Recent NZ insurance decisions

There have been several recent decisions of note:Body Corporate 74246 v  QBE Insurance (International) Ltd & Allianz Australia Insurance Ltd [2017] NZHC 1473:This decision involved a dispute between insurers QBE and Allianz regarding whether, as a matter of contractual interpretation, double insurance existed. This depended on when the time of day a particular policy was intended to have incepted. The decision includes interesting evidence about market practice in respect of the time of day insurance incepts. As a result of the Court's conclusions about contractual interpretation there was no double insurance.AMI Insurance Ltd v Legg and Ors [2017] NZCA 321:This case is notable for being New Zealand appellate authority that the so-called Wayne Tank principle represents the law of New Zealand.In this case the Court of Appeal allowed an appeal from a High Court decision. The Court of Appeal found for the insurer, concluding that it was not liable to cover the policyholder for damage "arising out of or in connection with" a business of the policyholders other than their farming business. The damage caused by a fire which had spread from a deliberately constructed "fire heap" on their property consisting of material from their farming activities (prima facie covered) and materials from another business.The Court of Appeal reviewed the authorities and confirmed that the expression "in connection with" requires a causal connection of some kind. It applied the so-called Wayne Tank principle, an equivalent of which can also be found in s. 55(1) of the New Zealand Marine Insurance Act 1908. Where a loss has two effective and interdependent causes, one within the policy and one excluded by it, the exclusion prevails. This was apt to describe the present case, in which there were two interdependent causes, neither of which could be isolated from each other:  material from the (covered) farming operations and material from the "other" business (not covered).Notably the Court of Appeal declined to follow a decision of the Supreme Court of Canada; Derksen v 539938 Ontario Ltd [2001] 3 SCR 398 which read down the the presumption that where there are concurrent causes, all coverage is ousted if one of the concurrent causes is an excluded peril. So Wayne Tank continues to represent the law of New Zealand.*I briefly mention the delivery of a decision which will be of interest to insurers and brokers in terms of the interrelationship between PI and D&O cover: Fund Managers Canterbury Ltd v McBeath & Ors and AIG [2017] NZCA 325.

Steve KeallBarrister28 August 2017

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

Corporation liable for criminal conduct committed by employee: recent UK decision

In a recent ground-breaking decision the Supreme Court of the United Kingdom has ruled that an employer can be liable for crimes committed by a staff member while at work: Mohamud v WM Morrison Supermarkets plc [2016] UKSC 11. This decision should interest anyone engaged in risk management. It will be of particular interest to purchasers and providers of public liability insurance.

Morrisons is a UK supermarket chain which also operates petrol stations at some locations. In March 2008, Mr Mohamud, a man of Somali descent, parked at a Morrisons petrol station forecourt. He entered the payment kiosk and asked the employee on duty, Mr Khan, whether he could print some documents on a USB stick. Mr Khan refused and Mr Mohamud objected. Mr Khan then embarked on a racist tirade against Mr Mohamud, directing him to leave. Mr Khan left the kiosk, followed Mr Mohamud to his car and physically attacked him, causing injury.

Mr Mohamud sued Morrisons, contending that it was vicariously liable for Mr Khan’s actions. The trial judge dismissed the claim finding that there was an insufficiently close connection between what Mr Khan was employed to do and his conduct in attacking Mr Mohamud for Morrisons to be liable. The Court of Appeal reached the same conclusion. Mr Mohamud appealed to the Supreme Court. He challenged whether the “close connection” test was the correct legal standard. He also contended that his claim should have succeeded even if this was the standard.

The Supreme Court unanimously allowed the appeal (which, incidentally, was conducted by the English Bar Pro Bono Unit). The Supreme Court upheld the “close connection” test as the correct one. The Court outlined how two matters fell to be decided. First, the Court needed to inquire what function or fields of activity had been entrusted to the employee, viewed in a broad way. Next, the Court was required to decide whether there was sufficient connection between the position in which the employee was employed and the wrongful conduct to make it just for the employer to be held legally responsible.

