Claims - Parry Field Lawyers

Consequential loss is a loss that arises as a result of a breach of contract. In contracts, parties often exclude liability for consequential loss which is provided for in an exclusion clause.

If you are entering into negotiations for a contract, it is important that you understand what consequential loss is, when damages can be claimed for consequential loss, and how to effectively exclude liability.

A question that arises when dealing with consequential loss is how far you can actually go in claiming damages for a consequential loss? Where do you draw the line?

Say, for example, that Mrs Smith has purchased a freezer for her catering business from Mr Jones, which she has filled with ice cream. This ice cream is for a stall that she has been running at the local fair for a few years now, and is a favourite for many fair-goers. Unfortunately, the freezer broke the day before the fair causing all of the ice cream to melt and meaning that Mrs Smith cannot serve ice cream at her ice cream stall and would therefore not make any profit. The lack of ice cream at the stall meant that there were a lot of grumpy children, and grumpy children meant grumpy parents which resulted in a lot of backlash on the fair.

The following year, the fair suffered a 50% reduction in attendance as a direct result of the grumpy children and the lack of ice cream, and the organisers then had to cancel the fair in subsequent years and claimed the amounts they lost from poor Mrs Smith.

Mrs Smith now wants to sue Mr Jones in damages for the loss of profit and the amounts claimed by the fair organisers, which were losses resulting from the breaking of the freezer. But how far can Mrs Jones actually go in claiming these damages? Let’s look at some cases and see what they say.

Hadley v Baxendale

In an 1854 English Court of Exchequer decision Hadley v Baxendale, Alderson B famously established the remoteness test, which is a two-limb approach where the losses must be:

Considered to have arisen naturally (according to the usual course of things); or
Reasonably considered to have been in the contemplation of the parties at the time when they made the contract as a probable result of the breach of it.

Alderson B said that in order for a party to successfully claim damages on the grounds of consequential loss, the loss must fall into either of those two categories.

McElroy Milne v Commercial Electronics

In 1992 in New Zealand, Cooke P said this test no longer applied in modern law, and he established a multi-factorial discretionary approach in which a range of factors are to be taken into consideration, including foreseeability.

Transfield Shipping v Mercator Shipping (The Achilleas)

This is more recent English House of Lords decision concerning the late return of a ship. In this case, the judges established that while Hadley v Baxendale is generally a good approach, there are certain circumstances where it may not necessarily apply.

These judgments create confusion in determining what actually constitutes a consequential loss and where to draw the line. Generally speaking, however, the loss must have been in the contemplation of the parties for it to amount to a consequential loss.

A way forward: What should the clause say?

In our view there are three ways forward:

No exclusion of consequential loss – this means that the parties are leaving it up to the interpretation of the Courts;
Include a general consequential loss clause; or
Incorporate a bespoke clause for the specific contract.

Where possible, we recommend a general exclusion of consequential loss with some examples of specific situations (essentially a bit of both 2 and 3 above).

Other options available:

Remember that a contract is ultimately a give and take from each side and another way that a party can limit liability in a contract is by putting a total cap on their liability.

Another option is that a party could limit liability by stating a time period in which the other party can bring a claim. A small company negotiating with a large multinational will have less scope and a template agreement is much more difficult to get changes made to it.

Ultimately, whichever route is taken depends on the preference of the parties, and their negotiations will also play a role in determining what liability is excluded.

Every situation is unique and how much Mrs Smith could claim for will depend on what the contract said and the circumstances of the situation. Whatever your scenario, we have a dedicated commercial team at Parry Field Lawyers who can give you personalised advice on all aspects of your business ventures. This article is also based on a more detailed analysis of the cases mentioned above – contact us if you would like a free copy of that.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Kris Morrison or Steven Moe at Parry Field Lawyers (348-8480).

Following the Kaikoura earthquake in 2016, EQC and private insurers advised that private insurers would act on behalf of EQC in receiving, assessing and settling home and contents claims arising from the earthquake, even those claims that were under the EQC cap. Customers were reassured however that this approach would not change their entitlements under their insurance policy or the Earthquake Commission Act (‘the Act’) and that insurers would receive training to ensure compliance with the Act.

Homeowners affected by the Kaikoura earthquake may well be wondering what exactly is the extent of their entitlement under the Act. This article considers that issue. For homeowners dealing with EQC in respect of the Canterbury earthquakes, please see our earlier article “EQC is repairing my home – what am I entitled to?”

What is the extent of EQC’s obligations?

If you have fire insurance, your home is secured against damage caused by natural disaster for its “replacement value” (generally up to a maximum of $100,000 plus GST).

Under the Act, this means that you are entitled to receive the costs “reasonably incurred” to replace or repair the damaged part or parts of your home to a condition which is “substantially the same as but not better or more extensive” than its condition “when new”.

