03.12.2014

Earthquake Commission v Insurance Council of New Zealand [2014] NZHC 3138

Background

EQC sought a declaratory judgment from the High Court to approve its policy on “Increased Flooding Vulnerability” (the “Policy”), so persons insured under the Earthquake Commission Act 1993 (the “Act”) have confidence that their settlements are based on adequate grounds.

Increased Flooding Vulnerability and Increased Liquefaction Vulnerability

EQC defines “Increased Flooding Vulnerability” as “a physical change to residential land as a result of an earthquake which adversely affects the uses and amenities that could otherwise be associated with the land by increasing the vulnerability of that land to flooding events”.

EQC’s geotechnical evaluation of damage to residential land in the Christchurch area show that up to 13,500 residential properties are now more vulnerable to flooding from lower land levels as a result of the earthquakes.

The first issue that the Court had to resolve was whether “Increased Flooding Vulnerability” constitutes “natural disaster damage” to residential land for the purpose of the Act, and if so, how EQC may settle such claims.

“Natural disaster damage” is defined in section 2(1) of the Act and means any “physical loss or damage to the property occurring as the direct result of a natural disaster”. “Physical loss or damage” is defined as any physical loss or damage to the property that is imminent as the direct result of a natural disaster that has occurred.[1]

The Court held that as a direct result of the earthquakes, there has been a reduction in the levels of the land, leaving the land more vulnerable to flooding. As the main use of residential land is a “platform for building”, land that is more susceptible to flooding is clearly less fit for that purpose. Therefore a reduction in land levels satisfies the criteria for “physical loss or damage” as the damage is already present.  The Court concluded that Increased Flooding Vulnerability constitutes “natural disaster damage” to insured residential land for the purpose of the Act, and made a declaration to that effect.

The Court also briefly looked at whether Increased Flooding Vulnerability constitutes natural disaster damage to “residential buildings” under the Act. It held that in cases where an earthquake caused reduction in levels of the land that resulted in a building sinking, but has not actually affected the physical state of the building, Increased Flooding Vulnerability does not constitute “physical loss or damage” to residential buildings.

Not only has residential land in Christchurch become more vulnerable to flooding as a result of the earthquakes, but it has also become more vulnerable to liquefaction from future earthquakes. In light of this, the Court held that for the same reasons, “Increased Liquefaction Vulnerability” constitutes “natural disaster damage” for the purposes of the Act.

The Court then considered how EQC will settle claims for Increased Flooding Vulnerability. The Court held that the declaration sought by EQC to settle land claims by providing a payment based on repair or reinstatement cost or on a “diminution of value” basis where appropriate, were consistent with its obligations under the Act to insure on an indemnity basis.

Anticipatory Relief

A second key issue that the Court sought to resolve was whether and in what circumstances the High Court is entitled to grant anticipatory relief to an insured person, either by judicial review or by declaratory judgment under the Declaratory Judgments Act 1908.

Is judicial review available?

 The Court considered whether an insured person can bring an action for judicial review against EQC in relation to the Policy. Under section 4(1) of the Judicature Amendments Act 1972, an application for judicial review can be made to the High Court “in relation to the… proposed… exercise by any person of a statutory power” to seek relief by way of declaration against that person in any such proceeding. The Court confirmed that EQC was a public body against which relief could be obtained by judicial review.

 Relief under the Declaratory Judgments Act 1908

 The Court looked at the circumstances in which anticipatory relief could be granted by way of a declaratory judgment under the Declaratory Judgments Act 1908.  That act “enables anyone whose conduct or rights depend on the effect or meaning of an instrument… to obtain an authoritative ruling…Access to the jurisdiction does not depend on there being an existing dispute”.[2]

The Court analysed past cast law on point and concluded that the High Court may provide anticipatory relief on questions of statutory interpretation if “an appropriate evidential foundation were available to enable a legal question to be determined”. It follows that in this case, there was a sufficient factual foundation on which appropriate declarations could be granted.

The Court then turned to the legitimacy of EQC’s Policy. The Court accepted that it was appropriate for EQC to formulate and apply the Policy to manage claims for statutory entitlements, however the Policy must not operate as a substitute for a statutory framework. Further, it must not be applied too mechanically, but rather be applied on a case by case basis.

The Court concluded that EQC was entitled to implement guidelines in relation to Increased Flooding Vulnerability provided EQC acted in good faith and provided that the guidelines are not applied mechanically, do not exclude consideration of factors relevant to any particular case and do not prevent claimants challenging the decision in a court by way of ordinary proceeding or judicial review.

The right to bring ordinary proceedings to enforce EQC’s statutory obligations

EQC sought a declaration that an insured person can only enforce an obligation owed by EQC by bringing an action of judicial review in the High Court. Therefore the issue before the Court was whether there was also an ordinary right of action available to an insured person against EQC concerning an unresolved insurance claim.

The Court held that the Act is a “scheme of statutory insurance”, however, this does not stop it being enforced by way of ordinary proceedings.  EQC’s statutory obligations to make right/make payment under the Act create rights in an insured person and those rights create obligations, enforceable by ordinary action.

Further, there is no express exclusion of an ordinary right of action in the Act and in many cases, judicial review will not be an appropriate mechanism to determine entitlement to payment under a statute, for example, where the obligation is of a definite nature. Therefore, the Court declined to make the declaration sought by EQC.

Back to Summary Table

[1] Section 2, Earthquake Commission Act 1993

[2] Mandic v Cornwall Park Trust Board [2011] NZSC 135

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