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 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 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 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

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.

The Family Dispute Resolution Act (the Act) was passed on 24 September 2013.

Under it the Government has introduced a mandatory “user-pays” pre-court alternative dispute resolution – Family Dispute Resolution (FDR) – in parenting or guardianship matters. The Government has also made it discretionary for judges to refer parties to FDR after proceedings have commenced (once only).

Who does what in FDR?

The Family

Pre-court: Mandatory attendance:

The parties to a parenting or guardianship dispute must attend an FDR prior to filing any court applications. They are barred from making applications to court except in limited circumstances.

The parties will attend the mediation with or without lawyers, depending on their means, whether they are State-subsidised. It is understood that the state does not provide funding for attendance of lawyers.

After commencement of proceedings: ‘Once-only’ FDR:

Parties can be directed to attend at FDR after proceedings have been commenced, if a judge thinks there is a ‘reasonable’ prospect of reaching an agreement. Parties’ consent is only needed if they have attended an FDR in the last 12 months. The parties will attend the mediation with or without lawyers, depending on their means.

The Child

There will be no State-funded lawyer, or other representative, to represent the views of the child at FDR.

The FDR Provider

The FDR provider is a mediator, who is required to be specifically trained and accredited to an approved dispute resolution organisation.

The FDR provider is obligated to determine if it is appropriate to start FDR. If it is, the FDR provider will identify the matters in issue between the parties, facilitate discussions on the guardianship and parenting issues, and assist the parties to reach an agreement
on the resolution of those matters that best serves the welfare and best interests of all children involved in the dispute.

The FDR provider is effectively a “gate-keeper” to court/access to justice due to obligations with the FDR form and who he/she provides it to and how.

FDR form

It is troubling to require the mediator to provide an opinion going forward where the parties are not legally represented in FDR itself (and may not have had the benefit of legal advice), and the FDR provider may not be legally trained or have any Family Court legal expertise/experience. It makes the quality of that opinion concerning.

The FDR practitioner can refer parties to three hours preparatory counselling for FDR, to parenting through separation, and for legal advice to State-paid legal counsel where appropriate. The form cannot be given outside these circumstances outlined.

The form remains a potential barrier to access for justice for parents and guardians.

Client Cost

The fee for FDR was originally stated as being $897.00 GST inclusive. Currently the cost is unknown but will be confirmed in regulations when they are made.

FDR is ‘user-pays’, and both parents are jointly responsible for payment. Payment is a private fee paying arrangement if the parent does not qualify for a State subsidy.

The State will not pay for a lawyer to attend the FDR mediation with a parent/guardian even if they qualify for a State subsidy. The State will only provide four hours of “legal support prior to court”.

When does FDR ‘go live?’

March 2014 is picked as the likely implementation date for the majority of reforms. Family dispute resolution forms and the key FDR provider role/obligations linked to these, may come into force later (October 2014). These are the key ‘gate-keeping’ forms that determine access to court (for those otherwise barred except by compliance with mandatory FDR).

However, given the bulk of the Family Court reforms appear to be scheduled for introduction in March 2014, mandatory pre-court FDR would seem likely to be introduced at the same time as a package.

Conclusions and Concerns

Changes as a result of the government’s Family Court Review will be in place early in 2014.

Unless the matter is very urgent, parties will be required to seek dispute resolution before making any application to the Family Court. That process is expensive and it is unclear what will happen if one party refuses to pay their share or to engage in the
process. All those working in the Family Court system are very concerned how families will be affected. Every family situation is different.

Parties can no longer choose to be legally represented in all Family Court proceedings, so vulnerable parties may be without support when they need it most.

The Law society also has concerns about the ability of court staff to provide services to the vast influx of self-represented people without any knowledge of the legal system the legislation will create.

Our advice

Family life has become increasingly complicated in the past 20 years. We move about more and separation and re-partnering is a commonplace occurrence leading to many blended families.

We strongly recommend time spent talking to a family lawyer about the particular concerns. Obtaining reliable information and understanding the legal situation can often save time, money and much heartache later.

This will be particularly so once the changes to the Family Court come into force in 2014.

Should you need any assistance with this, or with any other Family matters, please contact Hannah Carey at Parry Field Lawyers (348-8480).

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

Interpreting the insurance policy

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”?

Who does what in FDR?

The Family

The Child

The FDR Provider

FDR form

Client Cost

When does FDR ‘go live?’

Conclusions and Concerns

Our advice

Christchurch CBD

Christchurch

Rolleston

Hokitika