Judgment pins liability on insurers for defective repairs
Late last year, the High Court released its judgment in the long-standing dispute over defective earthquake repairs between the Sleights and their insurer, IAG. Described by IAG as a “test case”, the decision determined an insurer’s potential liability under a “pay” policy for defective repair works completed by a contractor engaged by the insured.
The Court found that IAG had breached its policy obligations to pay for repairs to the Sleights’ home to a “when new” condition. It also found IAG liable under the Consumer Guarantees Act (CGA) for not ensuring that repairs were carried out with reasonable care and skill, notwithstanding that the repairs were undertaken by a builder engaged by the insured and not by IAG. The case raises the spectre for insurers in that they will continue to be liable even after they pay for repairs and that they cannot simply point to the contractor (even if they were engaged by the insured directly) who carried out defective repairs.
The Sleights’ home was damaged in the Canterbury earthquakes. Their policy required IAG to pay for the costs of repairing or rebuilding their home to a condition as similar as possible to when it was new, i.e. a “when new” rather than “as new” policy standard.
IAG facilitated repair works under its Managed Repair Programme, which IAG established to address the high volume of earthquake related claims and repairs it had to deal with. IAG contracted with Hawkins as project manager and a number of builders, including Farrells. IAG required Hawkins to certify completion of relevant scoped works undertaken by Farrells before IAG would pay for repairs. Significantly, the building contract was entered into between the Sleights and Farrells – IAG was not a party.
Farrells’ repairs were signed off by Hawkins but were ultimately found to be defective. One of the key areas of the defective repairs was to the foundations, which never received a code compliance certificate. The Sleights sought to recover the cost of repairing the defective works from Farrells and Hawkins. Both were in liquidation, so the Sleights also claimed the cost of the repairs against IAG.
IAG had extensive control over Hawkins, including the ability to:
- review the calibre of its employees;
- require any of them to be removed or reassigned;
- control the number of employees working; and
- inspect all records and have all access to the personnel, premises, facilities, or data of any builder.
The Court was satisfied that the terms of the contract were such that they conferred on Hawkins, acting on behalf of and controlled by IAG, and on IAG directly, most of the rights and obligations which would normally be conferred on the Sleights as owners.
The claims against IAG were that IAG:
- breached its obligations under the insurance policy; and
- breached its statutory guarantee as to reasonable care and skill in the provision of services under section 28 of the CGA.
IAG breached its policy obligations
The Court found that the policy was a costs-incurred “to pay” policy, not a reinstatement policy. As such, IAG’s contractual promise was to pay the cost of repairing the Sleight’s home to a “when new” condition as opposed to effecting repairs to the same standard. An important aspect of the “when new” requirement, particularly for the elderly Sleights, was the requirement that any repairs to this standard are required to be completed in terms of a building consent issued by the local Council and a CCC would be issued for that work.
IAG argued that its payment obligation was discharged following completion of the repairs, on the basis that it had paid for adequate repairs, notwithstanding that only the Sleights had entered into the contract with the builder. The Court rejected that proposition as being inconsistent with the policy obligation which, properly interpreted, could only be discharged when the home was returned to its condition when new. Therefore, as the defective repair works never met this standard, IAG had breached its obligations under the policy because it had failed to return the home to its when new condition. For example, the foundations were never repaired to a “when new” standard as the repairs never received a code of compliance. The result is that IAG was effectively found liable for defective work, even though that work was performed by a third party builder, Farrells, under a contract between the Sleights and Farrells.
The Sleights also advanced an argument that there was an implied term that repair work must be carried out to a reasonable and workmanlike standard. This was quickly dismissed by the Court as the policy was a ‘pay’ policy, it was not one where IAG had an option to undertake or arrange repairs itself. Once the correct scope of indemnity was identified, it was no longer necessary to argue whether there was an implied term.
Therefore, as the defective repair works never met this standard, IAG had breached its obligations under the policy because it had failed to return the home to its when new condition.
Breach of the CGA?
The Sleights also alleged that IAG had breached section 28 of the CGA, which provided for a guarantee of reasonable care and skill in respect of the services it provided.
The CGA applied because the Sleights were ‘consumers’, and since IAG arranged for Hawkins to provide services for the benefit of its consumers, IAG was in trade and provided ‘services’.
Services were supplied by IAG to the Sleights in the following ways:
- directly, through its Managed Repair Programme, which included its selection and management of Hawkins and Farrells;
- indirectly, through procuring Hawkins as IAG’s project management partners on behalf of IAG to provide services such as monitoring repair work; and
- directly, by making payments to Farrells under the Building Contract, effectively being an overpayment to Farrells for uncompleted work.
The key finding by the Court was that Hawkins and IAG had a fundamentally different view of Hawkins’ role in the project. The Managed Repair Programme was flawed in that IAG believed Hawkins would actively supervise the quality of repair work, but Hawkins believed that it did not have such an obligation. This resulted in Farrells’ building work being unsupervised and defects unidentified. This misunderstanding was unknown to the Sleights.
The Court found that IAG knew, or ought to have known, that Hawkins was not monitoring the quality of building work. IAG’s conduct therefore breached its obligation to carry out its services under the CGA with reasonable care and skill and its indirect services by procuring Hawkins contributed to its liability.
We think that some of the findings in this case are questionable. However, we understand that it will not be appealed, so for the time being, insurers of “pay” policies will, as a general rule, need to ensure that building works are carried out satisfactorily so as to result in the repaired element meeting the policy standard. Any failure to meet the policy standard is likely to result in the insurer being found liable to continue making payments until it is met.