Taylor v Asteron Life--appeal

Peter James Taylor failed in his High Court income protection claim against NZ life insurer Asteron Life where the High Court upheld Asteron Life's counterclaim for repayment of sums paid under the policy to Mr. Taylor. Mr Taylor has lodged an appeal with the Court of Appeal. He sought a stay of execution of amongst other things the costs award against him pending determination of that appeal. The Court of Appeal has dismissed that application: Taylor v Asteron Life Limited [2019] NZCA 683 (20 December 2019).

This decision serves as a general reminder that an appellate court will not generally stay a costs award. The issue of costs sits as a a secondary consideration because it is incidental to the conduct of civil litigation. It does not have the same quality as a state of affairs where if a lower court decision is not stayed the substantive appeal becomes meaningless (or to use a word not used outside of legal practice: "nugatory"). This is so even where the appellant faces bankruptcy as a result of enforcement of the costs award. It is open to the Official Assignee to pursue the appeal if it has merit.

Steve Keall
Barrister
27 December 2019

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Supreme Court insurance case: no to assignment of replacement benefits

A majority of the Supreme Court has ruled that it is not possible to assign replacement benefits in an insurance policy:  Xu v IAG New Zealand Limited [2019] NZSC 68 (3 July 2019). In the view of your humble correspondent, the minority view is to be preferred. The case presents an opportunity to review some of the underlying principles. This review is useful because these ideas may resurface if a later Court picks up the minority opinion. You can read a summary of the case prepared by the Court/ its staff here. In this article, editorial views are put forward.The principal issue in Xu was whether the entitlement to replacement was capable of being assigned where the customer, as assignor, had not incurred the cost of replacement at the time of the assignment. The assignment occurred at the time of a sale and purchase of the property between the assignor and assignee.The subject was considered in Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA) which held that a right to replacement benefits was conditional on the insured incurring the cost of repair could not be assigned where the insured party has not incurred that cost.Under an classical insurance policy the insurer indemnifies the insured in respect of the loss or damage. The insured is put in the position it would have been in if the loss or damage had not occurred. Where property is involved, generally, this form of cover requires the insurer to indemnify the insured for the indemnity value of the property. Often that will be less than the cost of purchasing the property new at the time of the loss.Commentators have said previously, as has your humble correspondent, that replacement type insurance is a different beast altogether. In the event of an accepted claim, it represents a boon to the customer, who receives something new for something old. If this involves a one-hundred year old mansion being rebuilt as-new then the difference is significant by an order of magnitude.  A premium of $600 may result in building costs in the millions.This is not betterment because betterment by its nature is not covered. Betterment is an uplift on an indemnity where doing what is necessary under the policy necessarily results in an increase of value of the property. It sits to the account of the insured.By contrast, replacement as-new may involve the insured receiving from the insurer something significantly more valuable than it otherwise would have obtained under a traditional indemnity policy. It is not an indemnity at all. From the insurer's point of view, it is closer to a gamble. In individual cases the insurer writes the risk without having specific information about the total replacement costs for a building if it is destroyed. (The market value is not a point of reference.) Put differently, the amount required for replacement is not solely an incident of the loss. It is the function of a contractual commitment to be liable for certain costs, whatever they happen to be, if a certain thing happens and other criteria are met.There is a principle of insurance law that an insurance policy is not capable of being assigned by the insured without the consent of the insurer. The reason for this rule is that an insurance policy is personal to the insured. The insurer has had the opportunity to assess the risk of the individual being insured. It cannot make this assessment of the new person who takes its interest under an assignment. That person might have a bad claims history. It might be a customer the insured does not wish to deal with. (Insurers may transfer policies to other insurers under a legislative scheme which required Court approval.)So much for insurance law principles. Then there are the classical laws of property, including rules of law regulating assignments. A chose in action may be assigned. On the face of it, a claim under an insurance policy--certainly an outstanding claim for an indemnity only--is a chose in action, like a debt. It is a thing capable of being assigned, as a matter of law.How then to treat an assignment of a replacement type policy? This question draws together rules of insurance law and rules of property law. It is also useful to understand the economics of the situation.Until the time of the Canterbury earthquakes, competition in the retail insurance sector led to insurers offering unlimited replacement cover for property. This risk was passed on to reinsurers. Insurers made money on the margin between the reinsurance premium and the premium charged to the customer, less their costs. These margins have always been, and remain, tight.Since the time of the earthquakes, market practices in New Zealand have changed. Generally, cover of this nature is not offered. This change is linked to the cost of reinsurance. The cost of reinsurance for full replacement cover means that the insurer could not make an adequate margin. This means they could not operate prudentially: they would not have enough premium income to pay claims and make a surplus.So, opposition by insurers to moving away from the Bryant approach is understandable. There will also be a more immediate issue about a cohort of similarly affected people wishing to advance assigned claims on the same basis. Even if there are only about one hundred claimants, complete replacement in every case could presumably add up to tens of millions across the sector.The present case will not have been one that invoked a great deal of sympathy for the claimant. The Courts will have proceeded on the reasonable assumption that the claimant-purchaser-assignee received legal advice on the possibility that he would not receive the replacement benefit he received under the assignment, on the basis of Bryant. Presumably the claimant was not counting on a change of law by an appellate Court.Replacement  is often expressed in the insurance policy to be dependent on the customer having already paid for the reinstatement. In reality, this is generally not what happens because almost no one has sufficient surplus funds to pay for those works and then wait to be reimbursed. The actual concept in play is a little different. This requirement represents a commitment to pay for replacement works that are planned and then implemented. Generally, that process is coordinated by the insurer and its representatives. This way, it is in control of the cost. All of this is subject to the specific terms of the insurance policy.These are reasons to read down this requirement. This kind of reading-down occurs where a provision in an insurance policy conflict with its basic purpose. I say that this occurs because an insurance contract is not an ordinary commercial agreement, it is one that is intended to effect the transfer of a particular risk.For example, Courts have read down a requirement on an insured to take reasonable care and stipulations about "alteration of the risk" during the currency of the policy. You cannot agree to deliver 10 widgets and then say you have a discretion to deliver 8. The Court will require you to deliver 10. So, you cannot insure someone against their own negligence and then except cover when they are negligent. The minority approached this issue on the basis that by the time of the agreement for sale and purchase of the property, the right to claim replacement under the policy had accrued. This analysis is preferable because regarding the right as having accrued reflects the reality that building works are not generally carried out and then reimbursed. The right to require performance of a contractual commitment arises in accordance with the terms of the contract--in this case, upon the occurrence of loss or damage covered by the policy. The identity of the claimant should not matter because by that stage, the subject-matter is not personal.Reinstatement of this kind cannot be described as personal. While there are many decisions to be made, they are capable of being resolved objectively and so are not dependent on the whims of the person requiring the works to be carried out or paid for. Neither the person nor the property need to be assessed for risk. The damage has already occurred.In summary, I consider that the better approach is to regard the right to obtain reinstatement as purely contractual in nature. It is not an indemnity. All talk of the indemnity principle should be jettisoned. As a contractual right, it is capable of being assigned on ordinary principles. The minority achieved this outcome by regarding the rights as having accrued at the relevant time. For the issue to resurface, market practices must change once again. That is likely to be a while away. By then, a differently composed Court may take the opportunity to revisit Bryant.Steve KeallBarrister4 July 2019

