Ridgecrest is the first of a series of proceedings which addresses the vexed issue of incremental damage arising from multiple earthquake events.
Ridgecrest owned a commercial building damaged by earthquakes on 4 September 2010 and 26 December 2010. Limited repairs were undertaken after each earthquake, but all work ceased on 22 February 2011 when a further earthquake struck. There is an ongoing dispute as to whether the building was destroyed on 22 February, or by a later earthquake on 13 June 2011.
The building was insured under a full replacement policy, with a maximum liability for any one “happening” of $1,984,000. That sum was considerably less than the building’s replacement value.
The parties asked the High Court to determine a preliminary question – is the plaintiff entitled to be paid for the damage resulting from each happening up to the limit of the sum insured in each case? The High Court’s response was that the insurer’s liability was limited to the cost of repairs actually undertaken and the maximum sum of $1,984,000 for the final destruction of the building. The Court of Appeal reached the same conclusion, but on different grounds.
By contrast, the Supreme Court held that, on the specific wording of the policy, Ridgecrest was entitled to be paid for damage up to the limit of the sum insured for each of the earthquakes. The total claim could not exceed the actual replacement value of the building and there could be no “double counting” (multiple claims for the same damage).
Much of the argument focused on the doctrine of merger, which had been rejected by Dobson J in the High Court, but accepted by Cooper J in the Crystal Imports proceeding. IAG argued that Ridgecrest’s claims for partial losses from the earlier earthquakes merged into the total loss suffered in the final earthquake. The Court reviewed the marine insurance cases in which the doctrine of merger arose. It identified material differences between IAG’s policy and the marine insurance policies which meant that merger was inconsistent with the policy terms. They were:
- The policy provided for both indemnity and replacement cover and therefore it was possible the insured could make a profit, in the sense it could recover on a replacement basis more than the actual (indemnity) value of the building.
- The policy did not operate on the basis of a loss assessed at the end of the risk period, but on each happening.
- IAG was liable to make a payment regardless of whether repairs were done.
- A cause of action in respect of the losses caused by each earthquake accrued immediately.
- The liability limit was reset after each happening.
The Court went on to consider the effect of the indemnity principle on Ridgecrest’s claim. The principle states that an insured cannot recover more than its loss. Noting that “indemnity principle” is an awkward phrase in the context of a replacement policy, the Court accepted that it precluded recovery of more than the actual replacement value of the property (as distinct from the sum insured). It also prevented claims for incremental damage to the same elements of a building. While the Court noted that it is possible for parties to deem the sum insured to be the replacement value in their policy, it declined to take that approach in Ridgecrest, due to the policy wording and the presentation of the argument before the Court.
Ridgecrest may be the end of the road for the merger doctrine in the context of event-based liability policies. The scope and application of the indemnity principle will no doubt be the subject of further argument, depending on the facts of particular claims. The principle was reviewed by the Court of Appeal in Wild South/Marriott/Crystal Imports and by the High Court in Morrison, which are discussed elsewhere in this update.
 Read our commentary on the Court of Appeal decision here