Here is an article I wrote in the latest edition of Law Talk on JCS Cost Management Ltd v Johnston & Anor [2015] NZCA 524. The decision is under appeal in the Supreme Court.http://issuu.com/stevekeallbarrister/docs/court_divided_on_pi_insurance_scope?e=25812555/37578679
Steve KeallBarrister8 August 2016
The Court of Appeal has dismissed an appeal by a policyholders in relation to their insurance claim against Lumley arising out of the Canterbury Earthquakes: Jarden v Lumley General Insurance (NZ) Ltd [2016] NZCA 193.A point of particular interest arises in the decision. The Court determined that Lumley's "top-up" cover to pay for damage caused by a natural disaster which was stated to be in excess of cover provided under the relevant provisions of the Earthquake Commission Act 1993 was for cover in excess of EQC's actual (statutory) liability. This is not always the same amount the EQC actually pays to policyholders, and was not in this case. Lumley was entitled to be satisfied that any sum paid by the EQC equated with its liability under the legislation (refer paragraph [26]).With regards to this issue, the Court accepted a submission from Lumley that its cover and premiums are fixed on the basis of EQC’s actual statutory obligation and that it is not open for the policyholder to alter unilaterally the basis upon which Lumley’s liability arises under the policy (refer [27]).
Steve KeallBarrister23 May 2016
Ongoing litigation between Heartland Bank (previously Marac) and Vero Liability should be of interest to both insurers and financial institutions. It provides the first significant in-depth judicial consideration in New Zealand of fidelity cover and the issues it throws up in proving dishonesty and related matters: Vero Liability Insurance Ltd v Heartland Bank Ltd [2015] NZCA 288.
Fidelity cover is a form of insurance which covers businesses against the financial fraud of their own employees. In the marketplace this kind of product is sometimes known as a fidelity bond or a bankers blanket bond (although it is not a bond, but a simple contract of insurance).
Over the relevant period one of Marac's senior managers, an employee, knowingly continued to commit the company to lending to a customer well in excess of the employee's authority, causing loss to the company. The evidence was that the employee had taken steps to disguise what he was doing, including omitting relevant information about the lending from reports submitted to the company's credit committee, instructing more junior staff to alter internal records of arrears, and failing to mention it to a close colleague in whom he usually confided about his work issues. When the situation was queried in the course of an internal audit, after making one final attempt to cover it up the situation was uncovered and the employee did not return to work.
Marac made a claim under its "Crime Insurance" policy with Vero Liability. The policy covered direct financial loss consequent on dishonest acts of employees committed with the clear intent of causing loss to the company.
One remarkable feature of this case was that there was no suggestion, or evidence presented, that the employee ever made, or intended to make, any kind of real financial gain for himself from the transactions in question. Instead, the evidence was that he continued with the unauthorised lending transactions to disguise what he was doing to avoid or at least postpone being found out and inevitably losing his job. A further remarkable feature was that the employee, who Vero Liability called to give evidence at trial ten years after the events in question, could not explain why he started the unauthorised loans in the first place. For whatever reason, he could remember very little.
Both the High Court and Court of Appeal found that the employee's conduct in continuing to make the unauthorised lending available was dishonest. The more challenging issue was whether Marac had established that the employee had acted with "clear intent" to cause loss to Marac. This was a difficult question because, as outlined, the employee's motivation did not appear to be cause any harm to the company, or obtain anything for himself. This may have been an easier question to address if the genesis of the scheme had been shown to have some malign motivation, but as already noted, this was not the evidence. Rather this aspect remained something of a historical mystery, potentially more linked to the employee lacking operational expertise and competence in managing work of the relevant kind. So, what might have begun as an incompetent mistake or error of judgment ended up turning into a dishonest scheme the employee felt he could never reveal.
