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]
