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The High Court decision in Lee v IAG[1] provides clarification both on what measure of indemnity should be used, and how to calculate it.

 

An ‘indemnity’ policy is short hand for a policy that obliges an insurer to pay the insured  enough to put them back in the position they were in before the loss happened (old for old basis).  The occurrence of the peril (like a fire or earthquake) puts an obligation on the insurer. When do they have to pay? In an indemnity policy, the payment trigger is the happening of an insured event.  This is unlike ‘replacement’ policies.  In these policies, only once the insured has incurred the cost of repair must the insurer reimburse.

 

So, what does it mean to be indemnified?  What does it mean to be put back into the position you were in before the loss happened?

 

As with all contractual relationships, the starting point is the contract itself.  Some indemnity policies explain how the indemnity is to be calculated.

 

But what if the contract does not explain the measure and says “We will indemnify you for any insured loss”?

 

Fortunately, we have the benefit of centuries of common law authorities to guide us.  It is ancient law that where an indemnity policy is silent on the appropriate measure, the indemnity is a question of fact.  The question will be answered with particular regard to the nature and intentions of the insured party and the purpose served by the insured property.[2]

 

Lee v IAG concerned a three-story commercial building on Manchester Street.  IAG originally paid $672,750 being its estimate of the ‘market indemnity value’.[3]  By the time the proceeding came to Court, IAG had accepted that the appropriate measure of indemnity was actually the “estimated cost of restoring [the] business assets as nearly as possible to the same condition they were in immediately before the loss or damage happened using current materials and methods.”

  

The question before the Court was how that ‘estimated cost’ was to be calculated.  The Court was asked to give guidance about the extent to which betterment should apply.  The Court concluded that the estimated cost is found by allowing to restore “the property to the same condition as it was before the event that caused the damage or loss, and deducting for any betterment to the insured because the restored building in whole or in part be in new condition rather than old.”[4]

 

The critical point is that betterment should be deducted by reference to the extent which the restored building is in a better physical condition.

 

This requires a qualitative comparison between what was there at the time of loss and what will be put back.  For example, if a brick wall collapses, the replacement of it with a new brick wall, while ‘new’ may not necessarily be any better than the previous wall; in such a case, it may not be appropriate to make a deduction for betterment.

 

By contrast, if the same wall being replaced previously had old, decaying lime mortar that was now being replaced with new cement, the new mortar is better than the old and would justify a better deduction.

 

The case makes four key points:

  • Reduction in market value is not necessarily the correct measure of ‘indemnity’;
  • When the indemnity is to be calculated by reference to estimated building costs, betterment will only apply to parts of the repair that leave the building better off than it was;
  • Assessing whether a repair leaves the building ‘better’ is a qualitative exercise, made by evaluating the extent to which new parts of the building are any better than the parts of the building they are replacing.
  • It follows that allowing for secondhand materials may obviate the need for deducting for betterment.

 

Should you need any assistance with these, or with any other Dispute matters, please contact Paul Cowey at Parry Field Lawyers (+64 3 348 8480).

 

 

[1] Lee & Or v IAG New Zealand Limited [2018] Llyod’s Rep. IR 345

[2] Earthquake Commission v Insurance Council of New Zealand [2015] 2 NZLR 381 at [109];

Reynolds v Phoenix Insurance Co Limited [1978] 2 Llyod’s Rep 440 (QB) at 451.

[3] Lee & Or v IAG New Zealand Limited [2018] Llyod’s Rep. IR 345 at [4].

[4] At [54]

INSURERS EXPOSED TO PAYING INTEREST FOR DELAY

Lee v IAG[1] is the first Canterbury earthquakes decision to give substantial guidance on interest for payment delay.

 

Both the Judicature Act (for proceedings pre 1 January 2018) and the new Interest on Money Claims Act give the Court the power to decide when interest should apply to insurance monies owed to an insured party.

 

The starting point is to identify from when can the insurer be said to be default of its obligation to pay.

 

The Court set out some of the key factors, noting that “every case turns on the individual insurance contract and the facts.  Insurance practice will be relevant but not decisive.”[2]

 

Importantly, the Court confirmed that interest can be available from a date prior to the filing of proceedings.[3]

 

The Court observed that “there is a well arguable case that a reasonable time to assess the claim must be allowed before it can be said that the insured is wrongly without its money, and the insurer wrongly benefitting from that money.”[4]

 

However, noting the other side of the same coin, the Court also noted that interest may run from the date of the loss or damage.  The Court particularly referred to situations where the insured needs to quickly replace the loss.  The Court held “the loss or damage is immediate and although it may take time to investigate and assess, the economic effect of loss or damage is immediate. That may influence an award of interest from that date.”[5]

 

The starting point when considering from which date to award interest is the date of loss.  The Court recognised, however, that this may not be “necessarily the end point for assessing interest” because other factors may mitigate or justify delay in the running of interest.

 

Statutory interest is an issue that particularly arises in indemnity insurance policies which impose a payment obligation.  This is quite different from a reimbursement obligation which is more often a feature of replacement insurance policies.  However, the same principle applies to both: interest is a live issue once the obligation to pay arises – but the timing of that obligation will be quite different between indemnity insurance contracts and replacement insurance contracts.

 

When insureds are settling their claims they should be alert to the issue: have I been kept out of my money, and has the insurer wrongly been benefitting from it?

 

Should you need any assistance with these, or with any other Dispute matters, please contact Paul Cowey at Parry Field Lawyers (+64 3 348 8480).

 

 

[1] Lee & Or v IAG New Zealand Limited [2018] Llyod’s REP. IR 345

[2] At [86] (a)

[3] At [86] (d)

[4] At [86] (2)

[5] At [86] (f)

In the recent case of Avonside Holdings Ltd v Southern Response (SR), the Supreme Court agreed with the Court of Appeal’s earlier decision that SR was liable to include a contingency sum and professional fees when settling Avonside’s insurance claim on the basis of the notional cost to rebuild Avonside’s existing property. Read more

New Zealand law imposes time limits on suing other people.  These time limits often trip people up, and prevent them bringing what would otherwise have been strong claim. Parry Field Lawyers provide legal advice on a range of commercial matters include disputes and court proceedings.
Read more

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