [42].rebuilding on a new site where the requirements for foundations cost less than at theexisting site. He noted the corollary that an insured could elect to rebuild on a sitewith greater geotechnical difficulties than the existing site and oblige the insurer topay more than the cost of rebuilding on the existing site.[29] Dobson J concluded a two-stage process would be required, with the insurer'sliability under the "additional costs" component of the policy having to wait until anew site for the rebuilding was identified to enable the actual extent of additional coststo be measured.[30] Dobson J addressed the issue identified by the insured that the insurer wouldnot be complying with its primary obligation to pay the full replacement cost of"rebuilding your house" if the costing failed to take account of additional or differentwork required for code compliance because it would be costing a house which couldnot lawfully be built. He said:[48] However, so long as the quantification of the insurer's primaryliability recognises that a discrete exercise needs to be done under the "coverfor additional costs" portion of the policy, then there is neither a practical norlegal impediment to calculating the full extent of liability in the two stagesthat follows from the interpretation I have proposed.[31] Mr Friar, appearing for Southern Response in the present proceedings,observed that a large number of claims have been settled over the past five years onthe basis of this two-stage process.[32] Mr Campbell, for Shirley Investments, noted the obvious, that is Turvey didnot concern the buy another house option. However, the buy another house option inthe present case is subject to a cost cap expressed in identical wording to thatpertaining in Turvey and therefore the same reasoning must apply. If additional costsare included in the cost of rebuilding under the buy another house option, as ShirleyInvestments would have it, then they must also be included in the cost of rebuildingunder the rebuild on another site option. That would be directly contrary to Turveywhich considered the insured's entitlement to additional costs was a discretecalculation.Avonside v Southern Response[33] Avonside concerned the same premier rental property cover as the Policy.[34] Following the Canterbury earthquakes, the plaintiff's property was damagedbeyond economic repair and it elected to buy another house. At issue was thecalculation of the cost cap (rebuilding the house on its present site) and whether, andto what extent, certain items were to be included in that calculation being: builders'margin; contingencies; professional fees; demolition costs; and external works.8 Inthe High Court, MacKenzie J allowed a 10 per cent builders' margin, both sidesagreeing this was appropriate to include in a notional rebuild.9 He declined to includeany allowance for a contingency sum on the basis that, in a notional rebuild, therecould be no unexpected items.10[35] The professional fees considered in the High Court included fees for structuralengineering, geotechnical engineering, design, land surveying, and projectmanagement. The insured's expert made an allowance for professional fees of 10 percent of the total cost, being a composite figure based on his experience as to the feesof the categories of consultants involved typically in an individually designed housebuilding project. The High Court rejected that approach on the basis the expectedprofessional fees for an individually designed new house was not the appropriatemeasure, rather those fees that would necessarily be incurred for a notional rebuild ofthe existing house were to be included. MacKenzie J noted that not every home isarchitect designed and in a notional rebuild that was not required. He allowed a feefor redrawing of plans to meet the existing building code. Furthermore, he noted thepolicy itself dealt differently with architects' fees, which were covered as additionalcosts and not part of the basic cover.11[36] As far as demolition costs were concerned, MacKenzie J noted that, in termsof the policy, the cost of demolition and site preparation did not form part of the costof a notional rebuild. Read together with the words of the policy specifying the cost8 Avonside HC, above n 3, at [10].9 At [14]. The experts varied as to what that percentage would be.10 At [24].11 At [30]."must not be greater than rebuilding your rental house on its present site", that meantthe cost of demolition and debris removal was dealt with as a separate item and notpart of the costs of rebuilding on the present site. He concluded explicitly thatdemolition and debris removal costs did not fall under the cover for the buy anotherhouse option.12[37] MacKenzie J followed a similar approach to Dobson J in Turvey in identifyingthat the "additional costs" required separate consideration. Although the decision oncontingencies and professional fees was appealed, the High Court decision regardingdemolition costs was not. Mr Campbell submitted I should not place too much weighton that and the High Court was wrong as the reasoning in the Court of Appealdemonstrates. Furthermore, the land was sold to the Crown and therefore demolitioncosts were not a live issue on appeal.[38] The insured went to the Court of Appeal on the question of whether, and towhat extent, an allowance for contingencies, the costs of professional fees and thecosts of replacing external works should be included in the calculation of the cost ofrebuilding.13[39] The arguments on appeal were slightly different from the arguments putforward in this case and are worth recording. The insured's argument was that, inassessing the notional rebuild cost, it was not relevant that the rebuilding would nottake place or that rebuilding costs would not actually be incurred. The hypothesis onwhich cost was to be assessed was that the house was rebuilt on its present site. ForSouthern Response, the argument focused on the fact the policy was for a rentalproperty and that the policy protected the rental income stream by either providing foran as new rebuild or for the investment of the cost of that as new rebuild in the purchaseof another house. The argument was that the cost cap for the buy another house optionwas determined by the full replacement cost under the rebuild option. And then:[29] Putting aside cover for additional costs (which might be payable ifthe Property was actually rebuilt), the notional rebuild calculation was to beprepared on the basis of the cost of rebuilding, in terms of the plans and thesite, what had been built when the Property was first erected.12 At [37].13 Avonside CA, above n 3.[30] In general, therefore, architectural plans were not required, newengineering advice was not required, and there were no unforeseen risks. All that was required was the cost of repeating – albeit using current buildingtechniques and materials – the original exercise of constructing the existinghouse.