When a construction project goes wrong and property damage occurs, emotions can run high. Homeowners naturally want their property restored to perfection. However, a common point of friction arises regarding who pays for what.
The good news is that in law a builder is not legally liable for "betterment," but is only liable for the actual value of the property they have damaged.
In legal terms, property damage claims are governed by the principle of indemnity. The goal is to put the injured party back into the exact financial position they were in right before the damage occurred, no better and no worse.
What is Betterment? Betterment occurs when a replacement or repair increases the value of the property or extends its useful life beyond its original pre-damaged state.
Imagine a builder is operating a heavy excavator on a client’s property. While maneuvering, the excavator tracks damages substantial portions of the driveway.
Because of the extensive damage the driveway cannot simply be patched, it must be completely ripped out and replaced. The total cost to replace the driveway comes to $15,000.
However, the original driveway was 15 years old and already showing signs of standard wear and tear.
Under the law, the builder is not liable for the full $15,000 replacement cost.
The Betterment: if the builder pays $15,000 for a brand-new driveway, the client gets a driveway that will last another 30 years. The client’s property value has been enhanced, and they have been saved from the future maintenance costs they would have naturally faced. This is "betterment."
The Legal Liability: The builder is only liable for the value of what they destroyed, which was a driveway halfway through its useful life. If a standard driveway lasts 30 years, this driveway had depreciated by 50%. Therefore, the builder’s actual legal liability is capped at the indemnity value: $7,500.
If the client demands $15,000 directly from the builder they are not entitled to this as the builder is not liable for the betterment component. Instead, they should claim on their property insurance, which will in most cases be a "replacement value" policy.
1. The Client Claims on Home Insurance: The insurer pays the full $15,000 to get the new driveway built.
2. The Insurer Recovers via Public Liability: The client's insurer then goes after the builder’s Public Liability insurance to claw back their losses.
3. The Settlement: Legally, the builder’s liability insurer will only pay the client's insurer the depreciated value ($7,500).
In the end, the client gets their replacement driveway, the builder is only held legally liable for the actual value of the damage they caused, and the insurers absorb the commercial contractual differences.
An Auckland developer was convicted of breaching their Resource Consent and fined almost $50,000. Site run off is a common example of a Resource Management Act breach. Statutory liability insurance no longer covers RMA fines.
In this case of a contract works insurance claim for storm damage the Court held that the insurers were liable for the remedial work to fix the damage, even though the same work was required to fix defective work.
In a recent case the Court of Appeal found that builders who assume responsibility for construction are, like Councils and developers, generally subject to a legal duty to ensure compliance with the Building Code, even if they have delegated the work to subcontractors. The Building Act already makes this clear for residential building work and builders can’t contract out of it.