In other words, you are not automatically entitled to repairs (or the cost of repairs) which give you a home which is better than what you would have had when it (or any part of it) was originally built. However, you are entitled (subject to certain conditions) to receive repaired property which is largely the same in appearance, quality and working order as it was “when new”.

Consequently, you are not limited to receiving what is known as an “indemnity” payment, whereby an insurer is only responsible for paying for the cost of repairing your home to the condition it was in before the damage (which in most cases will be less than new).

Does EQC have to cover the cost of ensuring the repairs comply with current building regulations?

Yes, as a general principle.

The EQC Act provides that:

· EQC’s obligation to pay to replace/repair a person’s home to a largely new condition (but not better or more extensive than what the home was like when new) is modified “as necessary to comply with any applicable laws” (which would include current building regulations).

· The cost of such compliance is EQC’s responsibility – EQC is responsible for paying any costs “reasonably incurred” to comply with any applicable laws in relation to the replacement or reinstatement of your home.

In other words, while in general EQC is not obliged to pay to repair your home to a condition which is better or more extensive than what it was like originally when new, this limitation is modified where it is necessary for the repairs to comply with any applicable laws.

Consequently, this means that you may end up with something which is better than what you had before. This is because, although your home (or part of it) may have complied with building regulations at the time it was built, this may not be the case now. Therefore EQC may have to pay for additional work to be done to ensure that any repair to the relevant part of your home complies with current regulations.

This may include paying the cost of upgrading non-earthquake damaged aspects if those aspects need to be upgraded as part of completing the repair of your earthquake damage. In other words, if your earthquake damage cannot legally be repaired without also upgrading non-earthquake damaged parts, EQC may be responsible to meet those costs too.

However, that doesn’t mean that your entire home has to be fully upgraded to comply with the performance requirements of the Building Code. In general, only the relevant repairs have to comply with the scope of the Building Code that applies to that particular type of repair. With the exception of such things as ﬁre safety, the balance of your home only needs to comply with the Building Code to the same extent as it did before the earthquake.

Be aware however that, if your home (or part of it) did not comply with building regulations at the time it was built or no building consent was obtained when required, you may have to contribute to the cost of any additional work required to ensure that your repairs comply with current building regulations. This is particularly if the failure to obtain a building consent/comply with the relevant regulations caused or increased the earthquake damage to your property.

Is EQC responsible for paying any other costs?

Yes. Under the Act, EQC is also responsible for paying any costs “reasonably incurred”:

· To demolish your home (or any part of it) and remove debris but only to the extent that such was required to enable your property to be repaired/replaced;and

· To pay architects’ fees, surveyors’ fees and council fees.

Are there repairs/damage EQC may not have to cover the cost of?

Possibly. EQC is only responsible under the Act for covering damage to your home which occurred “as a direct result of a natural disaster”. Consequently, if you have damage to your home which was not caused by the Kaikoura earthquake (e.g. pre-existing damage) but which is also being repaired as part of your earthquake repairs, you may have to meet the cost of that.

However, this is not always the case. If your earthquake damage cannot be repaired without the non-earthquake damage aspects also being addressed, EQC may still be responsible to pay (see point 2 above for example). Likewise, if pre-existing damage has been made worse by the earthquakes.

Correspondingly, if your home (or part of it) did not comply with building regulations at the time it was built or no building consent was obtained, you may have to contribute to the cost of any additional work required to ensure that your repairs comply with current building regulations (again see point 2 above).

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Contact Paul Cowey at Parry Field Lawyers, paulcowey@parryfield.com (03 348 8480)

The Christchurch earthquakes changed the landscape in many areas of life. One such area is insurance. Prior to September 2010 the words “EQC claim” were never muttered by a Christchurch property lawyer. Nowadays, if a Christchurch property lawyer goes a day without mentioning those words, they have done extremely well.

Recently and with the recent events in Kaikoura in the forefront of our minds, we brought you an article that looked at some lessons learnt from the Christchurch earthquakes from a home owners perspective which you can find here. We thought that it would be also useful to also look at this issue from the purchaser’s perspective.

The area of EQC and private insurance claims has evolved significantly since September 2010 and in many situations the 2016 position is more complicated than the position immediately after the earthquakes. This is mainly because many home owners have had pay outs for various aspects of damage to their properties, some of which has been completed and some of which has not. Almost all contracts for the sale and purchase of property contain provisions in relation to the claims that have been made on the property and the assignment or otherwise of those claims to the purchaser. Purchasers need to be on guard. The effect of getting these clauses wrong should not be understated. We offer the following tips to ensure that your interests are protected and no surprises occur on settlement.

Know your terminology

Be aware that there is a difference between an EQC claim and a private insurance claim. Unless there has been more than $115,000.00 damage to the property, an EQC claim will relate to damage to the dwelling and a private insurance claim will relate to aspects outside of the dwelling like the paths and the driveways.

Obtain information early on

In your discussions with the real estate agent, discuss with them the EQC and private insurance position of the property. In particular, what damage has occurred and obtaining scopes of work, did the vendor receive a cash settlement or did they have the repairs carried out by way of a managed repair process. This helps to inform you as to how much work has been completed on the property and the mode of repair.