In applying this test, the Court found that it was Mr Khan’s job to attend to customers and respond to their inquiries. The way he responded to the Claimant’s query with verbal abuse was inexcusable, but, that said, interacting with customers was within the field of activities delegated to him by the company. The Court determined that what happened next could be regarded as “an unbroken sequence of events”. The connection between the field of activities assigned to Mr Khan and his employment did not cease at the moment when left the kiosk and followed the Claimant to his car. There were two reasons to come this conclusion, the Court said. First, it is not correct to regard Mr Khan as having metaphorically “taken off his uniform” when he left the kiosk (and surely the absence of clothing, if non-metaphorical, would have been particularly alarming to the victim). Rather, he was following up on what he said to Mr Mohamud. Further, when Mr Khan followed Mr Mohamud to his car and told him not to come back to the petrol station, that was not something personal between them, but an order to keep away from his employer’s premises. In giving the order he was purporting to act about his employer’s business.

Additionally, the Court stated:

Mr Khan’s motive is irrelevant. It looks obvious that he was motivated by personal racism than a desire to benefit his employer’s business, but that is neither here nor there.

In this decision the Supreme Court confirmed the “close connection” test but applied it in what can only be described as a radical way. It would not be unreasonable to argue that in doing what he did, Mr Khan did indeed abandon all connection with what he was supposed to be doing as a dutiful Morrisons employee. Nonetheless, that is not how the United Kingdom’s court of final appeal saw it. Time will tell whether the lesser courts, and courts in other jurisdictions, feel compelled to apply the law in a similar way.

Steve KeallBarrister9 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

Claim for costs upheld where primary causes of action failed at trial

Where an insurance claim is litigated, the potential for an award of costs against the unsuccessful party is a central consideration. The general rule is that costs should follow the event, which is to say an award of costs will generally flow with the result of the litigation. The loser pays the winner's costs in accordance with the costs rules. However, it is not always the case that the winner receives its costs as demonstrated in the recent case of Robinson v Whangarei Heads Enterprises Ltd & Freakley [2015] NZHC 2403.In this case the High Court considered whether a plaintiff should be regarded as having been successful at trial, triggering an entitlement to recover his legal costs, even though his primary claim had failed.The primary claim was that the first defendant, a company, had misled the Court in relation to an earlier application by the company to have the plaintiff arrested.At trial, the plaintiff was initially self-represented. He advanced the claim as abuse of process and malicious prosecution in relation to the arrest application.By the the time of trial, the plaintiff was represented by counsel. Counsel sought and was granted leave to advance an additional claim seeking compensatory damages pursuant to an undertaking provided by the company in support of the arrest application.At trial, the Court found that the company had failed to make appropriate necessary disclosure in relation to the arrest application. If it had done so, the arrest order would not have been made. This meant that the plaintiff was entitled to compensatory damages pursuant to the undertaking.So, while the primary claims had failed, the plaintiff's rights had been substantially vindicated due to a finding that the company had in fact misled the Court. The plaintiff was therefore regarded as successful and he was entitled to his costs.

Steve KeallBarrister8 October 2015

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

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.

