The plaintiffs owned two commercial buildings that were insured by QBE for $3,610,000 and $3,035,700. Each policy included an automatic reinstatement provision in the event of loss, subject to either party giving notice:
In the event of a loss for which a claim is payable under Part 1, and in the absence of written notice by QBE or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The Insured undertakes to pay such pro-rata premium at the rate applicable to the item(s) concerned as may be required for the reinstatement.
In the absence of written notice by the Insurers or the Insured to the contrary, the amount of insurance cancelled by loss or damage is automatically reinstated as from the date of loss or damage. The Insured undertakes to pay such pro rata premium at the rate applicable to the item or items concerned as may be required for reinstatement.
Both buildings were damaged in the Christchurch earthquakes and the replacement cost of each was assessed at more than $8m – well above the limits of indemnity. Neither party gave notice to preclude the operation of the automatic reinstatement clauses after each earthquake.
The judgment considered a number of preliminary issues regarding the construction of the two policies, including the operation of the automatic reinstatement clauses.
QBE contended that reinstatement only occurs when the amount of insurance arising out of the loss or damage is paid. If notice is given prior to paying a claim, the policy will not reinstate and any loss or damage that occurred after the first loss would not be covered. QBE argued that this would not adversely affect an insured person who is fully insured for reinstatement; only those who under-insure (as here) would be affected and the plaintiffs ran that risk when entering into the policies.
The plaintiffs’ position was that the policies automatically reinstated on the date of loss and that this could only be set aside by notice prior to the next event that causes loss. They pointed out that QBE’s interpretation would allow QBE to give notice preventing reinstatement after there had been subsequent events causing loss (e.g. further earthquakes) for which the insureds reasonably assumed they had cover. The plaintiffs argued that this would be commercially absurd.
The Court discussed the general principles of interpretation of insurances policies. Contracts of insurance are to be read like any other contract made in a commercial setting and their meaning should be ascertained objectively, based on what the parties reasonably would have understood the words to mean. The relevant background will drive that assessment.
In this case, the Court did not gain assistance from Re Earthquake Commission  3 NZLR 695 (HC) (a decision founded upon a reinstatement clause that differed from the present wording – where reinstatement was expressly provided for on payment of a claim). Each policy is to be interpreted on its own wording and in its own commercial context. The Court also found that there is no common law of reinstatement in New Zealand that would affect the interpretation of insurance policies in relation to clauses such as these.
The Court found that “automatic” meant that reinstatement would happen automatically i.e. without the need for either party to do something positive to trigger it. Therefore, if neither party gave notice, at some point the cover would automatically reinstate. The problem was that the clauses did not specify a time for the trigger.
The Court rejected QBE’s argument that the trigger occurred when the loss from the original event is settled and paid. While the plaintiffs’ decision to deliberately under-insure was relevant to the commercial context, it was not determinative. QBE’s interpretation would leave the plaintiffs not knowing whether to rely on the clauses or to seek further insurance from the market, which does not make commercial common-sense.
The Court drew a link between “automatic” and the fact that reinstatement was to take effect from the date of the original loss. This suggested the trigger was intended to happen either immediately or promptly after the loss subject to notice. The Court rejected immediate reinstatement on the basis that the parties must have an opportunity after the loss occurred to analyse the implications and decide whether to give notice. Therefore, to give business efficacy to the clauses, the Court determined that the parties had a reasonable time after the original loss. If no notice was given within a reasonable time, the cover would automatically reinstate.
What is a reasonable period will depend on the knowledge and conduct of the parties after each event (here, each earthquake), which would need to be determined with evidence at trial. However, the Court made it clear that a reasonable period would not extend to completion of the loss adjustment process and payment of the first claim (as QBE had argued).
This case, like many others, will see insurers and brokers revisit their policy wordings. We expect that automatic reinstatement clauses will in the future include a defined trigger – possibly by reference to a specific time period. However, clauses that expressly preclude reinstatement until the original loss has been paid are likely to be unattractive to insureds and could leave them uncertain about whether they need to purchase further insurance following an insurable event.