Beware the cash settlement

If a cash settlement has occurred and the work has not been carried out, is the vendor agreeing to pay over the cash amount on settlement and if so, will the cash settlement be sufficient to complete the required work? If the cash settlement has been used to complete the work, can the vendor provide evidence (photographs, receipts and invoices) of the work having been completed? Often times, vendors who are cash settled for cosmetic work complete the work themselves. Therefore be wary of work that while technically “completed” has not been completed to a tradesman like standard. Your building report or other professional reports can be of use to determine the quality of work completed.

Obtain sign offs

If the work to the property has been carried out by way of a managed repair, ensure that you obtain all sign offs as well as any Council building consents and code compliance certificates in relation to the work. As you have probably seen in the media in recent times, even signed off work has had quality issues and therefore even with work that has been signed off, we would still encourage you to obtain independent professional reports to ensure the work has been completed to a good standard.

Feed back to your lawyer

The above information can then be fed back to your lawyer who can draft an appropriate clause in relation to the assignment of the EQC and private insurance claims. Your lawyer may want to confirm the information obtained with the vendor’s solicitor as well.

Make it a condition

You should consider making your approval of the EQC and private insurance information in relation to the property and the assignment of these claims a condition of the contract. This means that should any aspect of the EQC or private insurance position of the property that becomes clear through your due diligence process not be favourable to you, you have the ability to cancel the contract.

Beware of precedent clauses

We would caution you about relying on a standard EQC and private insurance provision that has not be tailored to the particular circumstances of the property. At Parry Field, we have more than 20 different clauses we use in relation to the assignment of EQC and private insurance claims so you can see that the variance is large.

Reliance on professional reports not commissioned by you

Be aware that professional reports (for example building and engineer’s reports) that are not commissioned by you (i.e. that you don’t pay for) can not be replied upon by you legally. Such reports must be commissioned and paid for by you if you wish to able to legally rely on them. Therefore, in a situation where a property has had significant damage, we would strongly encourage you to obtain your own structural engineer’s report in relation to the property.

Honesty is the best policy

if there is work still to be completed on the property, you should disclose this to your insurer and bank as early as possible. In relation to your insurance, this will likely result in your insurer excluding the damaged areas of the property from your policy coverage until the work has been completed. However, this is certainly the lesser of two evils given that if your insurers find out that you did not disclose damage when you are making an insurance claim for further damage to your property (a fire for example), this could void your policy and you be left with some hefty clean up costs.

Don’t rush

This is likely to be the biggest investment of you life so take your time, speak to your lawyer early to ensure the contract is right for you. This could save you thousands of dollars down the track.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Should you need any assistance with this, or with any other Property matters, please contact Paul Owens at Parry Field Lawyers (348-8480) paulowens@parryfield.com

Painting is easy when you don’t know how, but very difficult when you do. Edgar Degas

Our experiences over five years ago in Christchurch have unfortunately been brought to life again by the recent earthquake and the damage suffered in North Canterbury, particularly in Kaikoura. We know the power of an earthquake and have for several years now been helping our clients achieve good outcomes on their EQC and private insurance claims.

Reflecting on what we have learned over these years has resulted in the thoughts set out here. As the quote above indicates, sometimes with a little knowledge something can appear easy when in fact, digging a little deeper, it is much more complicated and difficult than you realised. Doing the hard work though, whether it involves painting or something else (like insurance claims), will result in a better outcome.

Our intention in sharing these thoughts is to proactively assist those who may now be at the start of a journey they weren’t anticipating and who could benefit from what we have learned about EQC and insurance claims. We are talking here about homeowners; for those with commercial premises and businesses there will be other points to consider (we have done a separate article for those who may have had businesses interrupted which you can access here.

The following are the most important principles to be aware of, and steps you should take, to help achieve a positive outcome with your EQC or insurance settlement:

Make an EQC claim and an insurance claim straight away if there is evidence of damage to your property.

Notify your insurer even if you think the damage is only cosmetic. By submitting the claim you enter the system. While you do have 3 months to submit claims, we recommend doing it sooner rather than later so that the wheels can start turning.

Take good photos of damage and also source or retain any photos (or reports) you have of your home before the quakes. Don’t rely on EQC or your insurer to record the damage.

This lessens the risk of a dispute over what is and isn’t earthquake damage and, should there be any further earthquakes, what damage was caused by each event. That can become relevant where claims have to be shared over more than one earthquake, which has been an issue in Christchurch.

Not all insurance policies are equal – get advice on your policy/EQC entitlements before doing anything further.

This not only ensures you know what you are entitled to from EQC/your insurer but also ensures that any professionals you use to help quantify your claim do also. In a number of cases we’ve dealt with, engineers/quantity surveyors haven’t been properly briefed in line with policy/EQC entitlements so cases have either been overstated or understated. This can stymie negotiations and cause delay and further expense.