Miah v AXA: complex life insurance dispute heads for trial

Summary

In Miah v The National Mutual Life Association of Australasia Ltd (AXA) [2016] NZCA 590 the New Zealand Court of Appeal allowed an appeal against a summary judgment of the High Court; finding that in a case of mutual life insurance upon the death of a life insured half of benefit was payable to her estate in respect of which her surviving husband could make a claim as executor of her estate. The husband as the co-owner of the policy could not claim on his own account because he had been adjudicated bankrupt and his interest in the policy vested in the Official Assignee which accepted a decision by the insurer not to pay the claim. The case throws up interesting issues of contract interpretation. The Court of Appeal’s property rights analysis which relied upon the existence and then severance of a joint tenancy between two policyholders sits uncomfortably with the presumed intention of these policyholders between themselves as opposed to the presumed intention between the policyholders and the insurer. It may be that the trial Court, with the benefit of full evidence of the contractual matrix of fact, reaches a different conclusion on the merits—as it is entitled to.

The High Court decision

Mr and Mrs Miah were a married couple. They took out mutual life insurance with AXA. Mr Miah was adjudicated bankrupt. Several weeks later, Mrs Miah died. Mr Miah is the executor of Mrs Miah’s estate. Upon Mr Miah’s bankruptcy by operation of law all of his property, including his interest in the life insurance policy, vested in the Official Assignee (“OA”). AXA avoided the policy; a decision the OA accepted. The Official Assignee refused to assign to Mr Miah the right to sue on the policy. That decision was challenged by Mr Miah but upheld by the High Court on appeal.Mr Miah has continued litigation seeking to claim the benefit of the life insurance in respect of Mrs Miah. Proper comprehension of certain causes of action advanced in the statement of claim is required. In the first cause of action, Mr Miah alleges that Mrs Miah’s estate was entitled to part of the sum insured because the Miahs owned the policy as tenants in common in equal shares. He claims to enforce that right as her executor for her half of the policy. In the second cause of action, Mr Miah alleges that if the policy was jointly owned then that ownership was severed on his bankruptcy so that Mrs Miah was entitled to an equal share that he could enforce as her executor. Mr Miah’s capacity as executor is central to both of these causes of action—he does not claim on his own behalf. Outside of the litigation presumably Mr Miah expects to enjoy a benefit under Mrs Miah’s will were one of these causes of action to succeed.In the High Court an Associate Judge granted a defendant’s summary judgment application made by AXA, finding that: (i) Mrs Miah had no entitlement to payment on her death; rather, the benefit vested in Mr Miah alone as survivor, and (ii) on Mr Miah’s bankruptcy all of Mr Miah’s interest in the policy vested in the Official Assignee, with whom that interest remains. That being the case, none of the causes of action as pleaded could succeed. Mr Miah appealed to the Court of Appeal which examined these two issues.