[40] The Court of Appeal considered the evidence focused on estimates forprofessional fees and contingencies. Importantly, the expert for Southern Responseapproached his task by identifying that the calculation of the cost to rebuild did notinclude the costs identified under cover for additional cost but, in terms of professionalfees and compliance costs, said:14Unless the policy holder was in fact rebuilding on the same site, then the costto design the replacement rental house, including any engineering orgeotechnical input into the foundations, would not be paid to the policy holder.[41] The expert approached the question of contingencies in a similar way.[42] That the Court of Appeal took issue with this approach was not surprising giventhe professional fees captured under additional costs are in respect of architects' andsurveyors' fees only.[43] Therefore, the way in which the case was argued before the Court of Appealwas very important. The focus of Southern Response was that on a notional rebuild,certain costs would not be incurred and this included all professional fees and the needfor a contingency. However, neither category of cost fell to be considered separatelyas an additional cost under the policy.[44] Southern Response's approach formed the foundation for the Court of Appeal'sanalysis.15 That is, Southern Response distinguished between the cost derived for anactual rebuild and a notional rebuild because in a notional rebuild, various costs wouldnot actually be incurred and hence were not included in the sum to be calculated as thecost cap for the buy another house option.1614 At [42].15 At [49].16 At [44].[45] The Court of Appeal then disagreed with the approach, reasoning that the buyanother house option made no reference to "the full replacement cost". The Court ofAppeal said:[51] The cost of rebuilding the rental house on its present site involves boththe full replacement cost and additional costs, encompassing contingenciesand professional fees. That is the amount the insurer would be liable for wherethe insured chose the "to rebuild on the same site" option. We are satisfied,therefore that it is an amount equivalent to the sum of both of replacement andadditional costs, and not the lesser amount of solely "the full replacementcost", that is to be paid by the insurer to the insured when the insured electsthe "to buy another house" option. In our view, if the Policy had intended anylimit to "the full replacement cost" to apply in cl (c)(ii), it would have said so.[46] The Court of Appeal agreed with the submission that costs could not beexcluded merely because the rebuild was not going to happen and costs would not beincurred.17[47] Despite the question of Enhanced Foundations not being at issue in the case,the Court of Appeal then said:[53] Accordingly, for example, we do not think "safe ground" can beassumed. Similarly, we consider that a reasonable estimate for professionalfees and contingencies prepared on the basis that the Property is actually beingrebuilt on the site should be included. This is so even though the exercise isnecessarily a notional one. Where, for example, the Building Code haschanged, or there is – as would be the case here – a different assessment ofground risks that would need to be addressed if the Property were to be rebuilton the site, those costs are, in our view, properly within the cost of rebuilding.[48] Understandably, it is this paragraph on which Mr Campbell placedconsiderable weight in the present case.[49] The Court of Appeal went on to say it had taken a "not dissimilar" approach tothat taken in Turvey and:[58] We take the same approach here. That is, the cost that is payable aspart of the required notional exercise – here under cl 1(c)(ii) – is the cost thatwould actually be incurred (whether as a component of full replacement costor in terms of matters covered by additional costs) to rebuild the house on theexisting site. Thus items such as contingencies and professional fees cannotbe excluded on the basis that they will not, in fact, be incurred because it is anotional cost that is being calculated.17 At [52].[50] The Court of Appeal then confirmed the High Court's decision in respect ofexternal costs but overturned it on the remaining matters on appeal and ordered theinsurer to pay the contingency and professional fees.[51] Mr Campbell submitted the Court of Appeal decision in Avonside is binding.In his submission, the ratio of the Court of Appeal decision is that, under the buyanother house option, the cost of rebuilding (which operates as the cost cap) includesboth the full replacement cost and additional costs. On that ratio, he said, the cost capincludes the cost of Enhanced Foundations.[52] Before exploring that submission in detail, it is necessary to look at what theSupreme Court had to say.18[53] The Supreme Court identified the issues as whether there should be a sum forcontingencies; the extent of allowance to be made for professional fees; and therelationship between cl 1 (cover for your rental house) and cl 4 (cover for additionalcosts).19 While observing that the relationship of the clauses of the policy was stressedby Southern Response in its submissions, the Court dealt with it first by observing thatthe relationship between the two clauses of the policy did not arise in the appeal. MrCampbell, who appeared for Avonside in the Supreme Court, told the Court it was notpart of Avonside's argument before the Court of Appeal that additional costs wereencompassed within the cost of rebuilding and:[20] Neither party included, within their estimates of the cost ofrebuilding Avonside's house, any allowance for improved foundations or foradditional work required to comply with the building code. Whether anallowance should be made for the costs of such additional work under the "buyanother house" option is not an issue on this appeal.[21] Further, the cover under cl 4(1)(a) for additional costs of professionalfees is for fees that the insured wishes to incur that are additional to thenecessary costs of rebuilding or repairing. The insured will be covered forthat additional cost only if the insurer approves it before it is incurred. NeitherMr Harrison nor Mr Farrell allowed for "additional" fees in that sense. Theprofessional fees allowed for by both Mr Harrison and Mr Farrell related torebuilding the existing house and thus came within cl 1(c)(ii). MacKenzie Jwas therefore wrong to characterise them as additional costs.18 Avonside SC, above n 3.19 At [17].