This case concerns an insurer’s right of election.
Tower could choose to settle the insured’s claim for earthquake damage by reinstatement or payment. It did not make an election while negotiations and proceedings were underway and the delay was unreasonable. As a result, the Court effectively substituted its own election – to settle the claim by cash payment of the indemnity value of the property, to be topped-up if actual rebuild costs were higher.
Canvassing an insured about the method for settling their claim is laudable. However, where insurers have the choice, they should carefully consider making an election once genuine deadlock is reached, such as when proceedings are issued by the insured.
Domenico owned a residential property, which was damaged beyond economic repair in the Canterbury earthquakes. The house was insured by Tower.
Under the policy, Tower could settle the claim by reinstatement or payment. If reinstatement was chosen, Tower would meet the “full replacement value” (ie the costs actually incurred to rebuild the house). If payment was chosen, Tower would pay the “present day value” (ie the indemnity value of the property).
Even though the method of settling the claim rested with Tower, it sought input from the Domenico regarding the preferred settlement option. Domenico desired a cash settlement but wanted to be paid the value of a rebuild without actually incurring rebuild costs. This was, strictly speaking, outside the policy terms. Nevertheless, discussions and negotiations proceeded on this basis. Offers were made for a cash settlement (in the region of $240,000-$270,000 gross of EQC payment) and at one point the parties got close, before Domenico issued proceedings in April 2013 claiming $842,392.
The proceeding considered: (1) whether Tower had the right to reinstate instead of paying cash; and (2) whether Tower had made a binding election to pay the rebuild costs in cash without requiring the insured actually to incur replacement costs.
Election to settle the claim
The judgment contains a helpful and comprehensive discussion about the doctrine of election in an insurance context. After surveying the authorities, Gendall J concluded:
- Tower plainly had the right to reinstate instead of paying cash, and the choice between those options rested with it;
- An election must be unequivocal, unqualified and communicated to the other party;
- Tower was obliged to elect the method of settlement within a reasonable time;
- Tower stood ready and willing to settle the claim, but had not, by words or conduct, made an unequivocal election to make a payment or to reinstate;
- The reasonable time for making an election had passed. By April 2013, 3½ years after the first earthquake, Tower had all of the material facts to settle the claim and the only impediment was the deadlock between the parties. Met with a statement of claim seeking more than treble its latest settlement offer, Tower should have realised amicable settlement was unlikely and made an election.
In the circumstances, Gendall J gave judgment that Tower was liable to pay the indemnity value of the property but, if Domenico chose to rebuild or buy another house, Tower would be obliged to meet any increase in cost in accordance with the policy terms. In reaching this finding, which had not been specifically sought by either party, Gendall J said: “I … consider, by a reasonably fine margin, as a result of effluxion of time, Tower has made an election to settle [the claim on this basis]”. Payment of the indemnity value does not appear to have been a default choice under the policy. Therefore, it seems that the Court effectively substituted its own election, which could be considered a novel approach to the doctrine of election.
This was, nevertheless, a pragmatic outcome that gave a baseline sum with the opportunity for top-up if Domenico did actually re-build the house. As there was no evidence on the indemnity value (the sums sought/offered had been based on the estimated re-build costs), Gendall J was unable to determine quantum. And with “no true victor”, costs were reserved.
Exaggerated claims have, regrettably, become commonplace in the earthquake list, and this is yet another example. Domenico initially claimed $842,392, which slowly retreated before settling on a figure of $370,000 for the purposes of trial. Gendall J observed that it was “remarkable, in a rising building market that final costs amount to only around 44 per cent of the quantum initially claimed”. Tower was less restrained in describing Domenico’s first estimates as “outrageous” and “extravagantly inflated”. It remains to be seen whether this impacts costs as it has in other earthquake cases.