Insurers lose ability to bring certain subrogated claims

The High Court has interpreted the lessee immunity provisions of the Property Law Act 2007 to extend to residential tenants under the Residential Tenancies Act 1986 in respect of property damage: Holler & Rouse v Osaki [2014] NZHC 1977 (20 August 2014, Justice Keane).The issue is significant to the residential tenancy investment industry, including general insurers insuring such properties. Specifically, the decision prevents such insurers from pursuing subrogated claims against residential tenants who are believed to be liable for causing damage to the property.Parties to such claims would be well-advised to put them on hold until the resolution of the anticipated further appeal to the Court of Appeal.The case also raises an issue about the role of the judiciary in interpreting legislation.Factual backgroundMr Holler and Ms Rouse owned a residential dwelling which was occupied by Kenji Osaki under a residential tenancy agreement, and also occupied by Mr Osaki’s partner, Teiko Osaki. On 19 March 2009, there was a fire at the property causing property damage. AMI Insurance Ltd indemnified Mr Holler and Ms Rouse for the cost of repair, which was $216,413. It is alleged that the fire was caused by Ms Osaki carelessly leaving a pot of boiling oil on a stove while she was distracted by their children.Mr Holler and Ms Rouse sought to recover the cost of repair from Mr and Mrs Osaki (presumably at the behest of AMI exercising its rights of subrogation).Procedural historyMr Holler and Ms Rouse brought a summary judgment application in the High Court. The Osakis opposed the application, contending that the claim was barred by ss 268 and 269 of the Property Law Act 2007 (the “PLA”), which exonerate lessees from liability for fire damage caused by their negligence or that of their licensees. The Osakis also entered a protest as to jurisdiction on the basis that the Tenancy Tribunal had exclusive jurisdiction. Associate Judge Abbott stayed the summary judgment application and determined that while the claim exceeded the Tenancy Tribunal’s $50,000 limit, the Tenancy Tribunal retained the ability to decide whether the claim was barred by ss 268 and 269. It decided that ss 40 and 41 of the Residential Tenancies Act 1986 (the “RTA”), which make tenants liable for the damage they or their licensees cause, applied unaffected by ss 268 and 269.The Osakis appealed successfully to the District Court. Mr Holler and Ms Rouse obtained permission to appeal to the High Court which is the subject of this note.The immunity issueHistorically, the lessor insured the property against accidental loss and damage, and either directly or indirectly passed on the insurance premium to the lessee. This often resulted in a mistaken assumption by the lessee that the lessor’s insurance policy also covered the lessee in the event of accidental damage. This mistake was often uncovered when the lessee found itself the recipient of a subrogated claim by the lessor’s insurer to recover the cost of repair following damage to the property where the lessee was believed to be liable. The existence of such actions was generally considered to be unjust[1] where the lessee had either directly or indirectly paid the premium but was not a contractual beneficiary of the insurance. The deeper thinking behind this concern was that if the lessee had in effect been a co-insured, or treated as one, the insurer would not ordinarily be able to bring a subrogated claim because it would involving causing common parties to an insurance contract to sue each other, which is generally prohibited.Sections 268 to 272 of the PLA were enacted to address this issue. The combined effect of ss 268 and 269 is that a lessor must not require the lessee to pay the cost of repairs necessitated by destruction or damage to the property except where the damage was cause deliberately by the lessee or its agent or where the conduct constituted an offence. The provisions apply to specifically named perils: lightning, storm, earthquake or volcanic activity, or any other peril for which the lessor has actually obtained insurance or agreed with the lessee to be insured. The provisions apply where the damage was caused or contributed to by the negligence of the lessee or its agent.On the face of it, and subject to the analysis which follows below, ss 268 and 269 stand in contrast to the provisions of the RTA which deal with a residential tenant who has caused damage to the rented property. Section 40(2)(a) states:

the tenant shall not intentionally or carelessly damage, or permit any other person to damage, the premises.

Section 40(4) states:

where any damage (other than fair wear and tear) to the premises is proved to have occurred during any tenancy to which this Act applies, it shall be for the tenant to prove that the damage did not occur in circumstances constituting a breach of subsection (2)(a) of this section.