[54] The Supreme Court accepted the submission that the relationship between thecover for your rental house and cover for additional costs clauses did not arise on theappeal and that Avonside's claim related only to cl 1 (cover for your rental house).They also accepted Avonside's submission that the High Court had mischaracterisedarchitects' fees.20[55] The Supreme Court concluded that, in determining the cost cap, an allowancefor contingencies should be included, saying:21[38] The amount payable under the policy can be no more than the cost ofrebuilding the house on its present site. The exercise that is required is toestimate the actual cost of rebuilding the house on the site.[39] Mr Harrison, in accordance with what is agreed to be standardquantity surveying practice, included a sum of 10 per cent for contingencies.Southern's witnesses both agreed that there were "unknowns" in any buildingproject, including in a rebuild of this type (existing house in an existinglocation).[40] We accept Avonside's submission that the fact that this is a notional,rather than actual, rebuild does not affect the inclusion of an allowance forrisks generally encountered. Such risks are relevant to estimating the cost ofan actual rebuild and, as noted above, it is the actual cost of rebuilding thatmust be estimated. The Court of Appeal was thus correct to accept theinclusion of an allowance for contingencies.[56] The Supreme Court then dealt with whether there should be an allowance forprofessional fees by observing that Southern Response's expert's approach was basedon his erroneous assumption that a different approach was required for a notionalrebuild.22 In contrast, Avonside's expert's approach allowed professional fees onorthodox quantity surveying practice. Furthermore, the High Court hadmisunderstood that the estimate was based on the use of an architecturaldraughtsperson and not an architect and did take full account of the fact that thenotional build was a rebuild on an existing site with existing plans. The SupremeCourt said the Court of Appeal's approach to this issue was correct.[57] In summary, the Supreme Court concluded the Court of Appeal's approach tothe question of professional fees was correct and the Court of Appeal was correct to20 At [22].21 Citations omitted.22 At [49].accept the inclusion of an allowance for contingencies. The Supreme Court did not,however, address the Court of Appeal's comments on the relationship between "coverfor your rental house" and "cover for additional costs", saying it was not at issue.[58] I now turn to consider how and the extent to which those decisions are bindingin this case.[59] Given the issues before the Court of Appeal were contingencies, professionalfees and external works,23 I do not accept that the relationship between the two clauseswas at issue in the Court of Appeal and thus that the Court of Appeal's commentsshould be followed.[60] The Supreme Court dealt with the question of contingencies and professionalfees under cl 1, cover for your rental house. This is because contingencies andprofessional fees are standard costs. The professional fees at issue did not involvethose of an architect or surveyor and therefore did not fall under additional costs. Itwas made clear to the Supreme Court that the question of Enhanced Foundations andadditional work was not relevant to the case, not having been included in either party'sestimates. The Supreme Court specifically did not consider the relationship betweenthe two clauses and accepted Avonside's submission that the relationship between thetwo clauses did not arise in the appeal.[61] Furthermore, in relation to what the Court of Appeal said about Turvey, theSupreme Court observed as follows:24The Court said, at [55]–[58], that its approach was similar to that taken byDobson J in Turvey Trustee Ltd v Southern Response Earthquake Services Ltd.It is not necessary for the purposes of this appeal for us to make any commenton whether that is the case or on Dobson J's approach.[62] The distinction drawn by the Court of Appeal between replacement andrebuilding, suggesting full replacement cost does not include additional costs but thecosts of rebuilding does, is at odds with the actual words of the rebuild option in thePolicy which are "the full replacement cost of rebuilding". The words in the buy23 Avonside CA, above n 3, at [16].24 Avonside SC, above n 3, at n 19 (citations omitted).another house option, that the costs must not be greater than rebuilding, must relateback to Southern Response's obligation to pay the full replacement cost of rebuilding.Similar wording was considered by the Supreme Court in Skyward, where the Courtinterpreted the clause differently from the Court of Appeal in Avonside as discussed inmore detail below.[63] In Mr Friar's submission, the Supreme Court accepted the distinction in thePolicy between cover for your rental house and additional costs. I am not convincedthe Supreme Court went that far. It was simply not required to consider therelationship between the two parts of the policy because the two costs at issue did notfall under additional costs.[64] I do agree with Mr Friar, however, that the Court of Appeal's observationsabout costs occasioned through a change in the building code were obiter. No suchcosts were before the Court of Appeal and there was no argument on this issue. Theratio of the Court of Appeal decision is limited to external work costs, professionalfees and contingencies, none of which are additional costs.[65] An analysis of these cases demonstrates the rationale for our common lawapproach to precedent. The value of precedent lies in the ratio decidendi of a casebecause an analysis of the facts and full argument on the law results in a ratio. TheCourt of Appeal's observations in respect of foundation costs did not have the benefitof facts or legal argument. That is why its observations did not form part of the ratioand thus why those observations do not have precedential effect.Tower Insurance Ltd v Skyward Aviation 2008 Ltd[66] The Court of Appeal and Supreme Court decisions in Tower Insurance Ltd vSkyward Aviation 2008 Ltd were relied on by Shirley Investments on the basis that therebuild and buy another house options have the same financial consequences forSouthern Response.25 The Skyward case concerned an insurance policy offered byTower Insurance providing that Tower would pay either: the full replacement value ofa house; the full replacement value of the house on another site; the cost of buying25 Skyward CA and Skyward SC, above n 4.another house; or the present day value. The issue was whether it was Tower or theinsured who had the right of election.[67] The Court of Appeal and Supreme Court both considered the election was thatof the insured and the maximum amount payable by Tower under each alternative ofrepair, rebuild or purchase was materially the same.