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.

In an earlier article – Insurance Policy Intepretation – 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.

In this article, we considere the ramifications of the decision in respect to whether earlier losses caused by an earthquake automatically merge/combine with later losses, so that an insured cannot claim for multiple losses.
IAG argued that, regardless of the policy wording, unrepaired losses from each earthquake “merged” in the later loss suffered when Ridgecrest’s building become irreparable. As a result, Ridgecrest was only entitled to receive payment of the sum insured from IAG (rather than payment for earlier unrepaired losses plus the sum insured, if the building was replaced). This was on the basis of the Marine Insurance Act 1908 which provides that where a partial loss has not been repaired and is followed by a total loss, the insured can only recover in respect of the total loss.

IAG however could not point to any case where this principle had been applied to a non- marine insurance case..

Most marine insurance policies are “time policies”. This means a vessel or cargo is insured against perils of the sea during a voyage. It was the practice that an insured only obtained rights in respect of loss caused at sea at the end of the policy period, usually at the destination port.

The Supreme Court looked at the New Zealand decisions dealing with merger. Having analysed those, it decided that the “merger” principle had no application to Ridgecrest, given Ridgecrest’s policy wording, as application of the principle is shaped by the relevant policy wording. Ridgecrest’s policy wording was clear that Ridgecrest’s rights in respect of each loss suffered in each earthquake accrued immediately after the earthquake, rather than being deferred as with marine policies.

As noted in our earlier article, actual policy wording is therefore critical in understanding an insured’s rights and obligations and, in particular, whether “merger” may apply or not. If you would like any insurance advice please do not hesitate to contact Paul Cowey at paulcowey@parryfield.com.

In the case of Earthquake Commission v Insurance Council of New Zealand Inc (delivered in December 2014), the High Court considered the question of how EQC’s obligations under the EQC Act may be enforced against it.

EQC argued that a claimant could only file judicial review proceedings (essentially a review by the High Court as to whether a decision made by a public body has been made lawfully) against EQC. The Insurance Council of New Zealand argued that this was incorrect and that such proceedings would be inadequate and insufficient (as there are limitations on the types of issues which can be covered and the relief/compensation which can be awarded).

The High Court agreed with the Insurance Council holding that claimants were not limited to filing judicial review proceedings against EQC. Instead, claimants may also file ordinary legal proceedings against EQC, whether in the District Court or the High Court (depending on quantum).

This was on the basis that:

EQC’s obligations under the EQC Act provide claimants with definite entitlements and rights (and, conversely, place definite obligations on EQC).
Based on modern civil procedure, an ordinary action for payment is and should be available where the factual basis for payment is in dispute.
The Act does not exclude claimants filing ordinary proceedings against EQC/require proceedings to only be commenced by judicial review. If that was intended, Parliament would need to have expressly said so.
New Zealand civil procedure has historically resisted limiting judicial review proceedings, as some other jurisdictions have done.
Judicial review is not generally an appropriate way to determine entitlement to payment under a statute where the obligation is definite in nature (as EQC’s obligations are).
The remedies available for breach should be direct and definite, and not discretionary (as is the case with judicial review).

This is a positive development, clarifying uncertainty as to how to enforce EQC’s obligations against it.

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

In a recent High Court decision – Whiting v The Earthquake Commission [2014] NZHC 1736 – EQC was ordered to pay a proportion of a homeowners’ legal costs, following settlement of the homeowners’ legal claim against EQC and the homeowners’ insurer. Read more

If a homeowner wishes to settle their insurance claim by buying another house (and the insurance policy provides this option), how much does the insurer have to pay?

This question was considered in the case of Skyward Aviation 2008 Ltd v Tower Insurance Ltd.

The Court held that, if the homeowner buys another home, the homeowner was entitled to receive the cost of that house, capped at the cost which the insured would have notionally incurred in repairing its existing house on site to the same condition and extent as and when new and up to the same area as shown in the certificate of insurance.

Background

The case concerned a Christchurch property located in the “Red Zone”. The property had been deemed “uneconomic to repair” by Tower. The owner had accepted CERA’s offer to buy the land. It had settled with EQC and had attempted to settle its insurance claim with Tower.

The homeowner wanted to settle its claim by buying another home elsewhere.

Tower argued that it was liable to pay the cost of buying a comparable replacement home (excluding land) elsewhere.

The insured homeowner argued that it was entitled to receive the cost of reinstating its home on site to be put towards the cost of buying elsewhere.

The Policy wording

The key policy wording provided:

We will pay:

the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your house on its present site.

The Decision

The Court held:

the policyholder is not obliged to choose a house of comparable size, construction, condition and style as its existing house once it is agreed that its existing house is damaged beyond economic repair.
the only limitation is that the cost must not be greater than the cost of “rebuilding your house on its present site”. There is no other control or limit on the size, style or quality of the other house. It is implicit on the basis of the policy wording that if the insured buys a house at a greater cost, Tower’s contribution will be capped at the agreed level with the homeowner meeting the difference from its own resources.
In other words, if the insured buys another house, Tower is bound to pay the cost of that house up to the cost which the insured would notionally incur in repairing its existing house to the same condition and extent as and when new and up to the same area as shown in the certificate of insurance.