The Court of Appeal decision

The first issue is a matter of contract interpretation. As the Court of Appeal noted, resolution of the second issue flows from the first one. So the heart of the matter was whether, as a matter of interpretation,  Mrs Miah (i.e., her estate) had any entitlement under the policy upon her death.I comment that it appears that the precise circumstances of how the insurance cover came into being is not discussed in the Court of Appeal decision; this may be a point of interest in any later trial. In any event, working from the facts as they are conveyed in the decision: one policy was issued identifying Mr Miah as the relevant “Life Insured” and another, a separate policy was issued identifying Mrs Miah as the relevant “Life Insured.” It was the latter policy that was in issue in the case although I assume that both policies were issued on substantially identical (i.e., reciprocal) terms. The policy schedule says that the relevant event is the death of the Life Insured (i.e., Mrs Miah) and it provides that “All … Benefits are payable to You.” “You” is defined as the “Policy Owner.” The definition of “Policy Owner” is “the person or persons named as Policy Owner in the schedule and if more than one means all such persons jointly” (my italics). The schedule states under the heading “Policy Owner” the names Adbur Miah and Afrouza Miah; Mr and Mrs Miah.The Court of Appeal considered Murphy v Murphy [2003] EWCA Civ 1862, [2004] Lloyd’s Rep IR 744 which is a decision of the English Court of Appeal. In England, s. 9 of the Inheritance (Provision for Family and Dependants) Act 1975 provides that when there is a joint tenancy in respect of property and a person dies, there can be an application to the Court for an order that the deceased’s severable share be treated as part of the deceased’s estate. (The English legislation is broadly the equivalent of New Zealand’s Family Protection Act 1955—but a specific application of this kind is not available under the New Zealand legislation.) Mr Murphy died. The offspring of Mr Murphy made an application in respect of an claimed interest in a life insurance policy. The policy benefit was payable to the “policyholder”, who was defined as “the person(s) named as the policyholder in the policy schedule or his executors, administrators or assignees.” Mr and Mrs Murphy were the named policyholders. The application for an order did not succeed because the Court held that the obvious intention of the policy was that the death benefit was payable to the survivor of Mr and Mrs Murphy. The gist of the English Court of Appeal’s reasoning was that the parties could never have intended severance after the death of one of them. As a consequence, the death benefit was always payable to the survivor and the Court would not order otherwise.The New Zealand Court of Appeal noted a difference between the policy wordings in Murphy and the present case, where there is the specific use of the words “if more than one means all such [owners] jointly” (my emphasis). It noted that in Murphy there was no reference to the death benefit being paid jointly. The Court regarded this as material. This meant just what it said—the benefit was payable jointly.The Court of Appeal also distinguished Murphy on the basis that in that case each person was a life insured and policyholder under the same policy document. The policy benefit was only payable once, on the death of one, before the other one (different considerations may apply in England, and New Zealand, in the case of simultaneous deaths—outside the scope of this note). So, survivorship was the only concept they possibility could have contemplated. The Court saw this as being significant for several reasons. In the present case: (i) each party had a half share in each contract so it was not clear the survivor would always benefit entirely, (ii) there was no point in naming Mrs Miah as a joint owner if she was not to benefit, and (iii) the focus on survivorship only works if there is a survivor. If hypothetically speaking Mr Miah had died first, the policy would be extant and the benefit would either be paid to Mrs Miah’s estate if so provided in the policy or otherwise payable to her estate if she is the single beneficiary, as a matter of contract interpretation.The Court then went to find that on the bankruptcy of Mr Miah the “unity of title” was destroyed. This severed the joint tenancy into two separate tenancies in common. The Court concluded that it was arguable that Mr Miah, as the executor of Mrs Miah’s estate, had a claim in respect of the second cause of action (refer above).As the Court determined there was an initial joint tenancy as pleaded in the second cause of action, and not an initial tenancy in common as pleaded in the first cause of action, it followed that this first cause of action was not arguable. A third cause of action was apparently not pursued. Therefore the plaintiff was reduced to only one causes of action of the three initially pleaded. However because the success of a defendant’s summary judgment application depends on the defendant establishing that none of the causes of action can succeed, the arguability of the second cause of action meant that the application as a whole failed.

Comment

It would appear that the Court of Appeal’s reasoning is sound as far as it goes and for the purposes of a summary judgment application. On the face of it, the policy plainly provides for benefits to be paid jointly. Assuming it is correct that this created a joint tenancy of some description, Mr Miah’s bankruptcy severed that joint tenancy. Mrs Miah’s severed interest did not form part of Mr Miah’s bankrupt estate under the control of the OA. It was therefore arguable that Mr Miah was able to advance a claim in respect of this severed interest as Mrs Miah’s executor and not on his own behalf.It seems to me that it is still open to the insurer to seek to establish that, in the factual matrix, unalloyed survivorship was intended to apply in all situations, irrespective of the use of the word “jointly.” Surely there is a good case for that conclusion, contextually, where the people making the proposal are in a married relationship and wish to benefit the other upon the death of one of them. This may well be different where two people take out life insurance in respect of the life of a third person because the two people in that case are not intending to benefit each other; they are intended to benefit themselves. If there are two of them the interest must by its nature be joint, and therefore, open to severance. The issue in this case might be approached on a “tripartite” basis where the Court takes into account what was intended as between the policyholders between themselves in terms of how the benefit was to be paid, on the one hand, and the presumed intention as between the policyholders together and the insurer, on the other. If the former is given more weight than the latter, then it may be open to the Court to consider that the interest was not ever intended to be severed.Even if not approached on this basis, it would not be heretical for the Court to override the use of specific words in order to achieve the intention of the insurance contract. This has arisen in two different kinds of cases in the past. The first is where an insurer makes it a condition of cover that an insured takes reasonable care. The Court have found very easily, as a matter of interpretation, that a failure to take reasonable care must means something close to gross negligence or recklessness. This must the case, the Courts have said, otherwise the insurance in question (usually material damage or similar) would quite often be futile. This is because accidental damage frequently results from our own failure to take reasonable care. So reasonable care in this context cannot mean what is says on the face of it—ever. An insurer could state this in the clearest language possible, and in the largest font size available, and still have its chosen language overridden.Similar kind of reasoning has been applied when the Courts have considered “alteration of risk” provisions which may require a policyholder to notify an insurer of any alteration of the risk during the term of the insurance. On the face of it this could lead to a multitude of irrelevant notifications. The Courts have held this cannot ever be what is intended. This kind of provision is consistently read down to only refer to a material change a nature of the risk, and not a change in circumstances.In both of these cases there is I suggest not so much a purposive interpretation as a functional one. The Court give effect to the proper function of the contract which is to accurately reflect the extent of the risk that has been passed to the insurer in each case. Both of these kinds of provisions are understandable from a purely underwriting perspective. With regards to reasonable care, the underwriter would like to proceed on the assumption that a person in any situation would do what any reasonable person would do, because no other reference point is available. Regarding the alteration of the risk, it is the risk itself, as presented, that is underwritten, and naturally the underwriter would want to know of any material change. But an insurance agreement is not a simple exercise in underwriting. It is a bargain where the parties use contract as a mechanism to transfer risk. The Court will give effect to that function appropriately. For example, in a case where there was an operative insuring provision but a series of exclusions according to which there was no cover at all, the Court would reasonably interpret the insurance contract so that actual cover was deemed to have been intended, and would therefore be available. It would read down the exclusions. Underwriting intention is subsumed into the bargain.Back to AXA and Mr Miah. Life insurance payable to the deceased estate is legally possible but counter-intuitive in many cases. Murphy describes the law as most people signing up for life insurance would expect it to be—where a married couple each identify the other as the relevant beneficiary then survivorship is contemplated to occur in all cases. In the circumstances of the case, did Mrs Miah really contemplate that if she died half of the proceeds of the life insurance would not be paid to Mr Miah? This is all, I suggest, proper material for a trial. With the benefit of full evidence and consideration of all of the available evidence of the contextual factual matrix the trial Court will be entitled to reach a different view to the Court of Appeal on the issue of contract interpretation. As I said earlier, the reference to the policy being joint is better suited to a situation where two people take out insurance on the life of a third person. It is not apt to describe the present case at all, as a matter of interpretation. 