[68] The evidence, however, was that the parties considered there was somedifference between the costs of the various options. Importantly, in the Court ofAppeal decision, it was said:26[7] The difference would be compounded if another $150,000.00 werefactored in for the cost of constructing special foundations for a house in thered zone. But Mr Campbell QC accepts, following the judgment of Asher J inO'Loughlin v Tower, that Skyward is not entitled to claim that cost incircumstances where it will not in fact rebuild in the red zone.[69] In O'Loughlin v Tower, the O'Loughlins elected to rebuild on another siteoutside of the red zone.27 Asher J held that, under the relevant policy, Tower couldelect to make a payment rather than fund the rebuild.28 More relevant to the presentcase, and on the basis that the policy specifically excluded liability for reinstating thehouse "exactly to its previous condition" as well as costs beyond what was"reasonable, practical or comparable with the original", Asher J also found thatTower's liability extended only to the cost of rebuilding on a notional site, with soundground conditions, rather than on the red zone site with its attendant increasedstructural requirements.29[70] Returning to Skyward, the option to buy another house was expressed inidentical wording to the buy another house option in the Policy, saying:30The cost of buying another house, including necessary legal and associatedfees. This cost must not be greater than rebuilding your house on its presentsite.26 Skyward CA, above n 4 (citations omitted).27 O'Loughlin v Tower Insurance Ltd [2013] NZHC 670, [2013] 3 NZLR 275.28 That approach was however overturned in Skyward CA, above n 4, at [24].29 O'Loughlin, above n 27, at [4(e), (f) and (h)] and [173]–[182].30 Skyward CA, above n 4, at [13].[71] Other terms of the Tower policy were slightly different from the Policy. Withinthe same clause as the one containing the options, the terms provided that if, as a resultof changes in government or local body bylaws, the rebuild or repair could not becarried out to the same specification as before, the additional costs incurred to rebuildwould be paid by Tower. In any event, as indicated, this particular issue was notrelevant to the case.[72] What is relevant, particularly in relation to the Court of Appeal's decision inAvonside, is how the Supreme Court described the buy another house option and thecost cap, which, as I say, was expressed in identical terms to that in the Policy. TheSupreme Court said:31[14] It is common ground that, for the purposes of cls 1, 2 and 3, Towerhas elected to "make payment" (see cl 3). This means that the case falls to bedetermined under cl 2. It will be noted that options (a), (b) and (c) all providefor recovery which is referable, in one way or another, to the "full replacementvalue" of the house. In later discussion we will refer to them as providing forreplacement value recovery. In contradistinction, option (d) is based on whatis normally referred to as indemnity value.[73] Therefore, even if the Court of Appeal reasoning about rebuilding versusreplacement cost in Avonside did form part of the ratio, the later Supreme Courtdecision of Skyward effectively overrules that.[74] The Supreme Court judgment is also important because it makes someobservations on the general context of insurance claims:32[24] The insurance policy is for full replacement value and proceeds on thebasis of replacement on a new for old basis. The availability of such policiesreflects a recognition that a traditional indemnity value policy may not providesufficient funds to enable a damaged building to be repaired or rebuilt giventhat such exercises will require new materials and compliance with currentbuilding standards which may be more stringent than those in place when thebuilding was constructed. A replacement value policy thus covers the impactof depreciation and increased building costs. ...[75] The Supreme Court then discussed how replacement value insurance createsheightened moral hazard because an insured may obtain more than their indemnity for31 Skyward SC, above n 4 (citations omitted).32 Citations omitted.the damaged property and thus profit from the loss.33 It explained that the risks canbe mitigated, including by policies providing insurers with the option of reinstatingthe property and limiting replacement value recovery to reimbursement of expenditureincurred by the insured.[76] Mr Friar submitted this was particularly relevant context in interpreting thePolicy. In his submission, the Policy dealt with the moral hazard by separating outrebuilding and additional costs and allowing recovery of the latter only when incurred.In contrast to the Tower policy, Southern Response had not given itself the right toelect which option was to be taken.[77] Mr Campbell relied on the Court of Appeal's observation in Skyward thatTower's obligation was to pay the cost of rebuilding on site, being the full measure ofreplacement cost,34 and that the maximum amount payable by Tower under all threealternatives was materially the same.35 In his submission, the Tower policy wordingwas almost identical to that of the Policy and the Court found that Tower's liabilitywas the same under each option. The Court's approach, he said, therefore defeatedSouthern Response's argument that the cost of Enhanced Foundations will not bepayable by it under the buy another house option, even though they might be payableunder the rebuild option.[78] The Tower policy is not on all fours with the Policy. The reference to mattersdescribed as additional costs in the Policy are dealt with in the Tower policy under thesame clause beginning "we will pay". Furthermore, what under the Policy areadditional costs, are bullet pointed in the Tower policy under the opening words "inall cases".[79] The Skyward decisions need to be considered in their context. First, the issuefor determination was whether it was the insured or Tower who had the choice as towhich option should be elected. Secondly, the question of the correct calculation ofthe rebuild cost in the context of the buy another house option was neither argued nor33 At [26].34 Skyward CA, above n 4, at [27].35 At [42].decided. Thirdly, the policy was different. There was also an acceptance at the Courtof Appeal (which must have flowed through into the Supreme Court) that an insuredwas not entitled to the cost of Enhanced Foundations unless he or she rebuilt in the redzone. So, the issue in the present case was specifically excluded from argument andconsideration.