In this update, we summarise significant insurance decisions released in the latter part of 2014.
Litigation arising out of the Canterbury earthquakes continues its progress through the levels of appeal. The Supreme Court’s judgment in Ridgecrest disposed of the doctrine of merger in the context of event-based policies, but identified the “indemnity principle” as a bar to the double counting of damage caused by successive earthquakes. The application of the indemnity principle was considered further by the Court of Appeal in Wild South/Marriott/Crystal Imports and by the High Court in Morrison.
The Supreme Court’s judgment in Firm PI 1 Ltd v Zurich outlined the principles which apply to contract interpretation in New Zealand. Disappointingly, the Court did not resolve the controversial question of whether pre-contractual negotiations are able to be used for the interpretation of contracts. However, the judgment signals a more conservative approach to contract interpretation, in line with that taken in England and Australia.
A more extensive discussion of particular judgments is linked to the case names highlighted in the summary table. For further information on issues raised in this update, please contact the Hesketh Henry insurance law team.
Summary of cases:
|Case||Issues||Decision / Principle|
|Ridgecrest v IAG NZ (SC)||Entitlement to recover damage caused by successive earthquakes||The doctrine of merger is inconsistent with an event-based policy, where liability is reset after each event. The indemnity principle caps claims at the replacement value and prevents claims for damage to the same elements of a building.|
|Firm PI 1 Ltd v Zurich New Zealand (SC)||Whether the sum insured was inclusive or exclusive of EQC cover
|A clause which provided that “Insurer’s liability will be limited to the amount of loss in excess of the Natural Disaster Damage cover” was interpreted in the particular commercial and factual context as meaning the sum insured was inclusive of EQC cover.|
|University of Canterbury v ICNZ (SC)||Requirement to increase the seismic strength of buildings||A territorial authority cannot require a building to be strengthened to a seismic capacity of more than 34% NBS.|
|Skyward Aviation 2008 Ltd v Tower Insurance (SC)||Interpretation of Tower’s Provider House Policy||The insured, not the insurer, has the right to elect to reinstate the property and to choose between options for reinstatement. If the insured elects to purchase a replacement property, he or she is not obliged to purchase a property which is comparable with the original property when new.|
|Wild South v QBE
Marriott v Vero
Crystal Imports Ltd v Lloyd’s (CA)
|Entitlement to recover damage caused by successive earthquakes
Automatic reinstatement of cover
When a property is destroyed
Application of average
|Where damage occurs in successive earthquakes, recovery is limited to the repair of cumulative damage and any repairs undertaken before further damage occurred.
Interpretation of automatic reinstatement clauses. Cover reinstates after each successive earthquake. Notice of cancellation can be given prospectively; cover and liability for premium remain in place until the notice date.
Destruction depends on the facts of each case; whether repairs are physically feasible is not the only consideration.
The measure of value when applying average is the elected measure of loss (indemnity value or reinstatement value, as the case may be).
|Avonside Holdings Ltd v Southern Response (CA)||Assessment of hypothetical costs of rebuild||Right to acquire another property capped at the cost of rebuilding the insured property on the existing site. Hypothetical cost of rebuild should include contingencies and professional fees.|
|New Zealand Fire Service Commission v Insurance Brokers Association Of New Zealand Incorporated  NZCA 179,  3 NZLR 541
||Calculation of fire service levies under section 48, Fire Service Act 1975 on “split tier” and “multi insured composite” fire insurance policies||Levies based on “amount for which the property is insured” could be a reference to indemnity value or the sum insured. For “split tier” policies:
1. If settlement is upon a basis no more favourable to the insured than indemnity value, and specifies a sum insured lower than its indemnity value, the levy is to be computed on the sum insured.
2. If a policy provides cover for indemnity value and contains a capped sum insured, the levy is computed on the sum insured. If the sum insured exceeds the indemnity value of the property, the levy may be calculated on indemnity value.
3. If settlement is limited to value in excess of its indemnity value, no levy is payable on the excess.
For multi insured composite policies, where separate parties insuring separately own property under a single contract of insurance, policy to be viewed as a single contract of insurance and only one levy is payable.
|Islington Park Ltd v Ace Insurance Ltd  NZCA 446, (2014) 18 ANZ Insurance Cases 62-038||Contract interpretation||Interpretation of the contractual measure for a deemed total loss. Specific to the policy in issue.|
|Bridgecorp Ltd (in rec & liq) v Lloyd’s  NZCA 571
||Extra territorial reach of s 9 of the Law Reform Act 1936||Claim under s 9, Law Reform Act 1936, against London-based underwriters. Policy provided for governance by NZ law and exclusive jurisdiction of NZ Courts. However, debts payable under the policy would be located in England (underwriters’ place of business). NZ Court lacked jurisdiction to make orders under s 9 requiring the underwriters to pay anyone other than the insured.|
|Jensen v Rameka (HC)||Exemplary damages||First case of exemplary damages being awarded against a solicitor for professional negligence.|
|Morrison v Vero (HC)||Assessment of damage in multiple earthquake events||First application of indemnity principle to a substantive claim. Computer model applied to assess damage attributable to each event. Relief under s 9(1)(b) of the Insurance Law Reform Act for late notification of damage.|
|Earthquake Commission v ICNZ (HC)||Approval of EQC Policy for Increased Flooding Vulnerabiity||Increased Flooding Vulnerability and Increased Liquefaction Vulnerability constitute natural disaster damage under the EQC Act. The EQC’s Policy is consistent with its statutory obligations. Claimants may challenge EQC decisions by judicial review or in ordinary proceedings.|
|Kraal v Earthquake Commission  NZHC 919,  3 NZLR 42, 18 ANZ Insurance Cases 62-015
||Whether loss of a right to occupy due to a risk of future damage is “physical loss or damage to the property”||“Red Zone” property owners unable to occupy home because of risk of rock falls and potential injury. Owners unsuccessfully sought declarations that loss of possession and use constituted “natural disaster damage” under the EQC Act and “damage” under a private insurance policy. Inability to occupy is a “loss of the ability to exercise a legal right… not ‘physical loss…to the property’”.|
|Marac Finance Ltd v Vero Liability  NZHC 1974||Quantification of loss under Commercial Crime Policy||Endorsement did not alter the meaning of the operative clause of the policy, acted instead as an exclusion clause. Failure to comply with an arbitration clause will not result in indemnity costs if party has elected to submit to litigation.|
|Michalik v Earthquake Commission  NZHC 2238||Meaning of “indemnity value” in Earthquake Commission Act 1993||Indemnity value of a 37 year old retaining wall under the EQC Act is its depreciated replacement value. Review of meaning of indemnity value under the EQC Act and at common law.|
|JCS Cost Management v QBE  NZHC 2718||Policy responds to claim made, not conduct of insured||Policy provided cover for civil liability for conduct in connection with a professional business practice. The claim made against the insured was for conduct which did not fall within the scope of cover. The policy would not respond, even if the evidence proved that the insured’s conduct was in fact connected to his professional business practice.|
|MacDonald v Tower Insurance  NZHC 2876||Admissibility of evidence||Challenge to admissibility of briefs of evidence prior to trial. Examples of inadmissible evidence from litigation support agencies/funders and non-experts.|