In this regard it is worth mentioning that sometimes legal fees are covered by home insurance policies which may mean that your insurer will cover any fees you incur clarifying your entitlements.

It can pay to be proactive and obtain your own professional advice (i.e. engineering) up front.

The EQC process can be a long and slow one. You may be better served getting your own advice early on in the piece, rather than waiting for an assessment.

If you do obtain professional advice, make sure the evidence you obtain is going to be robust and stand up to scrutiny.

While companies purporting to specialise in earthquake assessments and repairs may save you some initial costs, in our experience those assessments may not stand up to scrutiny when push comes to shove. Use reputable structural or geotechnical engineers, land surveyors and quantity surveyors – it will ultimately save you time and cost in the long term.

Appreciate upfront that that the onus is on homeowners to establish their loss rather than on EQC/insurers.

Therefore, while insurers/EQC usually carry out assessments, if you disagree, it’s not actually up to EQC/the insurer to prove their assessment. Rather, you need to obtain your own evidence, be it engineering, quantity surveying advice etc. In some cases EQC and insurers will cover these costs.

Watch out for cowboy contractors.

There are a lot of people making a lot of money from an unfortunate situation and we have seen situations where vulnerable people have been taken for a ride. To avoid this, ask for testimonials and evidence of their work.

Also, watch out in particular for contingency arrangements where you pay a cut of your insurance or EQC settlement to the company assisting you. It may seem they are taking the risk or the hassle away from you but, in our experience, often insufficient work is done to ensure you get the best result you can.

Be satisfied with any scope of works before any repair work begins or before you receive a cash settlement.

If repairs are being carried out for you, you want to ensure that all damage is reflected in the scope and the repair methodology is correct. Once repair work begins, you don’t want additional issues to arise, particularly if you have moved out for the repairs. That can mean the work has to stop while the issues are resolved, which can cause significant delays as well as issues with ongoing temporary accommodation. As always, get advice on the scope from appropriate professionals.

Similarly with a cash settlement, you want to ensure that it covers all damage and provides the correct repair. Once you’ve settled with EQC or your insurer, you don’t want to find that the cash settlement is insufficient to cover the actual cost of repairs or a rebuild. We have found, for example, that a quantity surveyor’s costings may differ markedly from those of EQC or insurers.

If EQC or the insurer is doing the repairs, also be aware that any building contract presented at the back end of the process is not a mere formality.

It is a document that requires careful consideration/advice. Inadequate attention to it can result in other issues once the repair/rebuilding work begins and may be counterproductive to the whole process. Again, many insurers pay for legal advice on these contracts.

Finally, as the cliché goes “patience is a virtue”.

Unfortunately, throughout the process, patience may be something you need in large supply. Dealing with EQC and insurers can take time and a lot of effort so it is good to try to reduce stress levels where you can but anticipate that it may take longer than you think to get through.

As we noted early on, when you look into something it may seem harder and more complicated than you first thought. However, if you embrace the challenge, you can achieve a successful outcome. With EQC and insurance claims, the hard work of preparation is key. We hope that the information provided here has been helpful to better prepare those now needing to make an insurance and EQC claim.

Every situation is unique so please discuss your situation with a professional advisor who can provide tailored solutions to you. Please contact Paul Cowey at Parry Field Lawyers (03 348 8480) paulcowey@parryfield.com

Business owners in Christchurch largely failed to take advantage of their business interruption cover. Here are some tips from our experience with those who did well.

Things to do:

Take photos of everything, before the clean-up if possible.
Get a copy of your business interruption policy schedule and the full wording document (if you don’t have them your insurance broker may do. If in doubt call the insurance company who will provide the full policy wording.)
Understand the cover that your particular BI policy provides. Your broker or your lawyer will help if they have had previous BI insurance experience (if not then get an advisor with experience). Most BI policies will pay for all claims preparation costs including legal and accounting advice. Good advice will make a very sizeable difference to your claim.
Business interruption cover usually only lasts 6-12 months starting from the date of the damage. Plan to make ALL the business adjustments you can within that period. That way the insurer will pay.
Possible policy responses may include re-establishing the business elsewhere, or changing the focus of the business.
Many BI policies cover staff wages and increased costs of business.
You can often obtain an interim payment from the insurer if you can clearly show a loss covered by the policy. A decent payment at this time allows more options and better decision making.

Don’t:

Decide to muddle through and think about it later. If you do that, your cover will expire and you may get nothing.
Make large changes to your business at your own cost without understanding what your BI cover provides for. BI cover is frequently more than expected.
Make decisions based on advice from someone who has not read your full policy wording.

For those waiting to settle earthquake claims, the six year limit to get judgment against your insurer is looming. This article considers the time limit, answers some key questions and proposes some options.

What is the time limit?

