This claim, Wild South and Crystal Imports all involve the application of an automatic reinstatement clause in a policy, in circumstances where the insured property sustains damage in successive earthquakes. Both Marriott and Crystal Imports make it clear that reinstatement occurs at the time of damage, and notice that cover will not reinstate must be given before a further event occurs giving rise to a right of claim under the policy.
Unlike Wild South, the judge in Marriott declined to imply a term that notice must be given within a reasonable period of the event triggering the reinstatement of cover. The judge noted the commercial common sense of providing for a period of notice before the removal of reinstatement took effect, to give the insured an opportunity to arrange alternative cover. However, this would require the implication of an additional term, which was not tested in argument and not warranted in the Marriott case.
The Marriott decision also considered the question of when a building should be treated as destroyed. The depreciated market value of the two small commercial buildings owned by the Marriotts was $460,000 plus GST. The buildings were damaged in earthquakes on 4 September 2010 and 22 February 2011. Although the buildings continued to be occupied by tenants, the insurer took the view that they were destroyed in the February event as they were uneconomic to repair (a constructive total loss).
The issue was important, as the Marriotts were claiming for additional damage caused in a later earthquake on 13 June 2011 (the total claims package was some $2.045 million). If the property had already been destroyed, there could be no further claims following the February event.
The judge held the use of the term “destroyed” in the policy related to the property’s physical state. A building is destroyed if the extent of the damage is such that it is impracticable to repair it in a way that restores it to its pre-earthquake condition.
As is the case with many policies currently under review, the Marriott policy provided traditional indemnity cover for loss or damage to the property (“old for old” cover), with an extension providing replacement/reinstatement cover on a “new for old” basis. The obligation to pay the indemnity cover arose at the time of damage; the additional liability for replacement costs arose when those costs were incurred.
Vero had the power under its policy to elect how its indemnity obligation was to be quantified. It had elected to pay the indemnity based on the depreciated replacement cost of the buildings and accordingly had no obligation to pay repair costs unless and until those costs were incurred. As a result, the insured could not pursue a claim for repair costs up to the value of the sum insured for each event.
Finally, the Marriott decision confirmed that, in the absence of a contractual provision to the contrary, the excess should be deducted from the payment due under the policy, as opposed to the total amount of the insured’s loss.
Marriott, Crystal Imports and Wild South are all being appealed, with a hearing expected later this year. We will provide an update once the judgments are available.