[80] Having manoeuvred my way through the cases, I will now turn to address theinterpretation of the Policy. In doing so I am conscious that insurance contracts areinterpreted according to the ordinary principles of contractual interpretation. Anobjective approach is taken, with the aim of ascertaining the meaning which thedocument would convey to a reasonable person having all the background knowledgewhich would reasonably have been available to the parties in the situation in whichthey were at the time of the contract.36 The parties' intention is taken to be thatobjective meaning and the context provided by the contract as a whole and anyrelevant background informs meaning. Furthermore, in Firm PI 1 Ltd v ZurichAustralian Insurance Ltd, the Supreme Court held:37[63] While context is a necessary element of the interpretive process andthe focus is on interpreting the document rather than particular words, the textremains centrally important. If the language at issue, construed in the contextof the contract as a whole, has an ordinary and natural meaning, that will be apowerful, albeit not conclusive, indicator of what the parties meant. But thewider context may point to some interpretation other than the most obviousone and may also assist in determining the meaning intended in cases ofambiguity or uncertainty.Submissions[81] In Mr Friar's submission, the Policy is clear. It distinguishes between notionalbuild costs and additional costs and the two-stage approach explained in the Turveydecision applies.[82] In Mr Campbell's submission, the Policy was drafted by the insurer as astandard form contract sold to consumer insureds and must be interpreted accordingly.In his submission, the natural and ordinary meaning of the Policy is that the buyanother house option is for the benefit of the insured. Southern Response is indifferent36 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.37 Citations omitted.as to which option is elected given the ultimate financial consequences for SouthernResponse can be expected to be the same; it follows that the cost cap under the buyanother house option must take into account the costs which would be incurred in anactual rebuild and this includes demolition costs and the costs of complying with thebuilding code. Furthermore, if Southern Response meant that the buy another houseoption was almost always going to lead to a different and lower payout than the rebuildoption, that should have been made clear.[83] Even if the distinction identified by the Court of Appeal in Avonside betweenrebuild and replacement is not valid, in Mr Campbell's submission the ordinarymeaning of rebuild means it must include a code compliant rebuild.[84] Mr Campbell suggested it was not clear that the additional costs were intendedto be additional to, in the sense of separate from, the cost of rebuilding and the morenatural reading is that the additional costs are identified for the avoidance of doubt.First declaration – are the costs of Enhanced Foundations and demolitionincluded in the calculation of an insured's entitlement under the buy anotherhouse option?[85] The Policy covers damage to the House due to any unforeseen and suddenphysical loss and damage except as excluded by the Policy. It is not limited to damagecaused by an earthquake but it specifically provides for earthquake damage (and otherdamage covered by the Earthquake Commission Act 1993). The Policy coverscircumstances where the damage can be repaired and where it is uneconomic to repair.Land is not covered by the Policy.[86] If the House is damaged beyond economic repair there are three options for theinsured:(i) rebuild on the same site;38(ii) buy another house; or38 The Policy covers repair but in the circumstances of this case I will confine the discussion torebuilding.(iii) a cash payment.[87] For the first two options (rebuilding or buy another house), how much SouthernResponse must pay is related to the cost of rebuilding the House on its present site inan as new condition up to the floor area stated in the Policy. The cash payment optionis limited to the market value of the House at the time of the loss. Market value isdefined as "the value of an item immediately before the loss or damage occurred,taking into account wear and tear and depreciation". This is traditionally referred toas "indemnity" cover. The difference between the cash payment and other options isthat the insured is not required to procure another house either by rebuilding on thesame site or buying another house elsewhere. The insured can take the money and go.It is accepted the cash payment option will result in an insured receiving lessrecompense overall compared to the other two options and there are clearly benefitsto that option in terms of allowing an insured the freedom to choose how to use theinsurance money.[88] Similarly, there are clearly advantages in the buy another house option in thatit allows the insured to move on, both literally and figuratively. The insured can buyan existing house, will not have to incur the delay in rebuilding and, importantly giventhis is a rental property policy, resume earning rental income sooner rather than later.Cover for lost rental is an optional extra under the Policy. Other advantages includeavoiding further potential damage by moving to a less vulnerable site, as was the casein O'Loughlin.39Is there any difference between the cost to be paid by Southern Response for the rebuildoption as against the buy another house option?[89] Under the rebuild option, an insured can rebuild on the same site. SouthernResponse will pay "the full replacement cost of rebuilding your rental house". ThePolicy defines "full replacement" as meaning "replacement with a new item, orrepairing to an 'as new' condition". Therefore, Southern Response will pay to rebuildto an as new condition using building materials and construction methods in commonuse at the time of rebuilding.39 O'Loughlin, above n 29.[90] The buy another house option requires Southern Response to pay the cost ofbuying another house, including legal and associated fees, but with a cap on the costwhich must not be greater than "rebuilding your rental house on its present site".[91] The first question is whether there is any difference between the two optionson this basis alone. There is no reference to "full replacement cost" in the buy anotherhouse option. The option does, however, stipulate that the cost to buy another housecannot be greater than "rebuilding your rental house on its present site". These wordsare effectively a repetition of the opening words of the rebuild option – "to rebuild onthe same site". The rebuild option is explained in the following sentence, which isthat the full replacement cost of rebuilding will be paid by Southern Response.[92] Given the use of the same language in respect of both options, it is clear to methat they both refer to the same. That is, under both options, Southern Response'sfinancial obligation is to pay for the cost of rebuilding the house on its current site toan as new condition. This requires the use of building and construction methods incommon use at the time of rebuilding. There is no difference between the financialliability of Southern Response under the rebuild and buy another house options so far.[93] That is the first step in calculating an insured's potential entitlement under thePolicy.