The High Court held that intent to cause loss was a question of fact to be inferred from the available evidence. Knowledge that an act would result in loss was strong evidence pointing towards the required intent existing. The Court held that intent could be distinguished from desire, and the fact that an employee did not desire loss to the employer, while relevant, did not prevent a determination that intent existed for the purposes of the relevant provision of the insurance policy. In a later judgment the High Court went on to assess the quantification of the loss the insured could claim as a result.
The Court of Appeal made a different assessment of the evidence and as a result of that different assessment, it reached a different view on the intent issue. The Court noted that from a particular date onwards, the evidence was that the amounts received from the customer exceeded the sums advanced during the same period, as shown in documentary records for that period. The Court of Appeal considered that these records, and the efforts made to obtain repayments from the customer, demonstrated a concern inconsistent with a clear intent on the part of the employee to cause loss to Marac.
The Court of Appeal also considered it was relevant to the intent issue that there was no evidence of dishonesty in relation to the commencement of the lending programme and that the employee did not receive any financial advantage from the transactions, other than remaining employed (in the sense that when he was uncovered, he would inevitably be fired).
The Court of Appeal concluded that Marac had not established on the balance of probabilities that the employee had a clear intend to cause Marac loss. It therefore allowed an appeal on this issue.
The Court of Appeal's reasoning will satisfy insurers because it aligns more closely with the historical purpose and function of fidelity cover type policies. They are geared towards embezzlement by employees where the financial gain by the employee usually equates to the loss claimed by the company under the policy. Insurers would say that the wider scope suggested by the High Court judgment would need to be priced differently.
The Supreme Court website shows that Marac has applied for leave to appeal to the Supreme Court. This does not reveal the existence of any cross-appeal in relation to the Court of Appeal's confirmation of the High Court finding that the employee was dishonest for the purposes of the policy. There seems to be a reasonable case for arguing that the "clear intent" issue is of sufficient significance to be considered by the Supreme Court, because the lower Court's decision is the only New Zealand decision on point. Presumably Marac has sought to argue that it would be unsatisfactory for an incorrect decision (in its view) to regulate the way all like New Zealand fidelity policies are treated for future claims. From the point of view of legal principle and argument, this will be an attractive case for the Supreme Court to grapple with. I doubt whether any cross-appeal for leave to appeal in relation to the dishonesty issue will succeed. There was ample scope for both the trial Court and the Court of Appeal to conclude that there was dishonesty. These findings were very much of a factual nature and the Supreme Court would not be inclined to permit Vero Liability to relitigate this point. The existence of the required "clear intent" is a different matter.
The Court of Appeal also disagreed with the High Court's assessment of the quantification of the loss. That is also the subject of Marac's leave application to the Supreme Court.
Court of Appeal judgmentHigh Court judgment (liability)High Court judgment (quantum)
Steve KeallBarrister13 September 2015
Amended on 15 September 2015 to reflect that Vero Liability and not Marac called the employee as a witness at trial.
