9.05.2018

Crystal Imports Ltd v Certain Underwriters at Lloyds of London [2013] NZHC 3513

Like Ridgecrest, Marriott and Wild South,[1] this claim concerns damage sustained by an insured property in successive earthquake events.  The question arising in all of these claims is whether the insured can claim the cost of remedying damage caused by each earthquake.  Crystal Imports is of particular interest due to Cooper J’s decision that the doctrine of merger applied to the material damage policy at issue in that proceeding.

Crystal Imports owned five properties in Christchurch damaged in the 4 September 2010 earthquake and the 22 February 2011 earthquake.  The insurer had paid $70,000 towards investigation and repair when the February earthquake struck, but the majority of the repairs had not been done.  Three of the five properties were subsequently demolished.

The insurance policy included a provision for the automatic reinstatement of cover following an event of loss, unless either party gave written notice to the contrary.  Notice was not given in the period between the two earthquakes.

The Court held that the insured’s right to be indemnified by the insurer arose when physical damage to the property occurred during each earthquake.  Cover was reinstated at the same time.   Subsequent notice to the contrary would mean that the reinstatement of cover was not effective, but notice had to be given before a further loss-causing event took place.

The insured was accordingly entitled to have the property reinstated after each earthquake up to the maximum limit of cover.  However, the Court held that the doctrine of merger means that a partial loss which is not repaired merges into a subsequent total loss.  As a result, the insured was only entitled to claim for the total loss in the February event, although the insurer remained liable for the cost of investigations and repairs which had already been incurred.

The doctrine of merger has only previously been applied in marine insurance cases, where the obligation to pay for unrepaired damage to a vessel does not arise until the repairs are undertaken.  Cooper J disagreed with the High Court judgment in Ridgecrest, where Dobson J took the view that merger does not apply to wider categories of material damage insurance.  The Court of Appeal in Ridgecrest did not express a view, but the issue was the subject of extensive argument before the Supreme Court.  The Supreme Court’s judgment, which has yet to be delivered, may clarify the issue of whether merger applies to event-based policies, where liability arises when the damage is incurred.

Crystal Imports also reviewed the meaning and effect of an Average provision in the policy.  Average clauses address under-insurance, by reducing the amount payable under the policy for loss in proportion to the difference between the sum insured and the true value of the property.  The dispute in Crystal Imports concerned the basis on which the true value should be calculated; the insured asserted the value was the depreciated replacement cost at the time of the February earthquake ($4,580,000), the insurer said it was the full replacement cost on the same date ($9,569,320).  The former measure would limit recovery to 67% of the loss, the latter to 32% of the loss.

The judge held that the appropriate measure depended on whether Crystal Imports elected to reinstate the property.  The policy included a reinstatement memorandum (“new for old” cover), which did not apply if the insurer chose not to reinstate.  The policy did not specify the method by which the indemnity would be calculated in that event.  The Court held that “generally applicable principles” meant that the indemnity would be based on the depreciated replacement cost of the property or the market value loss.  If Crystal Imports elected not to reinstate, the true value of the property for applying Average was the depreciated replacement cost.

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[1] Ridgecrest New Zealand Ltd v IAG New Zealand [2013] NZCA 291, [2013] 3 NZLR 618 (CA), Marriott v Vero Insurance New Zealand Ltd [2013] NZHC 3120, Wild South Holdings Ltd v QBE Insurance (International) Ltd [2013] NZHC 2781
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