An insurer can defend a claim if it is filed in Court more than 6 years after the date of “the act or omission on which the claim is based” (Limitation Act 2010). For pre 1 January 2011 claims, time runs from “accrual of the cause of action” (Limitation Act 1952). This is unlikely to make much difference. So the time limit for claims is likely start expiring on 4 September 2016.

If no Court proceedings are filed and a time limit defence is successfully raised by an insurer, the claim will be struck out by the Court. The insurer can then refuse to pay anything.

Why have a time limit?

The law has long required those seeking justice not to sleep on their rights. Delays in bringing an action can mean loss of witnesses, dimming of memories, and losses that could be avoided by bringing a dispute to Court promptly. Defendants should not have claims hanging over them indefinitely, which they may need to hold insurance cover for. For insurance claims, the time limit for taking action has long been 6 years.

When does the 6 years start running from?

Probably the date of the earthquakes. The New Zealand Courts are yet to consider this issue for earthquakes. English cases suggest that under insurance policies, contractual rights exist from the moment an insured event happens. Therefore the time limit would run from the date of the relevant earthquake.

Some commentators believe time should run from the date an insurer declines a claim, or ignores it. A New Zealand decision about an illness policy did hold that the time limit started when the insurer made a decision to decline a claim. But the English decisions seem to fit better with earthquake claims. It would be difficult to be precise about when an insurer has “declined” a claim. What about reasonable delay? What about just being unreasonable? No claimant will want to spend days in Court arguing about whether their claim is allowed to be in Court at all.

What is the relevant earthquake?

This will depend on which quake caused the damage. EQC has allocated damage based on broad percentages. Where it really matters however, it will be necessary to prove more precisely exactly what damage was caused when. It may be difficult to determine this. The Court may need to decide based on expert evidence, photos, computer modelling etc.

My insurer has delayed my claim. Will this affect the time limit?

Unlikely. As the time limit for property insurance claims is likely to run from the date of the relevant earthquake, conduct of the insurer is usually irrelevant. If earthquake damage was hidden, and came to light later, that may qualify as late knowledge and postpone the start of the 6 year limit. It is unclear whether EQC waiting for 6 years to decide that a claim is over cap would prevent an insurer relying on the 6 year limit.

Can the government use Limitation Defences for EQC or Southern Response?

The government is able to use Limitation defences, but it is uncertain if that applies to EQC. EQC is not an insurer, instead it offers a statutory scheme of insurance. But the Courts have applied Limitation defences to similar claims “by analogy” in the past, so it is likely they could be used for EQC.

Limitation defences will apply in the usual way to the AMI policies that Southern Response took over.

What happens if the six years runs out?

If proceedings are not issued before 4 September 2016, no damage from the 4 September 2010 earthquake would be payable. A claim for February 2011 damage could still be made. But a lot of effort would be needed to prove the exact cost of the damage caused in September, which would then be deducted from any pay out.

Claimants can still attempt to negotiate with their insurer after the time limit expires. But if they will not pay, Court action cannot be taken. This will leave claimants with no negotiating power and no options.

Can a Court extend the 6 year limit?

No. The limit is set by Statute. The Court can use a late knowledge period to postpone the starting of the 6 year limit in certain circumstances. The period then usually runs from the date when the claim was known, or could have been discovered, e.g. in sexual abuse claims and some latent defects in buildings. Generally, neither silence by the insurer or entering into negotiations will be enough.

Does the time limit automatically apply?

No, the time limit only applies if an insurer raises it as a defence. Insurers can agree to a “standstill”, or they can agree not to use a Limitation defence for a period of time. Such a “Waiver” must be clear and unequivocal, making it unfair for an insurer to later try to rely on a limitation defence.

We have written to the Minister responsible for EQC and to the Insurance Council of New Zealand. We asked them to give a public waiver, and asked for written confirmation that neither will raise the 6 year limit to try and avoid paying valid claims. We are awaiting their response. There are several possible outcomes:

(a) No response.

This would signal insurers (and their reinsurers) want to rely on limitation defences. The only safe way to protect claims will be to file Court proceedings. Legal costs may be partly recoverable from the insurer.

(b) Insurers refuse to offer a waiver to all claimants, telling them to seek a waiver one by one.

But if waivers are to be freely offered, why require people to write in one by one? This will involve many insurer’s hours which could otherwise have been spent solving outstanding claims. Some claimants will do nothing and fall through the cracks. The individual waivers granted by insurers may be adequate, or they may not. Claimants without legal advisors are unlikely to know until it is too late. Claimants with legal advisors will have to foot the bill for seeking and receiving an appropriate waiver. These legal costs may be partly recoverable from insurers.

This would need to be clearly and publicly stated. It could postpone the date for filing Court proceedings until 4 September 2018.

(d) The government could bring some clarity.

It is not likely that Parliament could act, or a Court decision could move through the appeals process in time, given the September 2016 deadline.

I have signed an agreement but have not been paid.