In a recent decision the NZ Court of Appeal allowed an appeal and set aside a decision of the High Court: Tower Insurance Ltd Domenico Trustee Ltd [2015] NZCA 372.Tower was the insurer and Domenico was the insured making a claim in respect of damage to a residential dwelling resulting from the 2010/ 2011 Canterbury earthquakes.One of the central issues for determination at the High Court trial before Gendall J was whether Tower had made a binding election to make a cash settlement to Domenico of the full reinstatement costs in resolution of Domenico's insurance claim.Gendall J found on the facts of the case that Tower had not made any such election. In describing the law, he stated that any exercise of a power of election must be made within a reasonable period of time, and further that if the election is not made within that time frame, the Court may make the election in substitution for the electing party. In this case, the relevant election was between the various settlement options open to Tower. Gendall J held that Tower had failed to make a relevant election within a reasonable period of time, and accordingly determined that the Court would do so, holding that Tower was liable to make immediate payment to Domenico of the indemnity value of the property.At the appeal hearing, counsel for Tower, who was also trial counsel, noted that at trial he elected not to call any evidence at the conclusion of Domenico's case in reliance on the pleadings. He stated that if election through delay had been pleaded he would have led evidence on the subject.The Court of Appeal held that election through delay was not open on the pleadings and was not raised in argument. The Court stated that if the Judge was contemplating a finding that was outside the pleadings and argument, he ought to have given the opportunity to both sides to address the issue and to seek an amendment to the pleadings. This being the case, the Court allowed the appeal and set aside the High Court's judgment.The Court stated that "the proceeding is remitted to the High Court for rehearing in light of the judgment of this Court" (emphasis added). This rider would appear to indicate that that only the issue of the alleged delay needs to be adjudicated, with the required related procedural steps also taking place, such as the formal pleading of the argument in a statement of claim, a response in a statement of defence and the exchange of evidence in relation to this issue.At the hearing, no doubt counsel for Tower will also have something to say about Gendall J's analysis of the law as described above. It is questionable whether it is correct to say that a Court may make an election for a party where it has failed to do so. That said, it is undoubtedly the case that where a contracting party is required to make an election for the benefit of the other party, if the electing party simply fails to act, it will be in breach of the obligation to make that election. In assessing the consequences of that failure, the Court must decide what would have happened if that party had done what it ought to have done. It will make that decision based on the evidence before it. It would be wholly unsatisfactory for the relevant remedy to be for the Court to order the party to make an election (which seemed to be what the Court of Appeal indicated as a possibility in its judgment, without deciding it). Where delay is the problem, that would only postpone the problem further. The Court's customary approach to problems of this kind is to make a conclusive determination that leads to a final resolution of all issues.
Steve KeallBarrister12 September 2015
Medical Assurance Society of New Zealand v East [2015] NZCA 250(Unanimously by Harrison, Keane and Wylie JJ)Nature of case: Insurance/ Canterbury earthquakes/ Appeal from the High Court, which made certain declarations sought by the insured based on construction of an insurance policy.Facts: The Easts’ dwelling, insured by the Society, was damaged in the 2011 Christchurch earthquake. The insured elected to rebuild/restore the property, instead of opting for indemnity value. The parties agreed that the insurer was liable for the cost of rebuilding/restoring the property, but disagreed as to the nature and scope of the insurer’s liability.The relevant provision in the insurance policy stated:
…the Society will cover the cost of rebuilding or restoring the dwelling to a condition substantially the same as new, so far as modern materials allow, and including any additional costs which may be necessary to comply with any statutory requirements or Territorial Authority by-laws...
Issues: (1) Whether the insurer’s liability is to cover cost actually or about to be incurred by the insured in rebuilding the property (which must be reasonable), or to pay a reasonable estimate of the cost of such rebuilding work before such cost is incurred by the insured. (2) Whether such cost is the cost of rebuilding the dwelling to the standard it was at when first built (in this case 2007), or to current Building Code standards (2015).Decision: (1) Insurer’s liability is to cover cost actually or about to be incurred, not an estimate of such ([20]-[21]). (2) Restoring the dwelling to “a condition substantially the same as new” means to a standard which satisfies current Building Code requirements [38].Reasons: in respect of holding (1) above: (i) the pragmatic difficulty in arriving at a satisfactory estimate. The insured’s own estimate of $3.096m here was seriously flawed ([22]-[23]); (ii) Contrary to the reasoning of the High Court, the interpretation of the clause given by the Court of Appeal does not impose a fetter on the insured’s entitlement under the policy ([25]); (iii) if any estimate proved to be in excess of the amount actually needed to rebuild/restore the property, there is no mechanism in the contract through which the insurer could claim back the surplus ([26]); (iv) the insurer is powerless in preventing any money, paid as an estimate of the cost, from being applied for other purposes ([27]). In respect of holding (2) above: (i) the phrase “as new” does not mean new at any particular time other than at the present ([38]); (ii) Council may not consent to restoration work based on an outdated Building Code. In that event the insurer cannot perform its obligation “to comply with any statutory requirements or Territorial Authority by-laws” [38].Orders: The High Court’s declaration to the contrary on issue 1 is set aside. The High Court’s declaration on issue 2 is affirmed. Dismissed: cross-appeal by the insured against High Court’s reservation of leave to settle quantum (if the insured’s claim ultimately fell for measure on a different basis from that proposed) ([41]-[42]). Dismissed: insured’s application for leave to adduce further evidence ([43]-[44]).Prepared with assistance from Ken Ng.
