03.12.2014

Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand [2014] NZSC 147

This judgment resolved a preliminary question over the interpretation of a replacement policy for a residential apartment complex which was destroyed during the Canterbury earthquakes.  The policy had a maximum limit (sum insured) of $12.95m, which was based on a pre-earthquake estimate of its replacement value.   The actual replacement cost was $25m.

The dispute turned on clause MD15 of the standard Brokernet policy wording, which read:

In the event of the Insured having insured residential property for which compulsory Natural Disaster Damage cover under the Earthquake Commission Act 1993 applies then in the event of such property suffering Natural Disaster Damage during the Period of Cover and covered by Natural Disaster Damage cover, then the Insurer[‘]s liability will be limited to the amount of loss in excess of the Natural Disaster Damage cover.  (our emphasis)

Zurich claimed that “loss in excess of Natural Disaster Damage cover” meant “insured loss”, so that its liability was limited to the difference between the statutory cover provided by EQC and the sum insured (i.e. $12.95m less EQC cover of $6.8m).  The insured claimed that “loss” meant “actual loss”, so that the cover provided by EQC was deducted from the replacement cost of $25m, leaving Zurich liable for the full amount of the sum insured.

The factual background was provided by affidavit.  The Body Corporate’s broker had sought quotes from various insurers based on a replacement cost estimate of $12.95m and the Brokernet policy wording.  Zurich provided rates, which the broker used to calculate the premium.  Its calculation assumed that Zurich would cover the difference between EQC cover and the sum insured (i.e. $6.1m).

The High Court found that the broker knew from its market experience that the premium was calculated on a net liability basis and in fact had calculated the premium on that basis.  The Body Corporate was fixed with that knowledge.

Both the High Court and Court of Appeal outlined the approach to contract interpretation set out in Vector and quoted Tipping J’s statement that the ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear.[1]  They differed in their view of the plain words of MD15.  The Court of Appeal held it was apparent from the factual background that both parties intended cover to be limited to the difference between EQC cover and the sum insured.

The grant of the application for leave to appeal to the Supreme Court aroused some interest, as it promised to resolve a controversy as to whether, and to what extent, Vector allowed pre-contractual negotiations to be used as an aid to contract interpretation.  The Court of Appeal has taken the view that such materials are admissible.[2]  However, the Supreme Court has hinted in a number of judgments that it might take a contrary view if and when the opportunity presents.

Disappointingly, Zurich left this issue unresolved.  The majority found the document with the premium calculation was in fact the original policy certificate (as opposed to negotiation materials).  When the certificate and Brokernet wording were read together, it was clear that cover was limited to the difference between EQC cover and the sum insured.  Although the subsequent policy certificate did not set out the basis for the calculation of premium, the Brokernet wording was interpreted consistently across the policies.  The minority judges disagreed with the conclusion, but not the approach.

As a result, Zurich is largely confined to its facts.  It is a further signal that the Supreme Court is taking a more conservative approach to contract interpretation, and is likely to use opportunities which present to bring New Zealand into line with the United Kingdom and Australia.[3]  The Court made it clear in Zurich that the words of the contract are of central importance, and contextual interpretation may have little part to play if the parties know that third parties will rely on the words that have been used.

[1] Vector Gas Ltd  v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at [19]

[2] i-Health Ltd v iSoft NZ Ltd [2012] 1 NZLR 379 (CA)

[3] See for example [60]-[63].  The Court preferred the English test for contract interpretation to the test outlined by Tipping J in Vector and quoted in the Courts below

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