The effect of these provisions is to make a tenant responsible for the cost of repairing property damage where he or she is at fault.The principal issue in the High Court appeal: application of PLA immunity to RTA tenantsThere is no issue that the immunity provided by ss 268 and 269 applies for the benefit of commercial tenants. The issue that arose in this case is whether it also applies for the benefit of residential tenancies under the RTA.Appellant’s submissionsThe appellants’ position was this. Before the PLA was enacted, any tenant who caused fire damage and did not have the benefit of the lessor’s insurance was liable. That remained the case after the passage of the PLA. Sections 268 and 269 of the PLA only apply to commercial tenancies because s. 142(1) of the RTA states that Part 4 of the PLA (which includes ss 268 and 269) does not apply to the RTA. Section 8(4) of the PLA makes the RTA paramount. Further, s 142(2) may require the Tribunal, in exercise of its jurisdiction under s 85, to look to Part 4 of the PLA as a source of general principles of law. But that can only be when the RTA itself is silent. When it is not silent, the RTA displaces the PLA. In essence, the appellants contended that ss 40 and 41 of the RTA trump ss 268 and 269 of the PLA. Section 40 provides that the tenant shall not carelessly damage the property. Section 41 makes the tenant responsible for the conduct of someone at the property with the tenant’s permission.[2]Legislative background to law reformIn papers published in 1991 and 1994 the Law Commission referred to the unjustness referred to above and suggested law reform to make lessees immune to claims by lessors (generally, if not always, subrogated claims by the lessor’s insurer) for property damage. The 1991 paper suggested the RTA be amended to reflect this for residential tenancies under the RTA. In 2006, the Residential Tenancies (Damage Insurance) Amendment Bill was tabled in Parliament to require landlords to insure, and to render tenants immune from claims by their landlords or by their landlords’ insurers. This bill did not progress. The relevant parliamentary committee envisaged that any such reform would be incorporated into a contemplated general review of the RTA. In 2008, the Residential Tenancies Amendment Bill (No 2) was tabled. One of its key aspects was limiting a residential tenant’s liability for property damage to four times the weekly rent. The government changed and this reform was not pursued. The RTA was amended by the Residential Tenancies Amendment Act 2010, which did not, in the event, include this amendment. In the meantime, the PLA was enacted, replacing the Property Law Act 1952. The PLA contained ss 268 and 269 set out above. Accordingly, the PLA was amended to reflect the desired law reform, and the RTA was not. However, as developed in the section below, that is not necessarily the end of the story.The High Court decisionHis Honour Justice Keane described the background facts, statutory framework and law reform history summarised above. The building blocks of his decision are as follows.Section 85 of the RTA: jurisdictionThe RTA created the Tenancy Tribunal as a forum to resolve residential tenancy disputes. The manner in which the Tribunal’s jurisdiction is to be exercised is set out in s. 85 of the RTA, which states:

(1) Subject to the provisions of this Act and of any regulations made under this Act, the Tribunal shall exercise its jurisdiction in a manner that is most likely to ensure the fair and expeditious resolution of disputes between land lords and tenants of residential premises to which this Act applies.

(2) The Tribunal shall determine each dispute according to the general principles of the law relating to the matter and the substantial merits and justice of the case, but shall not be bound to give effect to strict legal rights or obligations or to legal forms or technicalities.

The Court cited Welsh v Housing New Zealand Ltd which stated that s. 85(2)[3]:

does not create a licence for the Tenancy Tribunal to impose its views on the substantial merits and justice of the case upon one or other disputant unless its determination is based on general principles of law relating to the dispute. (Italics added).

The Court also cited Ziki Investments (Properties) Ltd v McDonald[4] which stated that s. 85(2) specifically provides for that each dispute shall be determined “according to the general principles of law applying to the matter” (italics added). Keane J referred to this as “the paramount principle.” Citing Ziki he noted that although the Tribunal can decide according to “the substantial merits and justice of the case”, that is only “where possible” under the law applying[5]. This analysis of s. 85 contributed to his later analysis of s. 142, as developed below.Section 142: application of Part 4 of the PLAKeane J put the focus squarely on s. 142 of the RTA, which was amended in 2007[6]. This section states:

(1) Nothing in Part 4 of the Property Law Act 2007 applies to a tenancy to which this Act applies.

(2) However, the Tribunal, in exercising its jurisdiction in accordance with s 85 of this Act, may look to Part 4 of the Property Law Act as a source of the general principles of law relating to a matter provided for in that part (which relates to leases of land).