[94] Southern Response is then obliged to pay specified additional costs. Thoseadditional costs are payable only where they are approved and incurred in the case ofarchitects' or surveyors' fees and demolition, reasonable and necessary in the case ofthe removal of rental house contents, and reasonable and required in the case ofadditional work to ensure the rebuilding complies with the building code.[95] There is no doubt, therefore, that in the case of the rebuild option, an insuredis entitled to those additional costs only if the qualification for them is met in eachcase. The issue is whether those additional costs should be taken into account whencalculating Southern Response's liability where the buy another house option iselected. Should the calculation of the buy another house option cost include areasonable allowance for architects' and surveyors' professional fees, demolition,removal of house contents and compliance with the building code when those costswould have been incurred if the insured had elected to rebuild on the same site? Toanswer this question it is necessary to go back to the structure of the Policy andconsider Southern Response's liability in relation to its obligation to pay "the fullreplacement cost of rebuilding your rental house".[96] To my mind, the Policy clearly distinguishes between what is included in "thefull replacement cost of rebuilding" and what is stated to be additional to that cost. Iam not attracted to the submission that the "additional" costs are effectively "included"costs "for the avoidance of doubt". The Policy makes it clear that Southern Responsewill pay the cost of rebuilding to an as new condition with building materials andconstruction methods in common usage at the time of rebuilding. It will also pay thecost of architects' and surveyors' professional fees, demolition, contents removal andincreased building code compliance but those costs are over and above what is thebase or notional rebuilding cost. The word "additional" means what it says. It isadditional to, over and above, the notional rebuilding cost where the notionalrebuilding cost is the cost of rebuilding the existing house using new materials andmethods but not including any additional work required to comply with building coderequirements with which the existing house did not comply before the damage.[97] It does not matter whether there is any logic to architects' and surveyors' feesbeing distinguished from other professional fees. It may well be, as Mr Friarsuggested, because architects' and surveyors' fees are not ordinarily required in arebuild of an existing house – only an architectural draughtsperson is needed to drawup the plans and, as the footprint of the previous house is used, there should be nosurveyors' fees. Mr Campbell asked why engineers' fees, for example, were notincluded. The point is, the Policy says what it says, and the Policy is the contractbetween the parties.[98] In the case of demolition, I do not agree that, because demolition would beinherent in a rebuild, the cost should be assumed to fall within the cost of rebuildingin any event. There is a difference between what might in fact be required and whatthe Policy says. I can see that, if there were no separate reference to demolition, therewould be a good argument that demolition costs would be included within rebuildingcosts. However, in this case demolition costs are specifically carved out and areexpressly in addition to the notional rebuilding cost.[99] The wording in respect of building code compliance is even more explicit, suchwork being referred to as "additional work" with the obligation on Southern Responseto pay the reasonable costs of the "additional work". The Policy therefore clearlydistinguishes between the cost of rebuilding in an as new condition with materials andusing construction methods in use at the time, with the cost of undertaking any workto ensure compliance with the current building code. Obviously, a house could not berebuilt unless it was code compliant. Had there been no separate reference to buildingcode compliance, the cost of it would likely fall within the cost of rebuild. But again,the Policy makes the distinction.[100] The importance of the additional costs is that they are costs which will notnecessarily be incurred. In respect of professional fees, architects and surveyors willnot necessarily be involved in a rebuild. Demolition will not necessarily be involved,for example, in the case of a fire causing total destruction.40 The same applies toremoval of rental house contents and additional work required for code compliance –such work will not necessarily be required. The additional work is additional torebuilding or replacing the existing house.[101] The Court of Appeal and Supreme Court decisions in Avonside can bedistinguished because they concerned contingency costs and professional fees (notincluding an architect or surveyor) which apply to a rebuild regardless.41[102] The Policy acknowledges the additional costs are costs Southern Responsemight have to pay but they are specifically in addition to the notional rebuilding cost.It is the notional rebuilding cost which is the cost cap for the buy another house option.Under both the rebuild and buy another house options, Southern Response will paythe cost of "rebuilding your rental house". Shirley Investments' interpretation wouldrequire those words to be interpreted differently depending on which option wereelected. In the case of the rebuild option, by not including additional costs unless they40 And it is certainly not inevitable in the case of repair.41 Avonside SC and Avonside CA, above n 3.were incurred but in the case of the buy another house option, including them. Thatcannot be right.[103] Mr Campbell suggested there were impractical consequences of this approach,requiring two different estimates of cost, being first an estimate of a compliant rebuildin order to determine the economics of repair and then an estimate of a hypotheticalnotional rebuild not allowing for any changes to the house required by the buildingcode. I am not persuaded any such minor practical difficulties should override theplain words of the Policy. This approach accords with Turvey and is implicitlyapproved in other decisions.[104] Mr Campbell then suggested Southern Response's interpretation of the Policydid not sit well with the earthquake top-up cover part of the Policy. This part providesthat Southern Response will provide earthquake top-up cover for loss or damage notcovered by the Earthquake Commission (EQC). Mr Campbell pointed out that theEarthquake Commission Act 1993 does not differentiate between rebuild costs andwhat Southern Response characterises as additional costs. I am not persuaded thispoint is determinative. EQC's calculation is a separate analysis.