If the insurer has agreed to the claim and signed an agreement the positon may be different. A contract to pay the cost of rebuilding a house will usually become its own cause of action. If an insurer fails to perform under that contract, the limitation period would usually run from the date of that breach. Note however that while this will often be the case, it will depend entirely on the wording of the agreement and the promises the insurer has made.

How do I avoid missing out if insurers will not give up the limitation defence?

The Limitation Acts provide that time stops running when the claim is filed in Court. Any claim will need to be filed in Court within 6 years from the date of the relevant earthquake, so by 3 September 2016 or 21 February 2017.

Where there is uncertainty as to which earthquake caused the relevant damage, it would be safest for claimants to file their claim before 4 September 2016.

If you have not yet settled your earthquake claim, do not leave it too late to seek competent, professional advice. Claimants may be able to recover a part of their legal costs from insurers. Good advice may also help you settle your claim well before the relevant time limits. But either way, the September 2016 time limit will soon be upon us.

Please click here to see the 2 attached letters:

If we can assist in any way with your insurance claim, please do not hesitate to contact us at insurance@parryfield.com.

We are sometimes asked who is responsible for proving whether a home has or has not suffered earthquake damage – the insurer or the insured homeowner? In Jarden v Lumley General Insurance this key question was addressed, with the Court confirming that the homeowner must prove their loss.

Background

The homeowners’ home was damaged in the Canterbury earthquakes. After failed negotiations with their insurer, they sought a rebuild of their home through the Court.

The insurer argued that much of what they were claiming for – foundation cracks, irregular floor slopes, voids in their foundation slab and leaks in their roof – was either pre-existing damage or not damage at all. The key issue for the Court to resolve was what the homeowner had to do to prove their loss/damage.

Decision

Who is required to prove loss/damage?

The Court confirmed that the burden of proving a loss/damage under an insurance policy lies with the party bringing the claim, in this case the homeowner.

The Court referred to case law which indicated that, while an insurer may suggest other (non-insured) causes of loss (such as pre-existing damage), they are not obliged to do so to counter a homeowner’s claim and, even if they do, they are not required to prove their alternative cause of loss.

Specific claims

Within the specific facts of the case, the Court held that the homeowners had not established that the cracks in their foundation, irregular floor levels, voids under the slab and leak in their roof were more likely than not caused by the earthquakes.

Relevant factors included:

The expert evidence from both the homeowner and the insurer was that the cracks in the foundation were, or may well be, as a result of natural, non-earthquake shrinkage. The only counter to this was anecdotal, from one of the homeowners. That was insufficient to establish that the cracks were caused by the earthquakes.

The homeowner’s own expert engineer indicated that the irregular floor slopes were “relatively trivial”, with the foundations settling approximately 10mm in the earthquakes but without damage. Again, this was insufficient to show that the variations in the slab levels was caused by the earthquakes or, even if it was, that it had caused the homeowners any loss as a result.

Only anecdotal evidence from one of the homeowners and their expert surveyor was provided as to the alleged voids under the slab. No recommended investigation – ground-penetrating radar nor core holes – had been used to confirm the presence of voids, despite the expert surveyor acknowledging that such was good practice and other methods employed were “imprecise”. Consequently, once again, the homeowners were held not to have proved that their house has voids beneath the slab, that the earthquake events caused such voids, or that they have suffered any loss covered under their insurance policy as a result.

A significant period of time had passed between when the earthquakes occurred and the major leak in the roof was identified. There was also a lack of evident damage to the ceiling lining. Finally the homeowners’ experts had either not inspected the roof or their inspection was cursory. In contrast, the insurer’s experts, who disagreed that the leak was caused by the earthquakes, had undertaken thorough examinations. As a result, the evidence as a whole did not support the homeowners’ contentions regarding the roof leak.

Outcome

While the Court found that certain items of damage were not covered, others were. On the policy wording, the homeowner was therefore entitled to be paid the cost of repairs for those items once such costs were incurred and if those costs exceeded EQC’s initial liability. In other words, the homeowners were not entitled to a cheque equivalent to the estimated cost of repair but instead had to wait until the repairs had been carried out before seeking reimbursement from the insurer.

Conclusion

The Court expressly noted that the court proceeding was the time for the homeowners to put their best evidence forward. By failing to do so, many of their claims were dismissed.

If you are considering a claim against your insurer, it pays to get sound evidence and advice. You do not need an army of experts, but you will need to assemble the right experts for your particular problem.

If your dispute involves issues over what damage is or is not earthquake damage, the extent of that damage or how to fix it, we recommend the following checklist:

Obtain expert evidence about the precise extent of damage actually caused by the earthquakes;
identify a way to fix that damage that complies with current building code and practice;
understand your insurance policy entitlements;
cost the repairs and the other add-ons under your policy; and
then engage with the insurer with a proper understanding of your position. Asking them to find the problems and pay you for them does not always work.

If we can assist in any way with your insurance claim, please do not hesitate to contact Paul Cowey at paulcowey@parryfield.com.

