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This case grappled with the issue of how to apportion damage between multiple insured events – specifically the Canterbury earthquakes. The Court had to evaluate the efficacy of modelling in the absence of full direct evidence of the damage caused by each event.
Background
The plaintiff owned a commercial building that was indemnified by the defendant. The total sum insured was $3,482,000 per event, with cover reinstating at the end of each event. The object of an indemnity payment under the policy was to return the plaintiff to its position prior to the event of loss (ie on an old-for-old basis).
The plaintiff claimed there were five earthquake events causing loss – on 4 September and 26 December 2010 and on 22 February, 6 April and 13 June 2011. The plaintiff estimated the total amount payable for damage caused by these events at $13,100,000. In support of this the plaintiff employed modelling to identify the five events of loss and estimate the extent of damage from each. In simple terms, the model measured the ground shaking intensity of the specified earthquakes and their corresponding relative impact on the resilience of the building.
The defendant believed that only the September and February earthquakes caused damage, amounting to circa $3,985,000 applying the per event cap. It rejected the modelling as unreliable and contended that most, if not all, major elements were beyond repair after February 2011 so that subsequent damage was not material or claimable.
Modelling and the apportionment of damage
The Court acknowledged that modelling involves value judgments and, in this particular case, some of the defendant’s criticisms had merit, including the inability of the model to incorporate the effects of liquefaction. However, these were not sufficient to render the plaintiff’s model wholly unreliable. It was helpful for the purpose of understanding the relative impact of the earthquakes – as one input in the allocation of damage. In other words, the Court endorsed the use of modelling as a tool, but stressed that an overall judgment was still needed based on both the qualitative and quantitative evidence as to the likely apportionment of damage and repair across the events.
Here the Court did not accept that the December and April earthquakes were likely to have caused any damage or that the modelling estimate for the September earthquake was accurate. To this extent the model was rejected, but the scope of damage estimated by the plaintiff for the February and June events was generally accepted. The parties were invited to quantify the loss themselves based on these findings.
Material damage / constructive loss
The Court did not accept the defendant’s argument that the building was effectively destroyed after the February earthquake, such that no additional sum is payable for further damage caused by the June earthquake.
Applying Ridgecrest[1], the Court acknowledged that an insurer cannot be required to pay more than the cost to replace a damaged item. However, on these particular facts, the June repair scope submitted by the plaintiff related only to items that were not included for replacement in the February earthquake. There was also evidence (including the modelling) that the June earthquake had caused material damage (any other conclusion was thought to be “highly improbable”). The Court also seems to have been influenced by the defendant’s implied election not to give notice preventing the reinstatement of cover after the earlier and much more significant February event.
Late notice
The plaintiff failed to inform the defendant of damage after the December, April and June earthquakes, despite the policy requiring immediate notification.
For the first two of these events, the absence of notice was irrelevant as the Court had already found that no material damage was caused, although s 9(1)(b) of the Insurance Law Reform Act 1977 would not have availed the plaintiff even if they had. That section provides that time limits on giving notice are only binding if the insurer was so prejudiced that it would be inequitable not to enforce the notice provision. Here the lack of notice for December and April deprived the defendant of an opportunity to inspect the damage or stop reinstatement.
By contrast, for the June earthquake, the Court was willing to apply s 9(1)(b). Unlike December and April, this was the last of the earthquakes on which a claim was based and the second largest in order of magnitude. As a result, it was not easily missed and there was an opportunity for the defendant to observe the state of the building afterwards (albeit some time later).
Expert witnesses
Somewhat unusually, the Court was critical of the caucusing between experts in that it was not as successful as it ought to have been. The Court stressed the need for actual and apparent independence of experts, early and meaningful discussions well in advance of trial, and constant professionalism (after one unfortunate incident).
[1] Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 129, click here for our review of the decision