It should be reiterated that s. 268 and 269 form part of Part 4 of the PLA. So, the effect of s. 142(1) of the RTA, if it were to stand alone, is that ss 268 and 269 do not apply to any residential tenancy under the RTA.Keane J considered the purposes of the RTA in light of the Interpretation Act 1999 and cases decided under it. He analysed the legislation as having a number of attributes, one of which was references in the RTA to other statutes. This particular attribute had three categories: (i) those that defined or enlarged the jurisdiction of the Tribunal. For example, s 14(4) confers jurisdiction on the Tribunal under the Minors’ Contracts Act 1969, (ii) those that enlarge or restrict the “statutory matrix”. For example, s. 16B of the RTA imports into residential tenancies operational rules made under the Unit Titles Act 2010, (iii) machinery provisions. For example, s. 94 confers standing on a manager appointed under the Protection of Personal and Property Rights Act 1988.Keane J observed that s. 141(1) remained substantially the same in the 2007 amendment. However, the previous version of s. 141(2) stated (bearing in mind Part 8 of the 1952 act dealt with leases as Part 4 does):The provisions of Part 8 of the Property Law Act 1952, so far as they are applicable to any fixed-term tenancy or service tenancy immediately before the commencement of this Act, shall continue to apply to that tenancy, but shall be read subject to the provisions of this Act.The effect of s. 141(2) in this form was to permit Part 8 to apply to residential tenancies under the RTA, but subject to the provisions of the RTA.Keane J held that the former s. 141(2) made clear that much of Part 8 (now Part 4) had no application to residential tenancies. Further, it was implicit in the former s. 141(2) that the Tribunal was required to take into account, and comply with, the relevant general principles of law.[7] Although he does not say so, it is implicit in his reasoning that these principles could then be located in Part 8 (now Part 4).Keane J went on to hold that the new s. 141(2), in distinction to the former wording of the provision, aligns itself expressly with the manner in which the Tribunal is to exercise its jurisdiction in accordance with s. 85. He stated:Section 142(2), as it now is, also qualifies s 142(1), just as its predecessor did, but with that critical shift of focus [to s. 85]. For these reasons I conclude that s 142 lies in the first of the three categories I identify. (square brackets added for clarity).This category consisted of the kind of provision that defined or enlarged the jurisdiction of the Tribunal. The Court concluded the s. 142 does not exclude ss 268 and 269 from creating residential tenant immunity.CommentThere does not appear to be any valid reason why there should be any distinction between commercial and residential tenants from the point of view of the immunity (leaving aside the issue of whether there should be any immunity at all which may well be a concern for insurers).If Keane J’s analysis is correct, both the Residential Tenancies (Damage Insurance) Amendment Bill, tabled in 2006 when presumably the PLA was available in its unenacted state (inclusive of s. 364, and Schedule 7 which referred to the wording of the proposed amendment of s. 142(2)), and the Residential Tenancies Amendment Bill (No 2), tabled in 2008 after the enactment of the PLA, were not necessary. All that was needed was s. 142(2), as amended in 2007. As noted in the decision, the absence of the desired reform in the 2010 amendment act was lamented. On Keane J’s analysis, such lament was not necessary because the law had already in fact been changed. Such a situation warrants close scrutiny of Keane J’s reasoning.The reasoning is, indeed, complex, and the use of what might be described as a taxonometric analysis- dissecting the legislation into attributes having sub-categories- can make it difficult to follow. But what it seems to boil down to is. Part 4 of the PLA contains general principles of lease law, many of which will not apply to residential tenancies, but where they do, they are the general principles which the Tribunal must apply in accordance with s. 142(2), which expressly refers to the manner in which the jurisdiction is to be exercised as set out in s. 85. One of those principles is the tenant immunity contained in ss 268 and 269.This reasoning is valid. However, the decision does not going on to explain how ss 40 and 41 of the RTA, which make a residential tenant liable for property damage, continue to remain in force, and how they reconcile with this analysis. Bear in mind that the RTA was subject to a general review, followed by an amendment in 2010. There was therefore an opportunity to amend or repeal ss 40 and 41. This did not happen. It is hard to describe this as an error or oversight when some lawmakers officially lamented the failure of the 2010 amendment act to contain the desired law reform. On Keane J’s analysis such lament was misplaced: Romeo was not dead, just sleeping. History is rewritten, and he awakes.That said, the logical and moral force of the position being unified for both commercial and residential tenants is overwhelming. Keane J provides a roadmap, of sorts, for achieving this, and a bold Court of Appeal may well continue to build the road.It is understood that the parties are in the process of resolving the necessary leave to appeal to the Court of Appeal. In the circumstances, it seems highly likely that such permission will be granted. It is an important issue for both the residential property industry as well as the general insurance industry. Moreover, the map leads to a clear fork in the road about the role in of the judiciary in interpreting legislation. One that may be considered by our Supreme Court, in time.

