The New Zealand Supreme Court has delivered its decision in Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117 (27 August 2014, delivered by William Young J), holding, amongst other things, that the doctrine of merger does not apply to successive earthquake losses.The doctrine of merger is a marine law concept recorded in s 77 of the Marine Insurance Act 1908 which states:
Successive losses(1) Unless the policy otherwise provides, and subject to the provisions of this Act, the insurer is liable for successive losses, even though the total amount of such losses may exceed the sum insured.(2) Where under the same policy a partial loss which has not been repaired or otherwise made good is followed by a total loss, the assured can only recover in respect of the total loss.…
In the present case, the insurer, IAG, contended that that the marine insurance principles should apply with the result that Ridgecrest’s partial loss claims in respect of earlier earthquakes were merged in the total loss claim resulting from the final earthquake.The Supreme Court determined that there were a number of differences between the policy in question in this case to the marine insurance policies in issue in the merger cases considered:(a) The policy provided for both indemnity and replacement cover. It wastherefore possible for an insured to make a profit, in the sense of recovering (on a replacement basis) more than the actual (that is the indemnity) value of the building;(b) The policy did not operate on the basis of a loss assessed at the end of the risk period. Rather, it applied happening by happening;(c) Under the relevant operative provision, clause C1, the insurer was required to pay before any repairs were effected and the liability to pay was unaffected even if such repairs were not effected;(d) A cause of action in respect of the losses caused by each of the earlier earthquakes accrued immediately;(e) The liability limit is reset after each happening.In the conclusion section of the judgment, the Supreme Court noted that the rights of Ridgecrest under its policy with IAG were subject to three limits:
- There could be no double counting;
- Each happening gave rise to a separate limit in respect of which the contractual limit of $1,984,000 applied;
- The total of all claims could not exceed the replacement cost of the building.
CommentThis brief note makes reference to the merger issue and concluding remarks of the decision only, a longer note will follow later which examines the entire judgment. In the meantime, it is refreshing to see the Court overtly acknowledge that "replacement" insurance - sometimes known as "new for old" - may in fact create what may be characterised as a windfall, or profit, to the policyholder. Replacement insurance does not offer indemnity, if offers something more.