03.12.2014

QBE Insurance (International) Ltd v Wild South Holdings Ltd Marriott v Vero Insurance New Zealand Ltd Crystal Imports Ltd v Certain Underwriters at Lloyd’s of London [2014] NZCA 447, (2014) 18 ANZ Insurance Cases 62-037

The Wild South, Marriott and Crystal Imports proceedings involved commercial properties incrementally damaged in successive earthquake events.[1]  The proceedings were heard together by the Court of Appeal in August 2014.  The Supreme Court’s Ridgecrest[2] 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.

Average

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.

Comment

 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 ([2014] NZSC 186).

Back to Summary Table

[1] For our commentary on the High Court proceedings, click here for Wild South, here for Marriott and here for Crystal Imports

[2] Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 129, click here for our review of the decision

Do you need expert legal advice?
Contact the expert team at Hesketh Henry.
Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

Related Articles / Insights & Opinion

iStock
Parker v Magnum Hire: A new era of personal grievance remedies awarded in the Employment Relations Authority?
If you heard a sudden loud noise last week – no it wasn’t a jet plane flying overhead, it was the gasp of employment lawyers across New Zealand when the Employment Relations Authority published it...
26.02.2024 Posted in Employment
employment dictionary website
Banding together: the Court’s new approach to awards for injury to feelings
One of the key remedies available to an employee who has successfully established a personal grievance in the Employment Relations Authority (Authority) or the Employment Court (Court) is compensation...
23.02.2024 Posted in Employment
Trust liability under the Health and Safety at Work Act
WorkSafe New Zealand v RH & JY Trust & ors
21.02.2024 Posted in Health & Safety & Private Wealth
New year, new government, new policies: what’s on the cards for employment law in 2024?
As we have been known to say once or twice (okay, maybe every year!) employment law never stands still. New governments can also spell major change, and this time is no exception. As you will likely h...
14.02.2024 Posted in Business Advice & Employment
Family Hands Paper Dolls Wide BW
Variations of Trust: Court’s Position Confirmed
Last year we published an article titled Variations of Trust: Obtaining the Court’s Blessing on the High Court decision in Re Jury Family Trusts [2022] NZHC 568 (Re Jury). In Re Jury, the High C...
05.02.2024 Posted in Private Wealth
Employment Law Wide
Trials and tribulations of trial periods – what an employer needs to know
If, like us, you were doing last minute Christmas shopping, you might have missed that the Employment Relations (Trial Periods) Amendment Act 2023 (Act) received Royal Assent and came into effect shor...
19.01.2024 Posted in Employment
iStock  Warning Speech Bubble Colour
A warning about warnings
It can be tempting for an employer to think that it is only a dismissal that requires a disciplinary process, and that a warning or a final warning can be issued simply by notifying the employee.  Be...
13.12.2023 Posted in Employment
SEND AN ENQUIRY
Send us an enquiry

For expert legal advice, please complete the form below or call us on (09) 375 8700.