Insurance Case Law Update December 2013

Introduction

As expected, the Canterbury earthquakes have resulted in a plethora of insurance litigation. The Christchurch High Court has a dedicated earthquake list to deal with the volume of cases.

In this update, we provide a summary of key decisions issued over the past 12 months. More detailed information on judgments having a wider impact on the insurance sector and the general law is linked to the case names highlighted in the summary table.

Summary Table

Case	Issues	Decision/Principle
Ridgecrest v IAG NZ (CA)	Whether an insured is entitled to the aggregate value of multiple losses during the period of insurance	Ridgecrest’s policy provided cover for repair / replacement under two alternative clauses – C1 and C2. Ridgecrest’s claim had been made under C2, which did not entitle it to the aggregate value of damage caused by each earthquake (or happening). Instead, Ridgecrest’s cover was limited to the cost of the uncompleted repairs actually carried out and the cost of replacing the building up to the limit of indemnity. Had the claim been made under C1, the outcome might have been different given the wording of that alternative clause, but it was said to be too late for Ridgecrest to change this. Ridgecrest has leave to appeal to the Supreme Court.
Minister for CER v Fowler (CA)	Lawfulness of 50% rateable value offer to owners of vacant land and uninsured improved properties in the red zone	The red zone was lawfully created. The Government’s decision to make 50% offers for vacant land and uninsured improved properties in the red zone was not lawfully made because it did not properly address the purposes of the CER Act, which is to enable people to recover from the earthquakes.
O’Loughlin v Tower (HC) Skyward v Tower (HC) Rout v Southern Response (HC)	Whether the red zone creates an insurable lossNovel repair methods Rebuild costs	The creation of the red zone did not give rise to a claim under the insured’s home policy.The insurer was prevented from paying a (lower) sum for notional repair costs based on a technique that was risky. If the insurer paid the notional rebuild costs instead, this should be based on the (lower) cost of rebuilding at a good site, since the insured had no intention of rebuilding on the existing damaged/vulnerable site. A house is only economic to repair if the actual repair costs are less than 80% of a full rebuild estimate (Rout).
Zurich v BC 398983 (CA)	Whether 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 context as meaning the sum insured was inclusive of EQC cover.
University of Canterbury v Insurance Council & Ors (CA)	Whether local authorities can require owners to increase the seismic strength of buildings above 34% NBS	A territorial authority cannot require a building to be strengthened to a seismic capacity of more than 34% NBS
IAG NZ v Jackson (CA)	Whether “in connection with” requires a direct causal connection Dishonesty exclusion	The phrase “in connection with” requires some causal or consequential relationship, but it does not need to be a direct or proximate cause. Here, insurers could rely on an exclusion in the insured broker’s professional indemnity policy which excluded cover for civil liability in connection with a dishonest act. The broker’s apparent dishonesty about whether his client’s insurance had been arranged came after his initial inadvertent failure to place the cover in the first place. The broker’s client sued after suffering uninsured earthquake damage.
Wild South v QBE (HC)	Automatic reinstatement	The particular policies included automatic reinstatement clauses. Cover reinstated automatically if no notice was given within a reasonable period following the first earthquake. What is reasonable will depend on the knowledge and conduct of the parties after each event, but will not normally extend to the date of payment of the first claim.
Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2013] NZHC 1433	Assessment of nominal costs of rebuild	Builders’ margin to reflect amount charged by a reasonable contractor, not special rates available under preferred agreement arrangements. Allowances for professional fees should reflect fees necessary for a rebuild of the damaged property, rather than a new build. The assessment can be discounted to take account of reusable parts. No allowance should be made for contingencies.
TJK (NZ) Ltd v Mitsui Sumitomo Insurance Co Ltd [2013] NZHC 298	Obligation to pay indemnity value prior to reinstatement	No rule of law that indemnity value is immediately payable when an insured elects reinstatement. On the terms of the policy at issue, the insured was entitled from the date of damage to an indemnity for its loss. The difference between the indemnity value and reinstatement cost became payable when the insured incurred those costs.
Morley v Earthquake Commission [2013] NZHC 230	Whether boarding houses are entitled to cover from EQC	A boarding house is a dwelling insured under s 18 of the Earthquake Commission Act 1993.
McLean v IAG NZ [2013] NZHC 1105	Whether rebuild costs include professional fees	The “reasonable cost to repair or replace” a house included professional fees.