[105] The structure of the Policy and the context adds weight to the position. Thestructure of the Policy is explained in the summary on the cover page. It separates"cover for your rental house if it is damaged or destroyed" from "cover for additionalcosts". Cover for additional costs is then in a new section of the Policy under theoverall umbrella of "what is covered by this policy" but separate from "cover for yourrental house". The opening words under "cover for additional costs" say SouthernResponse "will pay for the following additional costs".[106] Such an interpretation is not bringing hindsight to bear or using a technicalinterpretation with undue emphasis on the niceties of language.42 It is simplyconstruing the structure of the Policy and the plain meaning of the language used. Itis an objective interpretation.42 Multi-Link Leisure Developments Ltd v North Lanarkshire Council [2010] UKSC 47, [2011] 1 AllER 175 at [20]–[21].Does this interpretation accord with the purpose of the Policy?[107] The Policy provides insurance in respect of a rental house. It is a reinstatementpolicy, that is, the intention is to put the insured back in the same position he or shewas in before the damage on a new-for-old basis. The insured will obtain the benefitof the house in an as new condition using current building materials and constructionmethods.[108] Work required to comply with any changes to the building code is still paid forby Southern Response as an additional cost. The Policy is quite deliberate in doingthis.[109] I am satisfied the interpretation accords with the purpose of the Policy. Threeother matters require some discussion in this regard.(a) Windfall argument[110] In Mr Friar's submission, the purpose of providing cover for additional costsis to meet additional out of pocket expenses in fact incurred in order for the existinghouse to be rebuilt. However, on Shirley Investments' interpretation, the additionalcosts would be payable in any event. This effectively would result in a windfall foran insured which goes beyond the purpose of the insurance.[111] Mr Campbell responded by noting that Southern Response will receive awindfall if an insured chooses the buy another house option because SouthernResponse would be paying out less than it would have done under the rebuild option.[112] Where the rebuild on the same site involves the need for EnhancedFoundations, the existing house will be rebuilt to an as new condition under the "whatwe will pay" part of the Policy and any Enhanced Foundations will be built and paidfor by Southern Response under the "cover for additional costs". The interpretationadvanced by Shirley Investments would mean that, if the buy another house option iselected, the insured can buy a house on stable ground with standard foundations anduse the notional cost of the Enhanced Foundations to buy a more expensive house.The result is the insured obtains a house worth more than the house he or she wouldhave obtained had they rebuilt on the same site.43 That would result in a windfallwhich would not accord with the intention of a replacement policy.[113] The same applies to demolition costs. The Policy provides that if the existinghouse is in fact demolished, then Southern Response will cover the cost as anadditional cost. On Shirley Investments' interpretation, an insured would be paid thecost of demolishing the house even if the insured decides not to demolish it. Again,the insured would receive a windfall for a cost which is not incurred.44[114] This analysis is not limited to the extreme situation which has resulted fromthe Canterbury earthquakes. Mr Campbell urged me to consider the issue in relationto any additional work required to ensure building code compliance, for example ifthe code requires every new house to be insulated. The same analysis applies. Hadthe existing house not been insulated, Southern Response would pay for the cost ofinsulating the rebuilt house as an additional cost. It does not follow, however, that thecost should be included in the cost cap for the buy another house option, because againthat would be putting the insured in a better position than the Policy intended.[115] The issue is what the contract between the parties provides. The purpose ofthe Policy, if the house is damaged beyond economic repair and a cash payment is notelected, is to put the insured in the position he or she would have been had the damagenot occurred, with the house being put in an as new condition. That will involve someimprovement to the insured's position. It is not, however, intended that the insured isput in a better position by obtaining a house worth more than that of the existing houseonce rebuilt. Furthermore, as alluded to above, the buy another house option offersother benefits to an insured, including obtaining a new house with little delay incomparison to a rebuild, an early resumption of the rental income stream, and movingto more stable ground.43 This is based on what seems a reasonable assumption, which was not contested, that the cost offoundations (literally a sunk cost) is not reflected in a house's market value.44 Under the Policy, Southern Response has salvage rights (they are entitled to "take and keeppossession of your damaged property" and "deal with any salvage in a reasonable manner"). Theevidence was that frequently an insured simply retains the existing house and elects not to repairit because some houses which are uneconomic to repair are still liveable.(b) The Policy does not cover land[116] Another relevant aspect in this case, as far as Enhanced Foundations areconcerned, is that the Policy does not cover land. In this case, the cost of the EnhancedFoundations includes work described as "deep ground improvement". That is workrequired to be carried out to the land to enable the House to be rebuilt. The evidencefrom Southern Response was that it typically obtains a deed of assignment of theinsured's claim against EQC for earthquake damage to the land and SouthernResponse can then claim back the value of the work done to the land. If the cost ofthe Enhanced Foundations including work to the land were to be paid to the insuredunder the buy another house option, Southern Response would not be able to recoverthis part of the insurance payout.[117] I accept Mr Campbell's contention that any contribution from EQC is a matterbetween insurers and does not affect an insured's entitlement under the Policy.However, putting the EQC situation to one side, the fact that Enhanced Foundationsmay well include work to the land is a relevant consideration. The separation of thePolicy into "what we will pay" and "cover for additional costs" confirms that payingfor such works is an additional cost which the insurer will meet if the cost is incurred,albeit that it relates to the land which is excluded from the Policy. It emphasises whyany such payment is additional to the insurer's primary obligation.