If your insurer has suggested it will settle your claim by cash payment, can it then do something different, such as carrying out an actual repair/rebuild or vice versa?

This issue was considered in the Canterbury earthquake related case of Domenico Trustee Limited v Tower Insurance Limited (and on appeal in the Court of Appeal subsequently). The homeowner argued that the insurer (Tower) had elected to settle in cash and could not go back on that position. Tower argued that it had not made a binding choice.

In the High Court, the Court largely agreed with Tower, holding that Tower had not, by what it had said or done, made a definite choice (election) to either make payment or rebuild. It found however that, due to unreasonable delay, Tower was deemed to have chosen to settle by paying the homeowner cash at “market value”. However, should the homeowner rebuild or purchase another home, Tower would then be required to also cover those additional costs.

The case was then appealed to the Court of Appeal who agreed with the High Court that Tower had not made an unequivocal choice to either made payment or rebuild. However, the Court of Appeal referred the case back to the High Court for a rehearing on the issue on whether Tower had unreasonably delayed in making a decision and, if so, whether the Court could therefore make one for it.

Background

The homeowner owned a house which was deemed a “rebuild” as a result of the Christchurch earthquakes. The house was insured for replacement value by Tower under a “Provider House Policy Maxi Protection” policy.

In the course of settlement discussions, Tower provided the homeowner with a “settlement pack” which included FAQ addressing a settlement option outside of the policy, namely to cash settle on the basis of the “full rebuild cost” as opposed to “market value” (a lesser amount). Payment at “market value” was the only cash settlement option under the policy and applied until the homeowner actually rebuilt or replaced the damaged home.

There were also separate emails and discussions between Tower and the homeowner offering the homeowner the same “outside the policy” option (a cash payment based on the estimated rebuild cost of the home).

The homeowner and Tower could not reach agreement on the rebuild cost. The homeowner then filed legal proceedings seeking that Tower be ordered to cash settle on the basis of an agreed rebuild amount without the homeowner being required to rebuild.

The Decision

The High Court held that Tower had not made a binding choice to cash settle at “rebuild” value. This was on that basis that all discussions between the parties had been qualified by Tower and indicated that Tower had not made a final decision but instead remained willing to settle the homeowner’s claim by any of the options under the policy. In addition, that option was not contained in the policy and was therefore not available for Tower to actually elect.

The Court of Appeal agreed, holding that the offers to settle in cash were just that, offers, and no more. Tower’s actions demonstrated that it was pursuing its preference for a cash settlement while reserving the option to carry out the reinstatement works itself. All communications show it continued to keep its options open.

The High Court indicated that, in certain circumstances, it might be possible to argue that an insurer, by its words and actions, has made a choice to repair/rebuild coupled with a waiver (effectively a “giving up of”) of the requirement that the homeowner actually repair or rebuild. This would enable the homeowner to receive the full rebuild amount in cash without rebuilding. In the case however, the homeowner had not sought to rely on this argument so the Court could not make a decision on it.

The High Court also held however that, as a result of Tower failing to make a final decision for a substantial period of time, Tower was deemed therefore to have in fact made a choice to settle by paying cash at “market value” (which is less than full replacement value) as a starting position. However, should the homeowner rebuild or purchase another home, Tower would then be required to also cover those additional costs. This was on the basis that a party entitled to elect has only a reasonable time in which to do so before the law will make it for that party. In addition, there is a requirement to settle claims under insurance contracts with reasonable speed.

On this point the Court of Appeal disagreed. This was partly on the basis that it was not apparent that previous cases actually supported the idea that the Court could make a decision for an insurer if they had delayed unreasonably in doing so. However, more significantly, the Court of Appeal decided that the documents filed in Court by the homeowner had not raised this issue before the original hearing. Consequently, Tower had been disadvantaged by this omission and the case was referred back to the High Court for a rehearing on this issue. To date the rehearing has not yet been decided.

Discussion

The case indicates that, as a starting point, in order for your insurer to be bound to a particular method of settlement:

There must have been an unequivocal and unqualified choice communicated to you by the insurer. This can be either by words or actions;
The insurer must have first been aware of all relevant facts and information so that it is in a position to make an informed choice;
There must be a choice between one of the options in the policy and not some option outside of the policy (i.e. an insurer cannot be held to have made a binding choice in respect of an option not contained in the insurance policy). In this respect the Court held that the FAQ provided by Tower did not form part of the policy options – it was simply an explanatory document.
A mere offer to settle a claim without more will not ordinarily amount to a binding choice, nor usually will the making of inquiries by the insurer (i.e. looking into a cash settlement), even where it creates expectations for you.

These indications set a reasonably high threshold to cross before an insurer will be found to have irrevocably elected a specific option. However, if an insurer has unreasonably delayed in making a choice, a choice (in accordance with one of your policy options) may be made for them. This issue remains to be determined by the Court.

The case also indicates that the issue of whether an election has been made is fundamentally a factual inquiry (i.e. will be influenced by the facts of each case).