Steve KeallBarrister12 July 2015
In Avonside Holdings Ltd v Southern Response Earthquake Services Ltd [2014] NZCA 483 the Court of Appeal faced a difficult question regarding an insurer’s liability for a contingency sum for rebuilding works which by definition were never going to occur.The insurer, AMI (now Southern Response) insured the policyholder’s (Avonside) residential dwelling in Christchurch. As a result of the Canterbury earthquakes, the property was damaged beyond economic repair. The policyholder sold the land to the Crown in accordance with a government scheme.A relevant provision of the policy stated:
c. If your rental house is damaged beyond economic repair you can choose any one of the following options:
i to rebuild on the same site. We will pay the full replacement cost of rebuilding your rental house.
ii to buy another house. We will pay the cost of buying another house, including necessary legal and associated fees. This cost must not be greater than rebuilding your rental house on its present site.
iii a cash payment. We will pay the market value of your rental house at the time of the loss.
“Full replacement cost” meant “replacement with a new item, or repairing to an ‘as new’ condition”.The policyholder elected to purchase another property.In this case the rebuilding cost, as envisaged in the “buy another house” option was inevitably hypothetical because the land had already been sold and the property would never be rebuilt on the same site.In the High Court, the parties disagreed about whether a contingency sum and professional fees should be included in calculating the notional rebuilding cost. They also disagreed about how the sum apportioned for external works should be calculated. In this note the focus is on the contingency sum issue only.At trial, the policyholder’s quantity surveyor expert witness apportioned a sum of money for contingency fees, whereas the insurer’s expert did not apportion anything on the basis that there should be no allowance at all.The High Court held that there should be no allowance for contingencies in the calculation of the cost of rebuilding the property. MacKenzie J held that, in a notional rebuild, there could by definition be no unexpected items for which a contingency allowance would be provided in a contract. What was required was the best assessment of the cost of rebuilding, based on all known circumstances. As there would be no actual rebuild, that assessment would never be put to the test. So, there was no need to add a contingency sum to reflect possible contingencies which would never be encountered.In the Court of Appeal, the policyholder contended that it was necessary to assume hypothetically that the rebuild would occur. Costs could not be excluded from the estimate of the rebuild cost just because the rebuild was not going to happen and costs would not be incurred. If that approach were taken, it was difficult to see what costs would ever be included in the estimate, it submitted.The insurer contended that no allowance for contingencies was needed because, given the nature of the notional exercise involved in estimating the rebuild costs, all relevant risks were already known. Rather, what needed to be worked out was the cost of duplicating the construction of the property as provided for in its original plans. Where contingencies did arise they could be dealt with under a provision of the policy which provided for cover for additional costs.The Court of Appeal therefore had a clear choice between ordering that something, or nothing at all, be paid for contingencies.It analysed the insurer’s position this way at paragraph 49:
The approach contended for by Southern Response means that costs for contingencies and professional fees that would be incurred where the rental house was actually rebuilt on the same site, whether as part of “the full replacement cost” or as part of “additional costs”, are excluded from the calculation of the cost of rebuilding under the “to buy another house” option. The rationale for that exclusion is that because the exercise is a notional and not an actual one, contingencies that would as a result not be incurred need not be included. Southern Response argues this is the correct interpretation of the Policy.