Steve KeallBarrister2 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.[1] See, for example: Murdoch v Air Pacific [1994] DCR 46.[2] There was a secondary contention about whether Ms Osaki was a tenant who should enjoy immunity in light of the fact she was not a party to the relevant tenancy agreement. This issue falls outside the scope of this note.[3] HC Wellington AP35/2000, 9 March 2001 at [29].[4] [2008] 3 NZLR 417 (HC) at [69].[5] Ziki at [70].[6] By s 364(1) of the PLA with reference to Schedule 7, Consequential Amendments.[7] At paragraph [46].

NZ Supreme Court rejects doctrine of merger in successive losses EQ case

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. 

Steve Keall

Recent case a reminder of Court's limited role in disability benefit insurance cases

The recent case of Percy v Sovereign [2014] NZHC 1573 is a reminder of the limited nature of the Court’s inquiry in the context of a disability benefit/ income protection claim.Where an insurer’s decision about disability cover is under scrutiny, the question is whether the insurer acted in good faith, took account of relevant information available to it, and reached a decision that was reasonably open to it. It is only if the insurer has failed to form a valid opinion that the Court will determine the matter itself, on the basis of the trial evidence. If there has been no such failure, it makes no difference that the Court may have reached a different view.The relevant decisions in this case were Sovereign’s decisions to discontinue payment of a total disability benefit to the policyholder and to decline his total and permanent disability claim. The Court was also required to consider an alternative claim that the policyholder was eligible for a partial disability benefit.In Percy, Her Honour Justice Katz reviewed the evidence of the insurer’s decision-making processes. The Court concluded that it had not failed to reach a valid opinion reasonably open to it. The primary claim did not succeed.The position with regards to the claim for a partial disability benefit was less straightforward. The Court noted that in this case, the policyholder never presented any evidence to Sovereign in support of a partial disability claim, because he had never made such a claim, being adamant that he was entitled to the full benefit. The Court further noted that, as a result it would have been difficult, if not impossible, for Sovereign to assess the extent of any partial disability. The Court did not identify any error on the insurer’s part and so concluded that it was not entitled to undertake its own assessment of partial disability. So, this claim also did not succeed.

Steve Keall

NZ Supreme Court grants leave to hear Canterbury earthquake appeal

The New Zealand Supreme Court has granted leave to Tower Insurance to appeal the Court of Appeal's adverse judgment against it: Tower Insurance Ltd v Skyward Aviation 2008 Ltd [2014] NZSC 93.We provided commentary on the Court of Appeal's judgment in an earlier edition of nzinsurance law: read it here. Or alternatively listen to it on your smartphone while driving by following this link. We have received constructive feedback on this podcast; your correspondent's vocal manner being described as either robotic or monotonous. Your correspondent is investigating the cost and utility of vocal coaching.On a more serious note, we earlier noted that, in its reasoning, 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 was a very interesting one and will most likely be the focus of some attention in the Supreme Court hearing.