Steve KeallBarrister11 June 2017

Holiday reading: recent NZ insurance cases

Two insurance decisions have been delivered recently which deserve close reading: Zurich Australian Insurance v WIthers & Ors [2016] NZCA 618, and Miah v National Mutual Life Association of Australasia Ltd [2016] NZCA 590. Your correspondent has read them, but not subject them to the suggested close reading. A longer analysis will be provided later, time permitting. For the time being, the close reading is over to you.The relevant part of the Zurich decision concerns the applicability of a dishonesty exclusion in the context of a professional indemnity policy. Miah concerns the classification of an ownership interest in a life insurance policy.

Steve KeallBarrister28 December 2016

Recent insurance case: Prattley v Vero

Here's my take on a recent NZ Supreme Court decision about the nature of insurance cover in a contested Canterbury earthquake claim (Prattley v Vero [2016] NZSC 158):http://www.insurancebusinessonline.co.nz/nz/news/breaking-news/supreme-court-calls-it-on-prattley-228230.aspx

Steve KeallBarrister11 December 2016

Court divided on PI insurance scope

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

Supreme Court grants leave to appeal: Prattley v Vero

The Supreme Court has granted leave to appeal the Court of Appeal's decision in Prattley  Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZCA 67. See: Prattley  Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZSC 70.The Court of Appeal dismissed an appeal by an insured who negotiated a settlement with its insurer, Vero, following damage to the insured's building during the Canterbury earthquakes. The parties agreed to a final settlement and discharge of all claims present and future arising out of the policy or the earthquake damage. The insured sought to reopen its claim, contending that when they settled, both parties were mistaken about the measure of its entitlement. The primary question on the appeal is whether the insured assumed the risk of mistake so as to preclude relief under the Contractual Mistakes Act 1977 (the "Act").The Court of Appeal decision has been of general interest to the New Zealand insurance community. Amongst other topics, the Court considered section 6(1)(c) of the Act, a provision which had not received a great deal of earlier judicial scrutiny. It provides that a Court may grant relief under the Act for a mistake where:

the contract expressly or by implication makes provision for the risk of mistakes, the party seeking relief or the party through or under whom relief is sought, as the case may require, is not obliged by a term of the contract to assume the risk that his belief about the matter in question might be mistaken.

The Court of Appeal found that the risk did indeed sit with Prattley under the terms of the settlement agreement (refer [78]).The Court of Appeal also provided its opinion on Prattley's entitlements under the policy although, as a result of the finding on the mistake issue this was not strictly necessary. The specific issue was whether the insured was entitled to market value or depreciated cost on destruction. The Court of Appeal determined it was the latter.The Supreme Court has crafted fairly wide terms of reference for the appeal. The leave decision records that the approved grounds of the appeal are (i) the nature and extent of the respondent’s liability under the insurance policy and (ii) the effect of the release (i.e., the settlement referred to earlier).

Steve KeallBarrister21 June 2016

Court of Appeal dismisses policyholders' Canterbury earthquake appeal

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

Law firm summary of recent defendant joint liability decision

DLA Piper New Zealand has produced a good summary of the NZ Supreme Court's recent decision in Hotchin v The New Zealand Guardian Trust Company Limited [2016] NZSC 24. This is the article.

Steve KeallBarrister20 March 2016

Law Society publication advises of P contamination risks

An effective commercial lawyer is well-placed to advised clients on managing the risk of purchasing a property contaminated by methamphetamine (also known as crystal meth, or "P") production, writes Ken Trass, in a recent edition of The Property Lawyer (November 2015). The issues are also canvassed in a recent NZLS Practice Briefing.

Transactional lawyers dealing with the sale and purchase of property need to be aware of these risks, says Mr Trass, due to the potential for insurance not covering any resulting loss and damage.

Mr Trass suggests that practitioners consider the need for appropriate contractual provisions in the agreement for sale and purchase, including, potentially, that the agreement be conditional on the vendor carrying out methamphetamine testing at the property.

There is growing concern about P contamination in the New Zealand legal profession. The use of properties for manufacturing P has sadly been widespread. It is a process which can cause damage to the property, create health risks, and well as blighting the property in the perception of future purchasers.

The insurance position should be considered on a case by case basis.