With regards to this, the Court held at paragraph 51:
The cost of rebuilding the rental house on its present site involves both the full replacement cost and additional costs, encompassing contingencies and professional fees. That is the amount the insurer would be liable for where the insured chose the “to rebuild on the same site” option. We are satisfied, therefore that it is an amount equivalent to the sum of both of replacement and additional costs, and not the lesser amount of solely “the full replacement cost”, that is to be paid by the insurer to the insured when the insured elects the “to buy another house” option. In our view, if the Policy had intended any limit to “the full replacement cost” to apply in cl (c)(ii), it would have said so.
(Italics added for emphasis).
This line of reasoning can be broken down this way: an election to buy another house under clause (c)(ii) was referable to the cost of rebuilding the property on the same site under clause (c)(i), which was limited to the “full replacement cost.” Ordinarily, the full replacement cost for an actual rebuild would include a contingency sum. If the insurer had wanted the “full replacement cost” to be net of a contingency sum for the purposes of clause (c)(ii), the Court of Appeal reasoned, then it needed to say so.This reasoning, as in other Canterbury earthquake cases, involved an assessment of where the risk should lie where the policy is capable of different reasonable meanings. The insurer’s contention that it should never be liable for costs which, by definition, could never be incurred, is attractive. This is instinctively the correct position as a matter of logic. However, contract interpretation is concerned with more than logic; it is concerned with meaning. Clauses (c)(i) and (ii) used the concept of rebuilding the property on the same site as common concept and without any distinction between an actual rebuild (clause (c)(i)) or a notional rebuild (clause (c)(ii)). So, the insurer’s argument, as attractive as it is, can only be regarded as implicit in the wording, rather than explicit. Viewed this way, it is fair for the insurer to bear the risk because clearly it has the ability to control the way the policy is worded in a way that the policyholder does not. Simply put, if it wanted contingencies to be excluded where the policyholder elected to buy another property, then it needed to say so clearly and unequivocally.Further, this is not a case where such an outcome is inconsistent with commercial common sense or anything like it, which may justify the provision being read down. As I have commented previously, replacement insurance is consciously different to indemnity insurance. It is new for old. It is a permissible windfall on the behalf of the policyholder. An economist will tell you it is what the insurer promised to provide in the event of accidental damage, and what the policyholder believed it was paying for. So, while this outcome will put the policyholder in an advantageous position when it goes to buy a new house, this is an eventuality that was contemplated by the policy, based on a reasonable interpretation of it.
Steve KeallBarristerPark Chambers13 October 2014
This case note is not subject to copyright. I assert my moral rights to be identified as the author. Microsoft Word version available on request.
The Court of Appeal has ruled against an insurer in a Canterbury earthquake case: Skyward Aviation 2008 Limited v Tower Insurance Limited [2014] NZCA 76 (Randerson, Harrison and Miller JJ, 20 March 2014, judgment delivered by Harrison J).
Summary
The Court of Appeal has held that on a proper construction of "basis of settlement" provisions contained in the insurance policy in issue, the policyholder had the right to decide whether to rebuild or repair on site, or to rebuild elsewhere, or to buy another house, once it had been established that the house was not economically repairable. It reached this decision with reference to, amongst other things, the policyholder's ownership interest and specifically its "legitimate interest" in remaining in its chosen neighbourhood. The Court also held that if the policyholder purchased another house, the insurer was bound to pay the cost of that house up to the cost which the policyholder 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. On the evidence, these notional repair costs were significantly in excess of the market value of the existing dwelling, which on the face of it conferred a significant financial advantage on the policyholder, although not, the Court said, in breach of the indemnity principle.
Background
The policyholder company, Skyward, purchased a residential dwelling in Christchurch in 2009 for $450,000. Skyward insured the property with Tower, an insurer, under a full replacement value policy. The certificate of insurance did not state a sum insured, providing instead that the house was insured for its full replacement value based its surface area.
The property was badly damaged in the 2010/ 2011 Canterbury earthquakes. It was situated within a statutory area called the "Red Zone" where repair of any property was uneconomic.