Steve Keall23 July 2014

Building Act longstop provision applies to FTA claims

In Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2014] NZHC 1439 the High Court struck out a cause of action under the Fair Trading Act 1986 as being time-barred under the ten year limitation "long stop" provision in the Building Act 2004. It was the first New Zealand case to consider the issue. The case should be of interest to anyone in the professional indemnity field.FactsStadium Southland , a community sports and leisure centre in Invercargill owned by a trust (the "Trust"), was constructed in 1999. The consulting engineer was Mr Anthony Major. In November 1999, during construction, there was visible sagging in trusses spanning the roof over a particular part of the building. The Trust engaged Harris Consulting Engineers Ltd ("HCL") to peer review the design of the trusses. In December 1999, HCL produced a report (the "Design Report") which identified defects in the design of the trussses. Mr Major subsequently produced a modification drawing for the trusses.On 4 January 2000, HCL provided a producer statement  which incorporated remedial detail in respect of the modification work to the trusses (the “Design Review”). It also provided a letter dated 4 January 2000 which formed part of the producer statement, and included the proposed remedial detail (the "Letter”). In January 2000, the modification work commenced. In November 2000, the Invercargill City Council ("ICC") issued a Building Code Compliance Certificate.In April 2006, the Council became aware of movement in the roofline of the stadium in the vicinity of the trusses. As a result, on 12 April 2006, the Trust engaged HCL to review the roof structure to ensure that the building was safe in the event of snowfall on the roof. On 9 June 2006, Mr Harris of HCL confirmed in a report that the strength of the trusses was adequate to support the design loads specified in the relevant codes when constructed, and those applicable at the time. (the "June 2006 Report") Mr Harris concluded that the trusses were structurally satisfactory. In September 2010, during a heavy snowstorm, Stadium Southland's roof collapsed.ProceedingsFollowing the the collapse, the Trust commenced proceedings against the Council and the consulting engineer, contending that the collapse of the roof was caused by the failure of the trusses. Specifically, the Trust claimed that the failure of the trusses was caused or contributed to by defects in the design and construction of the modification work carried out on the trusses.The Council denied liability to the Trust and issued third party proceedings against Mr Harris and his firm, Harris Consulting Ltd.The Council alleged that HCL was engaged to provide structural engineering peer review services for the original design and redesign of the community courts roof trusses. The Structural Review of December 1999 and the Design Review and letter of 4 January 2000 provided to the Council, concluded that the redesign of the community courts trusses would comply with ultimate code loads once upgraded. In its statement of claim the Council pleads five causes of action against the first and second third parties. Two of these were as follows:

• Breach of Fair Trading Act 1986: The Structural Review and Design Review and letter contained statements that were misleading or deceptive and in breach of s. 9 of the Fair Trading Act 1986. Compensation was sought pursuant to s 43(2)(d) of that Act.
• Breach of Fair Trading Act 1986: As above, but in relation to the June 2006 Report, which contained statements that the strength of the trusses over the community courts was adequate in the event of heavy snowfall.

Strike out application: the FTA claim in relation to the Structural Review/ Design ReviewThe third parties applied to strike out the Council’s claims where they related to the Structural Review, the Design Review, and the Letter, including the first FTA claim referred to above, on the basis that such claims were time barred by application of s. 393 of the Building Act. The relevant part of s. 393 is subsection (2), which relevant part of which states:

"...no relief may be granted in respect of civil proceedings relating to building work if those proceedings are brought against a person after 10 years or more from the date of the act or omission on which the proceedings are based."

The essence of the applicant's position was that there was no reason why s. 393(2) would not apply to the FTA cause of action. Reference was made to the dicta of Courtney J in Dustin v Weathertight Homes Resolution Service (High Court, Auckland, CIV 2006-404-276) that whether a cause of action arises at common law, by statute or by virtue of contract, does not alter its nature as a civil proceeding. Reference was also made to the Court of Appeal in Gedye v  South [2010] 3 NZLR 271 in relation to the predecessor of s. 393(2) that "the expression of [the provision] is cause of action neutral.” In Gedye, the Court pithily stated at paragraph 45-46, in relation to a contention that fraudulent concealment should postpone the ten year longstop:

A plaintiff cannot in any circumstances sue more than ten years after the act or omission on which the proceedings are based, if the case involves, as this one clearly does, building work associated with the construction of a building.