Steve KeallBarrister20 March 2016

English Court of Appeal establishes remoteness of damage test

A recent professional liability decision delivered by the English Court of Appeal should interest anyone in New Zealand concerned with professional indemnity insurance: Wellesley Partners Limited v Withers LLP [2015] EWCA Civ 1146. The decision makes a significant finding regarding the approach to be taken when assessing the remoteness of damage where there is liability in both tort and contract. The Court found that the contractual, and not the tortious, test should apply. This is the first time the issue has been addressed in an English appellate Court. It is likely to be taken into account by New Zealand Courts in relevant cases. In practical terms, this holding tends to have the effect of limiting the extent of damage; it is generally considered that the contractual test is more restrictive that the tortious one.

The law firm Withers was instructed by its client Wellesley Partners, a recruitment company, to draft an agreement documenting an investment in Wellesley Partners by a third party, Addax. Withers negligently amended the wording of a provision in the agreement to permit Addax to withdraw its investment earlier than otherwise would have been possible. Following the 2008 financial collapse, Addax relied on this provision to withdraw its investment. The unavailability of this capital to WP meant that WP was not in a position to open a New York office, as it had intended at the time Withers was instructed in relation to the drafting of the agreement.

WP commenced proceedings against Withers claiming, amongst other things, damages for the profits it said it would have made from the intended New York office. The trial judge found that Withers was negligent. It fell to be decided therefore whether damages for the profits from the overseas office were too remote.

At trial Withers contended that, where there is concurrent liability in contract and tort, the contractual test for remoteness of damage applies. The judge considered himself constrained by authority for the proposition that a professional retained by a client has a concurrent liability in tort as well as contract, and that the client is usually permitted to take enjoy the benefit of more advantageous rules permitted by the tort cause of action (such as longer limitation periods). Accordingly, he determined that WP was entitled to take advantage of the more generous tortious test for remoteness.

On appeal to the Court of Appeal Withers maintained that the contractual test for remoteness should apply. WP disagreed. In the alternative WP contended that even if the contractual standard applied, the result should be the same in this particular case.

The Court of Appeal noted that a solicitor who fails to exercise reasonable care in providing services to the client who retains him can render himself liable both in contract and in tort unless tortious liability is validly excluded: Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, a case followed in New Zealand decisions.

The Court noted that while causes of action in tort and contract are independent, it was material that tort liability usually arose at the same time due to the voluntary assumption of responsibility. In a case such as this:

it would be anomalous, to say the least, if the party pursuing the remedy in tort in these circumstances were able to assert that the other party had assumed a responsibility for a wider range of damage than he would be taken to have assumed under the contract (at [68]).

It remains the basic rule that a contract breaker is liable for damage resulting from his or her breach if, at the time of making the contract, a reasonable person in his or her shoes would have had damage of that kind in mind as not unlikely to result from a breach. The rationale is that the parties, in the absence of in the contract would normally expect a contract breaker to be assuming responsibility for damage which would reasonably be contemplated to result from a breach.

In negligence, the defendant is liable for any type of damage which is the reasonably foreseeable consequence of its wrongdoing. This is assessed at the time of the breach.

So, for contract remoteness of damage is assessed at the time the contract is entered into (in the case of solicitors at the time of the engagement, generally recorded in an engagement letter) whereas in tort and negligence specifically, remoteness of damage is assessed at the time of the breach. In the case of professional liability, it is supposed that any breach of duty will generally occur after the parties enter into a contract, sometimes much later in time – potentially years later. It follows from this potential time lag that what is within the parties’ reasonable contemplation on the one hand, and what is reasonably foreseeable on the other, at these different times, may itself be quite different. So, the different tests are potentially quite meaningful.

The Court’s holding for this issue is in paragraph [80] of the decision:

I am persuaded that where, as in present case, contractual and tortious duties to take care in carrying out instructions exist side by side, the test for recoverability of damage for economic loss should be the same, and should be the contractual one. The basis for the formulation of the remoteness test adopted in contract is that the parties have the opportunity to draw special circumstances to each other’s attention at the time of formation of the contract. Whether or not one calls it an implied term of the contract, there exists the opportunity for consensus between the parties, as to the type of damage (both in terms of its likelihood and type) for which it will be able to hold the other responsible. The parties are assumed to be contracting the basis that liability will be confined to damage of the kind which is in their reasonable contemplation. It makes no sense at all for the existence of the concurrent duty in tort to upset this consensus, particularly given that the tortious duty arises out of the same assumption of responsibility as exists under the contract.

On the facts of this case, the Court of Appeal determined that the damage was not too remote for the purposes of the contractual test in any event. The Court held that, in its view, it was clear that the damage must be taken to be a kind for which Withers had assumed responsibility under their contract.

The UK Supreme Court website does not reflect any application for permission to appeal having been lodged, although it is possible an extension of time has been sought but not recorded on the website.

Steve KeallBarrister30 January 2016

Court's classification of Lladro as a work of art is questionable

In Newbery v AA Insurance Ltd [2015] NZHC 2457 the High Court was required to determine whether the insured's damaged Lladro was a work of art, as that expression was to be understood in the context of the relevant insurance policy. Cover for any works of art was subject to a relatively low monetary cap unless they had been listed separately in a schedule at the inception of the policy. In this case, the items had not listed separately. If they were regarded as works of art, therefore, insurance cover for them would be subject to the cap. In the litigation the plaintiff-insured contended that Lladro was not a work of art, as defined (and he was therefore entitled to the cover that would have applied but for the cap), and the insurer defendant contended that it was a work of art so that the cap applied.

Given the way the case was framed, it is worth examining the definition of "work of art" which was as follows in the policy:

Work of art - pictures, paintings, prints, sculptures, ornaments, tapestries, antiques (other than furniture), hand woven mats or rugs.

In terms of the way the Court approached the case, it considered it needed to decide whether the Lladro was an ornament or a sculpture.

