Court update # 1 - Rout

Rout v Southern Response [2013] NZHC 3262

The outcomes from the Rout case are a mixed bag for claimants. The Routs won a substantially increased settlement from what Southern Response originally offered, but not the cost of replacing their home on its existing, damaged, red zoned, Brooklands site.

Justice Gendall ruled on several issues which have wide importance to other EQ claims. They are:
1.What repairs are legally necessary for homes in flood prone areas?
2.Where does the line between a repairable home and a total loss lie?
3.What costs are insured when an onsite rebuild is not going to occur due to red zoning?
4.Should general damages be paid for poor faith and delays in quake cases?

Leveling vs lifting in flood prone areas
Justice Gendall found that to repair the Rout’s home to the standard intended by the policy, Southern Response needed to take account of the home being in a flood prone area and that the entire floor level had dropped below the minimum floor level required by planning rules.

Southern Response’s repair proposal was based on leveling the slab at its post quake height. Justice Gendall rejected this, finding that the house needed to be raised to the pre-quake height. He was also critical of Southern Response’s experts who didn’t take account of the costs to repair lateral stretch in the foundations.

The 80% rule
Judge Gendall then looked at whether Southern Response could settle for repair costs (including the cost of lifting the foundations back to the pre-quake level) or whether the house was a total loss. Justice Gendall recognised and applied a long standing insurance industry practice, deciding that because the repair costs were more than 80% of the replacement cost the house must be treated as a total loss.

Rebuild costs – the actual site or a “sound” site?
The Routs had accepted the Government settlement for the red zone, so the house would not actually be rebuilt. Having decided that the claim had to be settled on the cost of a rebuild, Justice Gendall considered what should (and shouldn't) be included in those rebuild costs. This meant deciding whether the policy covered the cost to rebuild on the actual site of the Rout’s home (weakened, quake prone TC3 land requiring extensive, complex, expensive foundations), or on a “sound” site with none of these issues.

He ruled, unsurprisingly, that the settlement amounts must be based on “sound” site costs. This is because if the settlement was based on TC3 land and the Routs rebuilt on a “sound” site the Routs would be benefiting from their loss by several hundred thousand dollars in a way not intended by the policy.

General Damages
General damages are awarded for stress, hardship, and other non monetary losses. The Routs argued that Southern Response’s repeated delays and reassessments were in poor faith, and this had caused distress. Justice Gendall rejected the claim, noting the Routs had engaged in negotiations which accounted for part of the delay, and had initially claimed $1.2 million, only to withdraw the evidence of this amount during the trial.

Rout suggests that for red zone land, the approach the court will take is to:
1. Assess the actual rebuild and repair cost, if the repair is more than 80% then it’s a rebuild or replacement.
2. Determine the settlement figure based on actual rebuild costs at a “sound” site, this should be on a site with similar characteristics to the original, i.e. flat or hillside, beachside etc. Any costs which relate to rebuilding on the damaged land will not form part of the settlement.

The Routs failed in their claim for general damages, but Justice Gendall was critical of the length of time Southern Response had taken to deal with the claim, the multiple times it had assessed and reassessed the damage and failures to properly consider the extent of the damage. Given the behavior of Southern Response in a number of different claims, general damages should succeed in other cases.