The insured subsequently elected to sell the land to a government agency known as the Canterbury Earthquake Recovery Authority ("CERA") for $291,000. The insured also received its maximum statutory entitlement from the Earthquake Commission ($100,000 plus GST), and an interim payment of approximately $165,000 from Tower. This interim payment was for the house damage based on the cost of purchasing a comparable house elsewhere (taking into account payments from all sources), without prejudice to Skyward’s right to claim more.
The dispute
The insured and insurer could not agree on the measure of the insured loss under the policy.
Tower contended that it had the right to choose from a number of settlement options under the policy. Specifically, it was obliged to pay only the fair price of a replacement house elsewhere of comparable size, construction and condition as the insured's dwelling was when it was new. It said that the pre-earthquake market value of the property was $492,000.00, divided between land at $275,000.00 and house and chattels at $217,000.00. It said that Skyward could buy a similar house (excluding the land) for $365,000.00. The combined payments from the EQC and Tower provided sufficient funding for this cost to be paid, thus satisfying Tower's obligations under the policy.
The insured contended that it was entitled to payment of an amount equal to the estimated costs of rebuilding or repairing its house on the land. Skyward said that the house could be repaired on the site at a cost of $682,525.00 or rebuilt elsewhere to regulatory standards for $770,960.00.
Accordingly, there was a difference of about $300,000 in the parties' calculations of the relevant measure of loss.
The issues to be determined
The parties remitted the following questions to the Court for determination in this context (paraphrased):
It is worth noting that the Court of Appeal dealt with the second question first, then the first question, and regarded the third question as irrelevant in light of its answers to the first and second questions.The policy wordingThe relevant provisions of the policy stated:"HOW WE WILL SETTLE YOUR CLAIMWe 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; orthe full replacement value of your house on another site you choose. This cost must not be greater than rebuilding your house at the situation; orthe 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." (emphasis added)"Full replacement value means the costs actually incurred to rebuild, replace or repair your house to the same condition and extent as when new and up to the same area as shown in the certificate of insurance, plus any decks, undeveloped basements, carports and detached domestic outbuildings, with no limit to the sum insured.""Present day value means the cost at the time of the loss or damage of rebuilding, replacing or repairing your house to a condition no better than new and up to the same area as shown in the certificate of insurance, plus any decks, undeveloped basements, carports and detached domestic outbuildings, less an appropriate allowance for depreciation and deferred maintenance, but limited to the market value of the property less the value of the land as an unoccupied site."The basis of settlement provisions also contained this statement: "in all cases: ... we have the option whether to make payment, rebuild, replace or repair your house."The basis of settlement issueThe Court of Appeal stated that the relevant provisions of the policy effectively provided for four different alternative bases for settlement, which were:
It was not disputed that Tower was not bound to pay anything more than "present day value" until Skyward incurred the cost of reinstatement, rebuilding or replacement. Having identified the various alternatives, the Court then recast the primary question as who had the ability to decide which basis of settlement was to be applied. It noted that the High Court had ultimately determined that the provision "in all cases: ... we [Tower] have the option whether to make payment, rebuild, replace or repair your house" was decisive. The High Court had stated at paragraph 68 of its judgment:
"Tower has the choice, therefore, of whether to make a payment, or rebuild, replace or repair. It follows that Tower, in making the payment, can choose the basis of payment. That basis must be on a repair, rebuild or replacement basis, and if repair is not an option, which I have found it is not, Tower can choose between rebuild and replacement."
The Court of Appeal interpreted the different basis of settlement provisions, read together, as containing language which gave the relevant decision to the policyholder, with reference to the following:
The Court of Appeal related these provisions to the parties' respective interests in the property: the policyholder had an ownership interest and the insurer had only a "strictly economic interest." The Court made a number of observations about these respective interests including that once the insurer must pay the full measure of loss "it should be indifferent to the policyholder’s decision about how to reinstate the property" (paragraph 23). It then stated at paragraph 24:
"In our judgment these provisions must prevail over the statement in the basis of settlement provision that in all cases Tower has the option to make payment, rebuild, replace or repair the house. While accepting that the policy allows Tower to insist on repair in certain situations, we do not accept that it allows Tower to control what happens in every case. If it did, as Mr Campbell observed, Tower might choose to pay on a present value basis, that being one of the settlement options, notwithstanding that the policyholder wished to reinstate or replace the house."