In the definition of work of art, different items are listed after a hyphen, in the form of a list. This wording is problematic. It is not stated whether this is an inclusive list, or an exhaustive one. The use of the word "or" is ambiguous. This may be taken to refer to a rug in itself (if read disjunctively, which is the meaning I will use in this article) or a hand woven rug (if read conjunctively with the previous item). Further, it is also not clear whether it is sufficient for an item to simply be listed in order to be a work of art, or whether something else is needed. This possibility is raised due to the inclusive of a rug, if understood disjunctively. Intuitively, a rug is not automatically a work of art, although it may be in some circumstances.

This last issue creates a difficult issue of classification. The inclusion of the word ornament is problematic because most people would agree that some ornaments may be works of art, and some will not be. There may be some ornaments which are decorative items whose sole function is aesthetic; to be displayed, and have no other utility or function, but are not, artistic, or "works of art" in any accepted sense. Equally there may be works of art which are ornamental in nature.

As noted above, the approach adopted by the learned judge was to consider whether not the Lladro could be classified as a sculpture (and it determined that it should not be; an issue which is not considered in this article) or an ornament. Either the Lladro was an ornament, or it was not. Having determined that it was an ornament, on the basis of the evidence put before the Court, including expert evidence, the Court found for the insurer and dismissed the plaintiff's claim.

In my submission the Court adopted the wrong starting point. The correct question was not to ask  whether the Lladro was an ornament, but to ask whether it was an ornamental work of art. I suggest that that the words listed after the hyphen did not stand in isolation. Instead, there is a requirement in each case for the item to be a work of art.

Informing this view is the Court's conclusion, which I agree with, that the economic value of the item should not be taken into account. This must be right because a work of art may have little or no value, or a very high value. Further, value can change over time. Value is relevant to the application of the cap, but it is not a factor in considering whether the definition is applicable to a particular item.

The approach taken meant that the Court did not consider the correct question, which is: can Lladro be classified ornamental work of art? Reframing the issue this way requires the Court to make an assessment of what a work of art actually is. In this case, it was not correct to let the rather skimpily worded definition do all of the lifting. My respectful suggestion would be that a work of art may be defined as the output of original artistic endeavour. A more nuanced analysis would probably take into account whether anything that is mass-produced can ever be a work of art. Viewed this way, and without wanting to cast aspersions on the Newberys' tastes, I have serious doubts about whether Lladro should be classified as a work of art.

A quick google search throws up a pdf of an equivalent ASB policy  (where the underwriter is IAG). The relevant equivalent capping provision in this policy is expressed to apply to:

any ornament, picture, painting or work of art.

The application of this cap is clear. No issue arises as to whether an ornament is a work of art. The cap simply applies to ornaments. This would have created a clearer path for the Newbery Court because it could have found for the insurer without classifying Lladro as a work of art.

In any event, in my opinion, a satisfactory definition of a work of art would be as follows:

"Work of art" means a picture, painting, print, or sculpture.

If an insurer wishes ornaments to be covered by the relevant cap, then the cap should stated to apply to ornaments. Defining work of art to include ornaments is problematic because not all ornaments are works of art. This is reflected in the ASB wording.

A conclusion that the Lladro is not a work of art would sit with the overall equity of the case. There was no evidence before the Court that if the insurer has received a separate schedule it would have done anything any differently. There was no evidence that the values of the Lladro were in excess of the cover available. So, there is no reason to suppose that there would have been any adjustment to the premium. The preparation of the separate schedule was, essentially, a box ticking exercise, of sorts. It is a shame the insurer did not pay the claim in full where there was genuine doubt about the meaning of the definition.

Steve KeallBarrister17 October 2015

Amended on 19 October 2015 to correct a typo and to add the last sentence.

Insurer obtains stay of execution of judgment, sort of

An insurer has partially succeeded in applying to stay execution of a High Court judgment against it, pending an appeal to the Court of Appeal: AAI v 92 Lichfield Street [2015] NZHC 2190. The judgment in respect of which the stay was sought had held that a statutory demand served upon the insurer by its insured would not be set aside. The statutory demand was based on an alleged agreement that the insurer would pay the insured a sum of money for property damage to the insured's building, outside the scope of the insurance contract. The key issue in the stay decision was whether the insurer should pay to the insured a sum reflecting the indemnity value under the policy that would be ultimately payable to the insured in any event, irrespective of the outcome of the appeal, taking into account the fact that the insured was insolvent.

In March 2015, Lichfield served a statutory demand on AAI, its insurer, stating that AAI had agreed to pay it the sum of $6.5m in respect of a property damage claim arising out of the Canterbury earthquakes.  The statutory demand was based on an alleged agreement between Lichfield and AAI that AAI would pay this amount to Lichfield, and it was not based on a claim under the relevant insurance policy. AAI applied to the High Court to set aside the demand, saying that the parties had never reached binding agreement that AAI would pay Lichfield that amount. An Associate Judge of the High Court agreed with Lichfield, holding that AAI had agreed to pay the sum in question. AAI appealed that decision to the Court of Appeal. AAI applied to stay execution of the High Court's judgment pending determination of the appeal.

The stay application was considered by Dunningham J. The crux of the case was that Lichfield was insolvent, and in receivership. It owed liabilities of approximately $9m, with most of that owing to a secured creditor, Equitable. If the judgment sum was paid to Lichfield, it would be distributed for the benefit of Equitable, and therefore later be irrecoverable in the event AAI's appeal to the Court of Appeal succeeded. In other words, the appeal would potentially be worthless. Whether an appeal will become worthless is one of the factors considered by a Court in the context of a stay application of this kind.