(c) Impact on other policies[118] Southern Response says that Shirley Investments' argument will adverselyimpact insureds covered by Southern Response's market value policies, which providea more limited form of cover than the premier policies for a lower premium. Suchpolicies provide indemnity cover but also contain "cover for additional costs" in thesame way as the Policy. This enables an insured under a market value policy to recoverindemnity value with additional payments in respect of the additional costs. However,if those costs are effectively considered as part and parcel of the "what we will pay"part of the policy, then holders of a market value policy will be disadvantaged.[119] In Mr Campbell's submission, the market value policy is not relevant tointerpretation of the Policy. It was not background context that was reasonablyavailable to both contracting parties at the time they entered into the contract. I agreewith that submission, noting the Court of Appeal has previously said the "differencein wording between this and other policies is immaterial".45Demolition costs[120] To the extent not already addressed, the same arguments apply to the questionof demolition. Mr Campbell suggested the Policy does not in fact require thatdemolition costs are incurred, only that the insured obtain approval before the costsare incurred. That is a strained interpretation to say the least.[121] The declaration sought by Southern Response does not include recognitionthat, even under the buy another house option, an insured is still entitled(conditionally) to recover demolition costs as an additional cost. Followingconsultation with the parties, the declaration sought has been amended to reflect that.Second declaration – does the buy another house option include the cost of buyingthe land on which the house is situated?[122] This question was at issue at the time of the pleadings. It is now moot asbetween the parties given the value of the other house purchased by ShirleyInvestments exceeded the cost cap. However, the parties both consider it a questionof principle which it is appropriate to address as it is of some importance and shouldnot have to wait for another case to be brought.[123] The question here is, under the buy another house option, is the maximumentitlement of an insured the value of the other house (as opposed to the land on whichit sits), even if less than the cost cap? Southern Response emphasises that the Policydoes not cover land. Mr Friar noted that in Skyward, the insured accepted the buyanother house option under a Tower policy allowed the cost of rebuilding to be appliedtoward the cost of a new house but not for the cost of buying the land. The SupremeCourt was not required to address the issue but did observe in a footnote that the basisof the position was "since Tower did not insure the land but only the house, it is logical45 Medical Assurance Society of New Zealand Ltd v East [2015] NZCA 250, (2015) 18 ANZInsurance Cases 62-074 at [21].to treat its replacement value payment obligation as triggered only to the extent thatthe insured's payment is referable to the house".46[124] Furthermore, Mr Friar submitted it would not be appropriate to requireSouthern Response to pay money towards the purchase of land in circumstances wherethe insured retains the land on which the existing house is sited. As he said, if theinsured required additional funds to purchase another house, they could sell that land.[125] Mr Friar noted that to date Southern Response has generally accommodatedcustomers who wished to apply the cost of rebuilding towards both the house and land.In many ways, it is unfortunate that a ruling is sought on this aspect as it may adverselyimpact that flexibility.[126] Mr Campbell's submissions focused on what he said was the natural andordinary meaning of the phrase "to buy another house". He said, as a matter ofordinary language, when someone talks of buying a house, they refer both to thedwelling and the land. In his submission, reading reference to buying another housein a non-technical context to mean as Southern Response contends is unreasonableand absurd.[127] Mr Campbell submitted that the interpretation allowing the cost to be appliedto the land on which the house sits is reinforced by the clause also covering "legal andassociated fees". In his submission, legal fees generally involve the complexities of aland purchase. He also suggested there would be real practical difficulties givenseparate valuations would have to be carried out.[128] Any ambiguity, in his submission, should be resolved against SouthernResponse as drafter of the Policy.[129] I am satisfied that Southern Response's interpretation is correct. The Policymakes it clear that land is not covered. It is entirely logical, therefore, that buyinganother house means exactly what it says, namely, it does not include the land. I donot accept the practical difficulties associated with that. Valuations typically separate46 Skyward SC, above n 4, at n 8.land value from improvement value. Legal costs are just as likely to be incurred indealing with aspects relating to the house itself, code compliance issues being anobvious example. I would be surprised if Southern Response were to take an undulyrigid approach to distinguishing which legal fees related to the house purchase andwhich to the land and indeed, as I have already observed, it would be a shame if thedeclaration would stifle flexibility on the part of Southern Response.[130] I am satisfied that the declaration is properly made.Result[131] For the reasons given, I make the following declarations:(a) The cost of rebuilding Shirley Investments' rental house on itspresent site under the buy another house option includes the costof rebuilding the existing foundations but does not include:(i) the cost of additional foundation work that is required toensure that rebuilding the rental house complies with thebuilding code; and(ii) the cost of demolishing the existing house.(b) The reasonable costs of demolishing Shirley Investments' rentalhouse are payable by Southern Response under the "cover foradditional costs" section of the Policy if Shirley Investmentsincurs that cost by demolishing the rental house, and if SouthernResponse approves that cost before it is incurred.(c) The amount payable by Southern Response to ShirleyInvestments under the buy another house option can be nogreater than the cost of Shirley Investments buying anotherhouse and does not include the cost of buying the land on whichthe house is situated.[132] I accept there is an issue as to costs given the nature of these proceedings. Ifthe parties cannot agree, Southern Response is to file a memorandum by 26 January2018, with any reply 14 days thereafter. A decision will be made on the papers.Thomas JSolicitors:Bell Gully, Auckland for PlaintiffShine Lawyers NZ Ltd, Auckland for Defendant