The Court of Appeal said that the policy worked this way: if the policyholder did not pursue full replacement by repair, rebuilding or replacing, Tower was bound only to pay the "present day value" as defined. If the policyholder wished to repair, rebuild or replace to full replacement value, Tower’s rights depended on whether the house was economically repairable. If it was, Tower would be able to insist on repair or rebuilding on the same site. Further, Tower would be able to commission the work. If the house was not economically repairable, then the policyholder could decide whether to repair or rebuild on the existing site, or rebuild elsewhere, or buy another house. But in every such case Tower needed only pay the cost of rebuilding on the existing site. The Court of Appeal recorded the insurer's submissions the contrary. Counsel for the insurer appears to have made a submission based on the inconsistency between the insurer have the choice between whether to reinstate or pay and for the policyholder to be given the choice between alternative bases for payment. The Court stated that it perceived no inconsistency in allowing the insured party to choose where the measure is effectively the same. It stated at paragraph 29:
"Once it is established as a matter of fact that the house is not economically repairable, Tower has no continuing interest in whether the insured party rebuilds on the existing site, rebuilds on another site or buys a house elsewhere, subject only to the insured actually incurring replacement cost, and further to the agreed financial limits."
So, it framed this submission in the context of the interests analysis referred to earlier. Counsel for the insurer submitted that Tower’s choice of the basis of payment was also confirmed by the limitation on Skyward rebuilding on another site or buying a house only if the existing house is damaged beyond economic repair. No purpose would be served by this clause, he submitted, if the choice between the bases of payment was for the insured. Its true purpose was to give Skyward fair notice of how Tower intended to exercise its choice, and the concept of Tower allowing the insurer to rebuild on another site or buy a house implicitly recognised Tower’s choice whether this will be done. The Court rejected this submission. It stated at paragraph 31:
"This construction of the proviso contradicts its plain language, and we reject it. Its purpose is to impose a limitation on the nature and scope of the insured’s underlying right to choose between alternatives, allowing the insurer to restrict the extent of its liability. It cannot be construed as a notice provision."
The Court of Appeal judgment records Counsel for the insurer as having submitted that in this case, by accepted the policy framed in the way that it was, the parties had effectively agreed that Tower's economic interests should prevail over the insured's interest in being able to rebuild or buy another house in a location where it retains neighbourhood links. This would be mitigated, he submitted, by the insurer acting reasonably to agree an amicable settlement with the policyholder. It would only choose the third alternative as a last resort. The Court of Appeal did not accept this submission. Amongst other things, it said that taken to its extreme, an insurer could require a policyholder to move to another city. The Court stated at paragraph 38:
"The words should not be construed to reach that extreme result and deny an insured party’s legitimate interest unless the words point unequivocally to that result. The insured party’s legitimate interest in remaining in an area is best recognised by the means adopted by the parties of allowing it to choose where to spend the reinstatement moneys."
The ratio for the overall question is contained in paragraph 39 of the judgment where the Court stated:
"Accordingly, the answer to the first question is that, once it has been established that the house is not economically repairable, Tower has no right to choose the basis of settlement. It is then for the insured, not Tower, to decide whether to rebuild (or repair) on site, or to rebuild elsewhere, or to buy another house. Of course it must incur these costs before Tower need pay anything more than the appropriate measure of present day value."