Resisting the stay application, Lichfield submitted amongst other things that (i) AAI was contractually obliged under the insurance policy to pay at least the indemnity value of the property, and (ii) AAI itself had said that if there was no binding agreement between the parties it would pay the indemnity value of the building under the policy of $4,627,000 in order to close the claim. Lichfield contended that this meant that whatever the outcome of the appeal, AAI would only ever be entitled to recover the judgment sum of $6.5 less this indemnity value: an amount of $1,873,000.

Dunningham J analysed the relevant provisions of the policy. She concluded that AAI's minimum obligation was to pay the indemnity value of the building regardless of whether AAI succeeds or not in its appeal and regardless of how Lichfield exercises its election under the policy to either accept payment of the indemnity value or choose to reinstate the building (an election open to it under the policy). The judge concluded that to protect AAI's appeal rights, the judgment only needed to be stayed to the extent of the difference between the insurer's assessment of the indemnity value and the judgment sum (plus costs). In other words, there was only a stay to the extent of $1,873,000 and conversely Lichfield was entitled to enforce the High Court judgment to the extent of $4,627,000, plus costs.  An order was made to this effect.

Comment

It is not absolutely clear from a review of the decision whether AAI had ever definitively committed to the indemnity sum being $4,627,000. Dunningham J noted that her decision did not determine the quantum of the indemnity value. She noted that in the event that AAI succeeds in its appeal, and the parties reverted to making an assessment of Lichfield's entitlements under the policy, then the correct figure would still need to be determined. This reasoning is open to question because the effect of Dunningham's decision was in effect to crystallise the amount of the indemnity sum. This is a consequence of the fact that from the time it is paid by AAI to Lichfield under the terms of the order, it will be irrecoverable.  On the face of it, this may sound like it has the potential to be unjust. However, based on the way the Court analysed the available evidence, it seems likely that if the indemnity value is not in fact $4,627,000 this amount is probably not too far of the mark. So, in the context of a stay of execution of a judgment, it was reasonable to conclude payment of at least this amount was appropriate in terms of the balance of convenience between the parties.

It is understood that AAI has not lodged an appeal against Dunningham J's decision.

Steve KeallBarrister23 September 2015

Recent case: Vero Liability v Heartland Bank

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.

Recent case: Tower v Domenico [2015] NZCA 372

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

1 minute case summary: HHR Christchurch NTL Ltd v Crystal Imports Ltd [2015] NZCA 283

HHR Christchurch NTL Ltd v Crystal Imports Ltd  [2015] NZCA 283(Harrison and Wild JJ)Nature of case: Appeal against summary judgment entered in the High Court in favour of a third party lessor seeking declaration that it was entitled to indemnity under policy made between insurer and lessee/assignee.Facts: Crystal leased hotel premise (top three floors of building) to Accor, which in turn assigned the hotel to HHR Christchurch (Host). Accor insured its interest in the premise with Allianz and later extended the policy to cover the interest of Host. Accor consistently denied that the head lease required it (and its assignees) to insure Crystal’s interest as lessor in the premise, but told Crystal that its interest was noted in the policy. The Allianz policy described the insured as being the Accor group, as well as those “more fully described in the schedule titled Appendix 1 (Schedule of Insured, in which Crystal was noted as a “financier”). The insured also included “owner of managed properties” as well as “mortgagees, lessees and other interested parties for their respective right and interest”.  Prior to assignment, Crystal requested from Host a confirmation that Host would insure all Crystal’s interests in the premise. In return, Host forwarded a certificate of insurance (generated by Allianz) to Crystal which contained:

NAMED INSURED: Accor Group and all other related subsidiaries

INTERESTS INSURED: HHR New Zealand Holdings Limited, HHR Christchurch NTL Limited & Crystal Imports Pty Ltd

The hotel was damaged in the February 2011 earthquake. Crystal claimed that it was entitled to indemnity under the Allianz policy.Issues:

1. Whether Crystal’s interest in the hotel was unarguably insured under Allianz’ policy.

2. Whether Host and Allianz were estopped from denying that Crystal’s interest is so covered by the policy.

Decision:

1. The answer turned on the text of the policy in light of the background facts. Here, the policy was materially ambiguous and the lessor’s interest is not unarguably insured [28]-[29].

2. Host and Allianz were estopped by the insurance certificate from denying that Crystal’s interest was insured [63].

Reasons:For 1 above:The policy limited cover to the Accor group and Host, which fell within the defined category of insured parties. Crystal was only erroneously mentioned as a “financier”. “Owner of managed properties” referred to owner of the leasehold estate [31]-[33].Crystal was also neither a mortgagee nor a lessee. While it has an interest in the property, its interest was not “more fully described in the schedule”. The phrase “as more fully described in the schedule titled Appendix 1” required an express reference to a particular insured within the Accor or Host groups [34].The fact that a policy states that it covers the interest of a third party does not of itself give that third party a right to enforce the policy. Such right only exists where the policy is arranged by an agent on behalf of that third party. Host had the authority to arrange cover for Crystal but it was not clear whether it had in fact done so [35]-[37].The purpose of the certificate of insurance issued by Allianz is to certify what is in the policy. It cannot alter the content of the policy. Moreover, the certificate was expressly subject to the terms of the policy [38].For 2 above:Representation – the certificate gave rise to an unambiguous representation that Crystal’s interest was covered [56]. It did not matter that the certificate was addressed to Accor (and not Crystal) [55], and by forwarding the certificate Host had adopted Allianz’ interpretation of the policy [56].Reliance – if Crystal had been correctly advised that its interest was not covered it would have taken immediate steps to procure cover [58] (notwithstanding that it had allowed its previous cover to lapse in 2009).Reasonableness – Host provided the certificate to Crystal for the purpose of securing its consent to the assignment of lease. Host cannot now argue that it was unreasonable for Crystal to rely on it [60].Orders:Host’s appeal dismissed. Summary judgment given in favour of Crystal affirmed (as Crystal was successful on the estoppel ground).(White J Dissenting)Decision:

1. (Endorses the majority’s judgment and reasoning on issue 1).
2. Crystal failed to establish an unarguable estoppel in order to justify entry of summary judgment [68].

