The Wild South, Marriott and Crystal Imports proceedings involved commercial properties incrementally damaged in successive earthquake events. The proceedings were heard together by the Court of Appeal in August 2014. The Supreme Court’s Ridgecrest decision was released shortly after the hearing, giving the Court of Appeal opportunity to consider the scope of the indemnity principle outlined in Ridgecrest before delivering its judgment.
Merger and the Indemnity Principle
All of the proceedings concerned the application of full replacement policies, in circumstances where the sum insured was less than actual replacement cost. Had the properties been destroyed in the first earthquake, the insureds would have had to cover the shortfall. The unusual sequence of the Canterbury earthquakes, where aftershocks were more destructive than the main event, created an opportunity for insureds to bridge the gap by claiming the cost of repairing damage caused by each earthquake. There was accordingly a risk of “double counting”: claims for successive damage to an element of a building, which could be repaired at the end of the earthquake sequence for less than the aggregate of the claims.
Crystal Imports Ltd confirmed that this was, in fact, its objective. In the High Court, Cooper J had held that its claims for partial loss in the first earthquake(s) merged in its claim for total loss in subsequent earthquakes, so that only the latter loss could be claimed. This not only ruled out “double counting”, it also capped liability at the sum insured per event (as loss could only be claimed for the final earthquake).
The Supreme Court’s decision in Ridgecrest ruled out merger as a solution. However, the Supreme Court also held that the indemnity principle precludes the recovery of more than the replacement value of the property in cases where the insured property has been damaged, and then destroyed. Unless the policy deems the sum insured to be the replacement value, the indemnity principle will not prevent recovery above the sum insured to the level of the insured’s actual loss.
The Court of Appeal confirmed that the policies before it were indemnity policies, notwithstanding the provision for reinstatement on a “new for old” basis. It clarified that the indemnity principle means that where damage to a building has not been remedied when a subsequent event occurs, the insured is only entitled to recover the cost of remedying the cumulative damage. If repairs have already taken place, the insured is also entitled to recover the cost of that expenditure. The amount recovered may exceed the sum insured, provided the loss from each event is less than the sum insured.
Operation of automatic reinstatement clauses
A central issue in the appeal was the operation of automatic reinstatement clauses. All of the policies provided for a reduction in the sum insured following an event by the amount of the loss caused by that event. They also provided for automatic reinstatement of the “amount of insurance cancelled by the loss”, unless either party gave written notice to the contrary. Upon reinstatement, the insured was liable for additional premium.
The insured buildings suffered incremental damage during the Canterbury earthquake sequence, which began on 4 September 2010. Most were destroyed in the catastrophic aftershock on 22 February 2011 or in the earthquakes on 13 June 2011. Notice was not given to cancel reinstatement between the original earthquake and the aftershocks. The insurers argued that under the policies, cover only reduced or was cancelled when a payment was made on a claim. The insurer could accordingly give notice to prevent reinstatement of that cover at any time before payment was made.
The Court of Appeal held that cover reinstated immediately following the insured event. The insured became liable to pay additional premium from that time. Either the insurer or the insured could give notice cancelling reinstatement going forward, but cover (and the liability to pay premium) remained in place for the period between reinstatement and the date of notice. As notice was not given before further events occurred, the insureds were fully covered for each earthquake.
When is a building destroyed?
In Marriott, a different measure of indemnity applied if the building was damaged, rather than destroyed. If it were damaged, the obligation was to restore it to an “as new” condition. If were destroyed, it could be rebuilt to its modern equivalent.
Dobson J in Marriott concluded that a building is only destroyed when repair is physically impracticable. The Court of Appeal concluded that Dobson J’s answer was incorrect: a number of considerations may inform a trial judge’s decision as to whether a property should be restored or replaced. The measure of the insured’s loss may depend on his or her intentions for the property and reasons for owning it, as well as the policy terms. The economics and physical feasibility of the repair are both considerations. There is no uniform test: each case will depend on its own facts.
Subtraction of deductible
The Court set aside the High Court’s determination that the deductible under the Vero and QBE policies was to be subtracted from the sum payable under the policy (as opposed to the actual loss). There was no evidence as to the meaning of “adjusted loss” in each policy, which would need to be resolved at trial.
The Court confirmed that Cooper J’s interpretation of the Average clause in the Crystal Imports policy was correct. Where average applies the insurer pays the same proportion of the loss as the sum insured bears to the value of the property. The measure of the value is that used to determine the amount of loss following the destruction of the property. If the insured elects to reinstate, the measure is the reinstatement value. If the insured elects not to reinstate, the measure is the indemnity value.
Both the Ridgecrest and Wild South/Marriott/Crystal Imports decisions raise questions as to how the indemnity principle will operate in practice. The Court’s affirmation of the principle offers insurers some protection from multiple claims for the same losses.
The Lloyd’s Underwriters applied for leave to appeal to the Supreme Court on the grounds that the Court of Appeal had wrongly interpreted the automatic reinstatement clause and wrongly applied the average clause. The application for leave was declined ( NZSC 186).