The measure of settlement where insurer pays the cost of buying another houseAs stated above, one of the questions remitted to the Court was the correct measure of settlement where Tower settled its liability by paying the cost of purchasing another house. The High Court had put it this way at paragraph 58 of its judgment:
"the amount to be payable by Tower, where it is to pay to Skyward the cost of buying another house, is to be the fair price of a replacement house which is to be a reasonable and practical extent comparable, of the same 270 m² size and construction (as far as may be possible), in the same condition, and of the same style and extent (more or less), as the Kingsford Street house was when new. This could be a new or (more likely) a second-hand house sited outside the red zone. As to whether its size, construction and quality were reasonably comparable, these would all be determined on the facts of this particular case..."
The Court of Appeal disagreed. It stated that the maximum amount payable by Tower as prescribed by all three relevant alternatives was materially the same. The first two alternatives expressly adopted full replacement value at the present site. The third alternative adopted the (necessarily notional) costs of rebuilding on the existing site. The amount payable by Tower if Skyward bought another house was not subject to any other limitation, including any limit on the size, style or quality of the other house. Counsel for the insurer submitted that this was contrary to the indemnity principle (refer: Castellain v Preston (1883) 11 QBD 380). He referred to the valuation evidence to the effect that the cost of rebuilding the house would be up to $770,960.00. Skyward would therefore receive between $860,000.00 and $920,000.00 as the measure of its loss when a comparable house would cost about $365,000.00 and its pre-earthquake market value was $211,000.00. If Skyward was paid the currently estimated rebuilding cost when it did not intend to rebuild, it would be receiving more than three times the market value of the house at the date of loss. The Court of Appeal held that payment at the higher value simply reflected what the parties had agreed - specifically, a measure of loss referable to a replacement value as opposed to the "present day value" (i.e., the indemnity value). Payment using the higher value was therefore justified. The ratio for the overall question is contained in paragraph 49 of the judgment where the Court stated:
"...We are satisfied that if Skyward buys another house Tower is bound to pay the cost of that house up to the cost which Skyward 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."
Did Tower irrevocably elect to make a payment based on full replacement value?The High Court held on the evidence that there was no such election. This was essentially a factual question and it appears that Counsel for the Skyward did not focus a great deal of attention on it in the Court of Appeal hearing. The Court of Appeal concurred that there was no such election, and determined it accordingly but observed that this issue was irrelevant in light of the answer to the two former questions.CommentThe policy in this case offered unlimited replacement value cover. In New Zealand, as is already the case in the United Kingdom and in certain other countries, insurers are ceasing to offer this kind of cover. Instead, they are limiting their liability to a stipulated sum insured that is either linked to an actual valuation (usually commissioned by the policyholder) or in its absence a default valuation. The kind of issues face in this case should, therefore, become increasingly rare as policies under the "old" regime go off risk over the next twelve months, subject to any litigation that is commenced.In this case, the Court of Appeal was prepared to take the fairly robust step of reading down the express term "in all cases: ... we have the option whether to make payment, rebuild, replace or repair your house." The relevant sentence was the proviso to the "second alternative" basis of settlement provision, which was: "we will only allow you to rebuild on another site or buy a house if your house is damaged beyond economic repair." The Court characterised the relevant "allowing" as a "veto", a concept which by its nature required the exercise of an "underlying choice" in the first instance. By this reasoning, the policyholder had a choice which it was at liberty to exercise. If there is any appeal, this line of reasoning will no doubt be subject to further scrutiny.Giving weight to the parties' respective interests is significant in what was otherwise a non-contextual "black-letter" contract interpretation analysis. The Court of Appeal referred to the policyholder's ownership interest, which included a "legitimate interest" in retaining a neighbourhood link to the existing location of the property, in contrast to the insurer's "strictly economic" interest. The suggestion that, in an insurance policy, language must be unequivocal in order to leave unaddressed a policyholder's legitimate interest in the property, is a unique one as far as this correspondent is aware. This may be the first blip on the radar of a potential incorporation of the United States' approach to contract interpretation which considers the parties "legitimate expectations."(Published on 22 April 2014, updated on 23 April 2014)