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)

Can I get legal costs when I settle out of court?

Since the limitation period of 6 years became a live issue for insurance claims arising from the Canterbury earthquakes homeowners have had a difficult choice, begging for an extension of time or pay the extra cost of filing court proceedings.

The High Court, in Black Rock Administration Ltd v IAG New Zealand Limited[1], shows that an insurer’s decision to refuse a limitation extension will carry adverse consequences.

In Black Rock, proceedings were commenced after IAG wrote to Black Rock’s solicitors denying cover to a significant part of property claimed by Black Rock for earthquake damage, and after IAG expressly declined a Limitation extension.  Ultimately, IAG accepted cover, and paid Black Rock for its repair costs. The Court found that “the need for Black Rock to initiate proceedings was precipitated by IAG’s refusal to waive its rights under the limitation statutes.”[2] 

This led the High Court to conclude that “it is indisputable that Black Rock had to initiate the proceeding as a result of how matters stood between the parties prior to its commencement.”[3]  While the High Court accepted that IAG’s decision to reserve its limitation rights  was “a legitimate choice”, that choice “has ultimately carried with it, consequences.”[4]  In this case, costs against IAG.

Who is the successful party where the dispute settles out of Court? The relevant issue is “the position between the parties at the time the proceeding commenced, rather than the history of the matter to that point.”[5] 

The Court found that the amount Black Rock obtained after filing its claim was “significantly more than was on offer at the time the proceeding was commenced.”[6]

IAG’s decisions to both deny cover and not offer a limitation extension, were relevant factors in determining that costs should be awarded against IAG.

IAG had already agreed to pay the repair costs, plus $20,535.86 claims preparation costs.  In addition it was ordered to pay Black Rock’s legal Court costs of $26,495,.

 

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] [2018] NZHC 3450.

[2] At [17].

[3] At [21].

[4] At [23].[5] At [22].

[6] At [20]

In August 2014, the Supreme Court released its unanimous decision in the case of Ridgecrest NZ Limited v IAG in respect of a preliminary question put to it based on agreed facts.  Paul Cowey was assisting counsel in the case.

While the case dealt with a preliminary question, the reasoning of the Court is instructive in three key respects:

(a) The Court’s approach to policy interpretation.

(b) The Court’s approach to the doctrine of merger – are losses resulting from earlier earthquakes “swallowed up” in losses caused by a later earthquake?

(c) The Court’s approach to the principle of indemnity, namely if an insured recovers for later losses, does it breach this principle?

This article considers the first issue – policy interpretation. We consider the second and third issues in separate following articles.

Background

  • Ridgecrest was the owner of a commercial building that suffered damage in four of the Canterbury earthquakes.
  • There was separate, distinct damage caused by each earthquake. The first damaged Ridgecrest’s roof when the parapet fell from a neighbouring building. The second caused internal non-structural damage. The third earthquake damaged the shear walls which exhausted their structural capacity. It is Ridgecrest’s position that the fourth earthquake subsequently caused structural damage to the foundation (this is still to be determined).
  • After each earthquake, both structural and quantity surveying evidence had been obtained by Ridgecrest.
  • After the first two earthquakes repairs were begun but not completed before the next earthquake.
  • The building was damaged following either the third or the fourth of the earthquakes so that the cost of the repair exceeded the sum insured.
  • The policy contained a maximum liability limit of $1,984,000 for each event. This sum insured – $1.984m + GST – was significantly less than the cost of replacing the building.
  • In issue was whether Ridgecrest was entitled to be paid for the damage resulting from each earthquake up to the $1,984,000 policy limit in each case or whether the losses resulting from earlier earthquakes should be treated as having been “merged” in the loss caused by the final earthquake.

Interpreting the insurance policy

The Supreme Court construed Ridgecrest’s policy with IAG in the following way:

  • The policy provided for both indemnity (essentially the value of the building) and replacement cover (essentially the cost to replace the building which is more often than not a lot higher than indemnity value). It is therefore quite possible for an insured to make a profit in the sense of recovering (on a replacement basis) more than the actual (that is the indemnity) value of the building;
  • The policy was to be applied event by event (i.e. loss was assessed after each earthquake rather than at the end of the policy period);
  • Under the policy, the insurer could be required to pay a certain proportion of the loss before any repairs were carried out. That liability was unaffected even if such repairs were not carried out.
  • The insured’s rights in respect of losses caused by the earliest earthquakes arose immediately. For the final earthquake, which was held to have made the building a “total loss”, the insurer’s obligations to pay arises after the building is restored or replaced. In other words, the insurer could be required to pay the estimated cost of repairs after the earlier earthquakes, subject to a top up payment later being made if the building was restored or replaced.
  • The liability limit of $1.984m plus GST reset after each earthquake.

While the result of the Court’s analysis means insurers can be liable for more than the insured sum in any policy year, the Court imposed clear limits.

  • There can be no double counting by an insured (i.e. claiming for the same damage twice). In Ridgecrest, expert evidence of the separate and distinct damage, and its estimated repair cost, was obtained after each of the four earthquakes. There is no suggestion of claiming twice for the same crack, even if it has grown.
  • The claim for each event under the policy was for the estimated repair cost up to the policy limit of $1.984m. This means that an insured with replacement costs in excess of the specified sum can still be left significantly out of pocket.
  • While the cap of 1.984m resets after each event, it has been assumed that value in the building remains. If a building that is a total write-off is further damaged however, it would be difficult to demonstrate any loss resulting from such further damage.
  • The total of all claims cannot exceed the cost of actually replacing the building. This is an important restriction. The entitlement is to full, new for old value, but not more.

The Court’s reasoning provided helpful clarification to both insurers and insureds. As with most insurance issues however, much turns on the actual wording of the policy. It is therefore important to carefully read and understand your policy terms, both before loss occurs and afterwards.

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

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