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The Salisbury Park Apartment complex in Christchurch, insured by Zurich, was badly damaged in the 22 February 2011 earthquake. The likely cost of reinstatement was $25m, but replacement cover under the Zurich policy was capped at $12.95m. The apartments also had cover under the Earthquake Commission Act 1993 and the maximum amount of $6.8m had been paid by EQC.
The Body Corporate claimed that it was entitled to be paid $12.95m under the policy, in addition to the $6.8m received from EQC (i.e. a combined payment of $19.75m). Zurich said that the Body Corporate’s cover was capped at $12.95m in total, $6.8m from EQC and $6.1m from Zurich.
The dispute turned on clause MD15 of the Brokernet policy wording, which read:
In the event of the Insured having insured residential property for which compulsory Natural Disaster Damage cover under the Earthquake Commission Act 1993 applies then in the event of such property suffering Natural Disaster Damage during the Period of Cover and covered by Natural Disaster Damage cover, then the Insurers liability will be limited to the amount of loss in excess of the Natural Disaster Damage cover. (our emphasis)
It was common ground that MD15 reversed the statutory presumption in s 30(1) of the Earthquake Commission Act that a private insurance policy responds first to natural disaster damage. The question was whether the insurer’s liability under MD15 was limited to the insured loss in excess of the statutory cover (i.e. the sum insured of $12.95m less $6.8m) or the actual loss in excess of the statutory cover (i.e. the reinstatement costs of $25m less $6.8m), subject to the cap of $12.95m.
The factual background to the claim was provided by way of affidavit. The Body Corporate’s broker, ACM, had sought quotes from various insurers based on a replacement cost estimate of $12.95m and the Brokernet policy wording. Zurich provided rates, which ACM used to calculate the premium. The premium calculation assumed that Zurich would cover the difference between the statutory cover and the sum insured (i.e. $6.1m).
The High Court found that ACM knew from its market experience that the premium was calculated on a net liability basis and in fact had calculated the premium on that basis. The Body Corporate had engaged ACM for its expertise in the insurance market and ACM’s knowledge as an “agent to know” was accordingly imputed to the Body Corporate. As the Court of Appeal noted at paragraph [16] of the judgment, it follows that the parties to the policy agreed that Zurich would provide cover of $6.1m.
As stated by Tipping J in Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 at [19], the ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. Evidence is assessed on an objective basis, taking into account the commercial or other context in which the contract was made and all facts and circumstances known to and likely to be operating on the parties’ minds.
The High Court held that the plain words of MD15 meant that Zurich’s liability was measured against the actual loss, not the insured loss. Having correctly stated the test in Vector, the Full Court then misapplied it, by focusing on the objective commercial sense of an agreement to provide cover for $12.95m in return for a premium based on $6.1m, rather than the actual intention of the parties (objectively assessed). The Court of Appeal overturned the High Court’s judgment: it was apparent from the factual background that both parties intended cover would be limited to the difference between statutory earthquake cover and the sum insured.
The Court of Appeal disagreed with the High Court’s view of the plain words of MD15. It is not clear whether the Court took the view that “loss” meant “insured loss” rather than “actual loss”, or whether it simply viewed the clause as ambiguous. The lack of clarity in the judgment on that point may limit its usefulness as a precedent.
The Court of Appeal noted that the plainer the words of a contract, the less likely it is that the parties intended them to mean something else and that if, read objectively, the language will not bear the meaning for which a plaintiff contends, a remedy may be sought in rectification (judgment at [35]). The majority in Vector made it clear, however, that an unambiguous clause does not preclude a review of the factual context and a displacement of the plain meeting. Rectification is accordingly not necessary to correct drafting or linguistic errors (see Tipping J at [33]), although it remains an alternative to an interpretation argument. The Court of Appeal’s view that the meaning of MD15 was not plain and unambiguous should not be interpreted as a precondition to its conclusion on the meaning of the policy in its commercial context.