If you are concerned that your insurer has changed their position, please contact us to discuss further. We can then assess the specific facts of your case to advise whether it appears your insurer has made a binding election or not and whether it might also be possible to argue that they have waived some requirement under the policy.

If we can assist in any way with your insurance claim, please do not hesitate to contact Paul Cowey at paulcowey@parryfield.com.

In the case of East v Medical Assurance New Zealand Limited, the question of when an insurer has to make full payment to a homeowner to settle their earthquake damage claim was considered.

The insurer argued that it did not have to make payment until the homeowner actually incurred the cost of repairs/rebuilding. The homeowner argued that the insurer had to make payment in advance of the works. Read more

In two earlier articles – Insurance Policy Intepretation – Ramifications of the Ridgecrest Decision and Combining Earthquake Losses – Ramifications of the Ridgecrest Decision, we looked at some of the significant findings of the Supreme Court in that case in respect to policy interpretation and “merger” of multiple losses.

In this article, we considere the ramifications of the decision in respect to whether the insurance principle of “indemnity” automatically prevents an insured claiming for multiple losses.

The Indemnity Principle

Insurance policies are policies of indemnity. They are an agreement between an insurer and an insured person to protect/compensate the insured for particular defined risks. The principle of indemnity is that an insured person cannot recover more than the loss under the insurance policy.

The words of Brett LJ in Castellain v Preston 1883 11QBD 380 (CA) at 386 have been frequently quoted as the starting point of the argument:

“… the contract of insurance contained in a marine or fire policy is a contract of indemnity, and indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong”.

When this case was decided, recovery under insurance policies could only be made on an old for old basis. A building could not be insured for more than its depreciated value at the time of loss.

This resulted in a practical problem however. A building owner with no additional funds would be unable to rebuild a destroyed building if the insurance proceeds were limited to the building’s depreciated value.

In response to this problem, replacement cost insurance cover developed, which was offered as a separate policy and later as an optional endorsement. Such insurance went beyond the old notion of indemnity, and insured the difference between actual cash value and the full replacement cost – depreciation that has already occurred.

Such policies allow recovery on a new for old basis. A new for old insurance policy clearly will place the insured in a better position following an insured loss than they were in before.

There was recognised however that there might be a potential moral hazard caused by an insured being able to obtain more than a mere indemnity for damaged property, and the risk of intentional damage so an insured could profit from their “loss”.

Frequently, policies provided for the payment of the indemnity value as a cash payment, with the obligation to pay the full replacement cost being postponed until the insured completed the rebuilding or repairs. The Supreme Court in Ridgecrest accepted that this was the scheme of the Ridgecrest policies.

Many commercial policies now separately identify the indemnity value and the replacement value, with replacement value cover provided as an optional endorsement. Presumably because of consumer demand, in residential policies they are rarely, if ever, separated. New for old policies are well accepted in New Zealand, for chattels, motor vehicles etc. In these cases an insured is entitled to what is known as “betterment” (receiving new for old).

Although not referred to in the decision, the Court did hear argument about whether an insured is under an obligation to spend insurance payments on the repair of damage. It has long been the position that an insured may do as they please with sums paid by the insurer, and there is no implied term requiring monies to be spent in any particular manner (unless contractually bound to do so).

This being the case, an insured cannot be seen as obtaining a windfall just because repairs were not and will never be carried out.

The Supreme Court was not attracted to use the principle of “indemnity” to whittle away policy entitlements. The Court instead endorsed “…An approach based firmly on the policy wording as to the resetting of liability limits”.

Having decided that the Ridgecrest policy reset after each earthquake, the Court held that recovery of loss caused by successive earthquakes did not offend the principle of indemnity. This is subject to three restrictions:

No double counting (i.e. an insured cannot recover for the same damage twice)
The loss from each event, i.e. earthquake, will be subject to the contractual limit (in this case $1.984m); and
The total of all claims cannot exceed the cost of replacing the building.

The Court of Appeal in the post Ridgecrest decision of QBE Insurance (International) Limited v Wildsouth Holdings Limited [2014] NZCA 447 noted that the Supreme Court did not consider the principle of indemnity to rest on the doctrine of merger, but to stand alone. In applying the principle, the importance of factual detail was highlighted. Where the cost of a repair is reduced by subsequent loss, the value of the first claim must also reduce. This was contrasted with the facts in Ridgecrest where the damage from each earthquake was separate and distinct, and the cost to repair was therefore unaffected by subsequent happenings.

Although there will undoubtedly be further occasion for the Courts to consider the full ambit of the principle of indemnity, the Supreme Court have made it clear the starting point is to be the entitlements set out in the policy. It would appear that the Highest Court has little enthusiasm to use the principle of indemnity as a launching point to rewrite liability provisions in insurance policies.

If you would like any insurance advice please do not hesitate to contact Paul Cowey at paulcowey@parryfield.com.