Combining Earthquake Losses – Ramifications of the Ridgecrest decision

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.