Reasons: For 2 above:Representation – the certificate did not name Crystal as an “insured” or define the nature of the “interest insured”. To ascertain those interests it was necessary to read the policy itself. The certificate provided expressly that it was issued in accordance with the terms of the policy [73]-[74].Reliance – arguable that Crystal did not rely on the certificate, as even after the earthquake it did not seem to know whether or not and to what extent its interest was insured [75].Reasonableness – necessary to ask whether it was reasonable of Crystal not to have asked for a copy of the policy, which would have disclosed that its interest was not insured. There was an absence of evidence as to whether such failure was reasonable or not [77]-[79].Unconscionability – here unclear whether it is (i) unconscionability on the part of Host or (ii) Crystal trying to take advantage of a mistake by Allianz in issuing the certificate (in the knowledge of Accor’s consistent denial of an obligation to insure Crystal’s interest) [80].Prepared with assistance from Ken Ng.

Steve KeallPark Chambers13 July 2015

1 minute case summary: Medical Assurance Society of New Zealand v East [2015] NZCA 250

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

High Court delivers ruling in EQ flood damage case

The full Court of the New Zealand High Court has delivered its decision in Earthquake Commission v Insurance Council of New Zealand & Ors [2014] NZHC 3138 (10 December 2014), finding that "natural disaster damage" includes increased flooding vulnerability and increased liquefaction vulnerability of residential land created by physical changes in the land caused by earthquakes (see paras [80, [93]).You can read a description of the case here.The Court's conclusion is of interest because it it includes taking into account the probability of something occurring - or not occuring - in the future. "Vulnerability" is, afterall, just another way of describing risk, specifically, a heightened risk of something happening. Diligent readers will be asking themselves: is this a million miles from Kraal v EQC [2014] NZHC 919? In Kraal, the homeowners unsuccessfully contended that the risk that  rocks on a cliff face above the property would dislodge and cause injury/ death and property damage brought them within the scope of the relevant legislation.The Court distinguished  Kraal on the basis that in Kraal the land was physically unchanged , whereas in the present case, the land was damaged (see [72], [73]). This is where, I say, the arguments become unsustainably metaphysical.  Does the fact that this thing we call land, not made by any person, has undergone some kind of change of state mean it is damaged? Counsel for the EQC submitted no, but the Court concluded yes, stating at [79]:

As a direct result of the earthquakes, there has been a disturbance to the physical integrity of the land, reducing it in volume and leaving the body of the land in a changed physical state. This changed physical state has resulted in the land being more vulnerable to flooding, thereby adversely affecting its use and amenity. The primary use of residential land is as a platform for building. Land that is materially more prone to flooding is plainly less suitable for this purpose and is less habitable. The criteria for physical loss or damage are satisfied.

The coupling of a "changed state" with increased vulnerability results in loss of use and amenity, the Court said, which is then equated to damage as it is understood by the legislation. This is not, I suggest, actual damage, but altered physicality, of some kind, which has increased the risk of something happening (and conversely  something not happening). It is the potential loss of amenity that permits the Court to conclude it amounts to damage. This is an elegant dance. If it is accepted that it is correct, then surely it follows that the homeowners in Kraal can be taken through the same waltz? Substitute the word "rock fall" for "flooding" in the penultimate sentence above and you will catch my drift. And I suggest it is not a continental sized drift, just a little one that would appear to serve the interests of justice for all affected homeowners.I suggest that if the Court's decision in this case is correct, then the High Court's decision in Kraal should be treated as incorrect. The distinction between them is just too fine.The Court of Appeal hearing for Kraal occurred a little while ago. It will be interesting to see if the Court is influenced by these kinds of arguments in its decision.

Steve Keall14 December 2014

NZ Supreme Court news: Canterbury earthquake cases

It is understood that Skyward Aviation 2008 Ltd v Tower Insurance Ltd is being heard in the Supreme Court tomorrow (Wednesday 5 November 2014). To refresh your memory, I wrote about the Court of Appeal case here. You can read the Court of Appeal decision here.In other news, a review of the "Case Summaries" list on the Supreme Court website shows that applications for leave to appeal have been filed in the Supreme court respect of QBE Insurance (International) Limited v Wild South Holdings Limited and Maxims Fashions Limited (SC 106/ 2014) and Certain Underwriters at Lloyds of London and Sirius International Insurance Group Limited v Crystal Imports Limited (SC 107/ 2014); two of the three "conjoined" proceedings dealt with in the Court of Appeal in QBE Insurance (International) Limited v Wild South Holdings Limited [2014] NZCA 447 (10 September 2014) which I mentioned briefly here after the decision was delivered. Noticeably absent from this line up is the third of the three proceedings; Marriott v Vero Insurance New Zealand Ltd. One assumes that the insurer in this latter case was content not to push the issues further.In further news, it is understood that the insurer has filed an application for leave to appeal to the Supreme Court in Avonside v Southern Response, which I wrote about here. One has to wonder about the utility of New Zealand's highest Court potentially opining on specific line items in a replacement cost analysis, and as it relates to a "notional" rebuild only. Of course, only the insurer knows how many properties fall into that category. The bench addressing the leave application will need to decide what number of affected dwellings makes it a truly significant case, in the circumstances. One would have thought that would have to be a very high number.

Steve KeallBarrister4 November 2014

Coping cogently with contingencies: Avonside v Southern Response

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.