What if the insured customer does not intend to buy elsewhere or has not yet found a replacement home?

The Court indicated that, on Tower’s policy wording, Tower was only liable to pay the “present day value”of the existing home until the insured incurred the cost of buying elsewhere. “Present day value” included an allowance for depreciation and deferred maintenance and was limited to the market value of the property less the value of the land.

In other words, if the insured wanted a cash settlement (without buying elsewhere), Tower was not liable to pay more than “present day value”.

This decision was appealed by Tower to the Supreme Court and heard in November 2014. The Supreme Court dismissed the appeal, confirming that, if an insured elects to buy another home to settle its insurance claim, Tower’s liability is the lower of the cost of rebuilding the insured’s house at its present site or the cost of the other house. There is no requirement that the other home be “comparable” to the existing insured house.

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

In the recent case of Skyward Aviation 2008 Ltd v Tower Insurance Ltd, the Court of Appeal considered whether, on the basis of Tower Insurance’s policy wording, the insurer or the insured customer had the right to decide between settling the insurance claim by rebuilding on site, rebuilding elsewhere, or buying elsewhere where the property had been deemed not “economically repairable”.

The Court held that, on the policy wording, the insured customer had the right, not the insurer.

Background

The case concerned a Christchurch property located in the “Red Zone”. The owner had accepted CERA’s offer to buy the land. It had settled with EQC and had attempted to settle its insurance claim with Tower.

Tower maintained it had the right to decide how the insurance claim was settled, the insured argued otherwise.

The Policy wording

The key policy wording provided:

HOW WE WILL SETTLE YOUR CLAIM

We will arrange for the repair, replacement or payment for the loss, once your claim has been accepted.

We will pay:

the full replacement value of your house at the situation; or
the full replacement value of your house on another site you choose. This cost must not be greater than rebuilding your house at the situation; or
the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your house on its present site; or
the present day value;

as shown in the certificate of insurance.

We will only allow you to rebuild on another site or buy a house if your house is damaged beyond economic repair

In all cases:

we will use building materials and construction methods commonly used at the time of loss or damage.

We are not bound to:

pay more than the present day value if you have full replacement value until the cost of replacement or repair is actually incurred. If you choose not to rebuild or repair your house or buy another house we will only pay the present day value and the reasonable costs of demolition and removal of debris including contents;
pay the cost of replacement or repair beyond what is reasonable, practical or comparable with the original;
repair or reinstate your house exactly to its previous condition.

The Decision

In holding that the insured customer had the right to decide how the claim was settled, the Court noted the following aspects of the policy in support (emphasis ours):

Tower reserves the right to pay only present day value “if you [the insured] choose not to build or repair your house or buy another house …
Tower reserves the right to disallow the insured from either building on another site or buying a house if the existing house is not damaged beyond economic repair. This right of veto could only be exercisedonce the insured had made the underlying choice. In other words, it assumes that the insured is generally at liberty to make the choice, then restricts the insured’s ability to choose options two (build elsewhere) or three (buy elsewhere) to the case where the existing house is not economically repairable
The second alternative provides for full replacement value of the house “on another site you [the insured] choose” – that is, it is the insured’s right to choose.

Will this decision apply to other insurers?

Yes, if the relevant parts of the policy wording is the same or very similar. The Court held that “An insurer cannot rely on a general statement of economic desirability to override the express or clearly implied provisions of its policy.”

The Court indicated however that the position may be otherwise if the policy expressly states that the insurer has the right to choose between the alternative bases for payment.

What if the insured customer does not intend to rebuild or buy elsewhere?

The Court agreed that, on Tower’s policy wording, Tower was only liable to pay the “present day value” of the home until the insured incurred the cost of buying or rebuilding elsewhere. “Present day value” included an allowance for depreciation and deferred maintenance and was limited to the market value of the property less the value of the land.

In other words, if the insured wanted a cash settlement, Tower was not liable to pay more than “present day value”.

What if the property is “economically repairable”?

The Court indicated that, if the property was “economically repairable”, Tower was entitled to insist on repairing or rebuilding on the same site.

In addition, Tower was entitled to control the repair work for the reason that the cost of repair was at Tower’s risk (so it would want to control the cost) and to decide whether repairing or rebuilding is ultimately the better option.

This decision was appealed by Tower to the Supreme Court and heard in November 2014. The Supreme Court dismissed Tower’s appeal holding that, where Tower has decided not to rebuild or replace a house, Tower’s payment obligation is determined by the choice the homeowner makes as to whether to rebuild the house, replace it on another site or buy another house.

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

In Part I of our series on EQC and Land Damage Settlements, we looked at what the EQC Act provides in general in respect of “land damage” and what it is. In this Part we examine what EQC’s obligations/rights are under the Act in respect of settling land claims. Read more

Background

The Policy wording

The Decision

What if the insured customer does not intend to buy elsewhere or has not yet found a replacement home?

Background

The Policy wording

The Decision

Will this decision apply to other insurers?

What if the insured customer does not intend to rebuild or buy elsewhere?

What if the property is “economically repairable”?

Christchurch CBD

Christchurch

Rolleston

Hokitika