In our June 2015 summary, we discussed the High Court judgment of Domenico Trustee Ltd v Tower Insurance Ltd, which held that a right to choose the method for settling an insurance claim must be exercised within a reasonable time. Delay could result in the right being lost, with the election being made by the Court instead.
Domenico was followed by C&S Kelly Properties Ltd, which applied the same principles to EQC’s statutory right of election under the Earthquake Commission Act 1993. Shortly afterwards, Domenico was overturned on a pleading point and ordered for re-trial. While the Court of Appeal expressed reservations as to the substance of the High Court judgment, it did not give a final view. That is unfortunate, as the issue of delayed election features in a number of earthquake claims.
C&S Kelly Properties Ltd v Earthquake Commission  NZHC 1690
The plaintiff owned a property which had been damaged in both the 4 September 2010 and 22 February 2011 earthquakes. The house was capable of repair, but a dispute arose as to whether the floors were out-of-level due to earthquake damage or pre-earthquake settlement. If re-levelling was not required, the total cost of repairs was $53,768.50. The Court held that the floors had suffered earthquake damage, but was unable to quantify the cost of re-leveling on the evidence before it.
EQC had a right under the Earthquake Commission Act to elect whether to reinstate the property or to make a payment. In September 2014, it made an unequivocal election to reinstate. EQC claimed that its exercise of this right of election could not be challenged, other than by judicial review.
Justice Mander held that the plaintiff could challenge the election in ordinary proceedings, as if EQC had a contractual – rather than a statutory – right of election. However, the test for challenging a contractual election is high. Judicial intervention is only appropriate if there is an implied term constraining exercise of the right, or if the right is exercised in bad faith, for an improper purpose, or arbitrarily, capriciously or unreasonably in the Wednesbury sense. An election to reinstate might, for example, be irrational if the cost of repair would clearly exceed the statutory cap.
The plaintiff’s evidence did not meet the required threshold for a successful challenge. However, Mander J held that EQC’s delay in making its election to reinstate meant that it lost its right to do so. There was no “default” option for settlement under the Earthquake Commission Act, so the choice between payment and reinstatement fell to be determined by the Court.
The means by which an election should be made in these circumstances is not clear from the judgment. The authorities cited by the judge propose different solutions for dealing with an insurer’s failure to make a timely election. These solutions include:
- the right to elect is shifted from the insurer to the insured; or
- the Court makes the election for the insurer, by considering what the insurer would do, acting rationally, not arbitrarily or capriciously; or
- the Court makes the election based on the Court’s own view of what is reasonable; or
- the Court orders the insurer to make the election (specific performance).
The judgment states that the election is to be made by the Court. However, the relief ordered by the Court was a right for the plaintiff to choose between a cash settlement ($53,768.50 plus the cost of re-leveling) or holding EQC to its election to reinstate.
The outcome may have been a pragmatic solution, and the judge made it clear that he viewed the latter option as the better outcome for the plaintiff. It is however difficult to understand the legal basis on which EQC could be bound by the attempted exercise of a right it no longer had, or how a statutory power of election could be transferred from the insurer to the insured.
Tower Insurance Ltd v Domenico Trustee Ltd  NZCA 372
One month later, the Court of Appeal overturned Domenico. It noted briefly the similar views expressed by Gendall J in Domenico and by Mander J in C&S Kelly Properties Ltd.
Domenico involved a residential property insured by Tower, which had been damaged beyond economic repair. Under the terms of the policy, Tower could elect to satisfy a claim for the property’s full replacement value by reinstatement or by a cash payment. If Tower elected to make a cash payment, the insured could elect to rebuild on the existing site, rebuild on another site, or buy another house. If the insured elected to rebuild, Tower had no obligation to make a payment until rebuilding costs were incurred by the insured.
Tower did not make an election between reinstatement and a cash payment. Instead, it engaged in protracted negotiations with Domenico for a non-contractual alternative solution, namely a cash settlement based on the cost of a rebuild before those costs were incurred.
Domenico claimed that Tower’s conduct was consistent with an election to pay the full replacement value, and payment was in any event the “default” position under the policy if no election was made. The Court of Appeal disagreed: there was no election by Tower and no “default” position. Under the terms of the policy, the full replacement value was only payable once an election had been made and reinstatement costs incurred.
In the High Court, the plaintiff successfully argued that Tower lost its right of election as a result of delay. This argument was made only in closing, and was not heralded in the pleadings or dealt with by evidence or in argument. The Court of Appeal held that Tower was seriously prejudiced as a result and allowed the appeal on that basis. The matter was remitted to the High Court for a rehearing.
As a result, the Court of Appeal did not give a final view on Gendall J’s proposition that if a right of election is not exercised within a reasonable time, the Court will itself make the election. However, the Court of Appeal expressed reservations as to whether the authorities relied upon by the judge supported that proposition. It noted that if the insurer’s words or conduct were consistent with only one choice, a Court might on orthodox principles reach the conclusion that an election had been made. Alternatively, the Court could order the insurer to make an election (specific performance) or award damages in favour of the insured.
A right of election gives one party the power to choose between different contractual pathways. Once the electing party gives notice of its choice, the election binds everyone and cannot be undone. Notice can be express, but it can also be given by conduct. If steps are taken down one contractual pathway, the Court will infer that the election has been made. If a party delays a choice to diverge from a “default” contractual pathway (e.g. a choice to exercise a right of early termination), that delay may be interpreted as an election not to take the divergent option. In those circumstances, the law may be said to have made the choice for the party.
The proposition that a Court has power actively to exercise the choice for a party, in circumstances where there is no “default” pathway and election cannot be inferred, is an extension to orthodox contract law principles. The Court does not have a general power at law to vary contracts. The primary remedy for a failure to perform a contract is damages. The Court may order a party to perform the contract (specific performance) if damages are not adequate, but the Court does not perform the contract itself.
It remains to be seen whether this new judicial power is endorsed and upheld in other judgments.
 It may do so where rectification is necessary to reflect the parties’ mutual intention, of where a statutory power to vary applies (e.g. Fair Trading Act 1986 s43(3)(c), Illegal Contracts Act 1970 s7)