The Council contended that the FTA prescribed its own limitation period which addressed the issue. Section 43A (and its predecessor s 34(5)) provide that an FTA proceeding must be commenced within three years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered. The Council submitted that this limitation provision was part of a comprehensive statutory framework applying to s. 9 claims even if that such a proceeding may relate to building work.The Court referred to s. 50 of the FTA, subsection (1) of which states: "nothing in this Act limits or affects the operation of any other Act."Section 393(2) applies without restriction to civil proceedings which relate to building work. That category of case concerning a particular activity which is the subject of statutory definition is not otherwise qualified in any other way. On the strength of this, the Court felt able to determine that s. 393(2) applied without restriction to civil proceedings which related to building work (para 66).Following Dustin, the Court stated that it was an error to focus on the statutory nature of the cause of action because whatever the nature the cause of action (contractual, statutory or otherwise)  by its nature the suit or action remained a civil proceeding. The Court continued at paragraph 67:

Parliament intended the provision to have wide application across the subject field. Its application was not intended to be determined by the legal footing or basis on which a party may choose to sue a building professional but by the statutory definition of the activity to which the limitation rule had application, namely “building work”.

The Court noted that the purpose and effect of the Building Act longstop period would be undermined if claims based on historic building faults could be the subject of claims under the FTA because loss or damage has only relatively recently been discovered (para 69).The Court noted that there was no reason to suppose that the statutory scheme of the FTA would be undermined by the application of s. 393(2). Furthermore, the Court made the salient observation that the FTA primary period of three years was shorter than the Limitation Act period of six years and so the balance sought to be struck by Parliament in providing a 10 year longstop for civil proceedings relating to building work was arguably more favourable in the context of a s 9 FTA claim (para 70).It could not have been Parliament's intention to subvert the need for the certainty s. 393 was intended to provide.  Parliament made its intentions clear with the wide an encompassing term "civil proceedings". This was intended to have comprehensive application, provided that the proceedings related to building work, as defined in the legislation (para 72).This FTA cause of action was therefore statute barred under s. 393(2) of the Building Act, and was struck out. Having determined the legal principles in the way that it had, the Court did not rehearse applying the law to the facts, given that the acts in question occurred in 2000, so were in on view time barred, the longstop period ending in 2010.Other causes of actions were considered in the judgment which are not considered in this note.AnalysisOther than the interesting and noteworthy policy considerations, the key point appears to be that section 50 of the FTA provides that the provisions of other enactments are unaffected. This includes s. 393(2), the language of which is deliberately broad, and includes all civil proceedings in relation to building work, as defined.  The FTA therefore cannot be used to read down the s. 393(2) of the Building Act. Where an FTA claim relates to building work, s. 393(2) shall apply. An FTA claimant has three years from the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered. Where the claim relates to building work, this shall not be longer than ten years.

High Court: FTA claim not capable of being assigned

[audio https://dl.dropboxusercontent.com/u/64094145/Episode%205.mp3]Listen to it as an iTunes podcastThe High Court has recently held that a civil claim for damages under the Fair Trading Act 1986 ("FTA") is not capable of being assigned: Swindle v Withers [2014] NZHC 578 (Associate Judge Doogue, 26 March 2014). Doogue AJ was therefore prepared to strike out the relevant FTA claims at an interlocutory stage (refer paragraphs 50 to 70 of the judgment).This holding followed the approach taken in Australian decisions regarding the equivalent to the FTA, the Australian Trade Practices Act 1974: Park v Allied Mortgage Corp Ltd (1993) ATPR 53,468 (FCA), Boston Commercial Services Pty Ltd v GE Capital Finance Australasia Pty Ltd [2006] FCA 1352, (2006) 236 ALR 720. The Court noted that the enactment of the FTA in New Zealand followed the Australia/ New Zealand Closer Economic Relations Treaty of 1982 which was part of an overall plan to harmonise consumer protection law between the two countries. The Court held that In light of this policy background, it would not make sense if New Zealand were to adopt a different approach to the assignment of FTA causes of action.A civil FTA claim is a common feature of a "transaction gone wrong" case in New Zealand, typically forming part of a bundle of claims which may also include breach of contract, misrepresentation (giving rise to rights of relief under the New Zealand Contractual Remedies Act 1979) and potentially also negligent misrepresentation in tort. It is significant that there is now a New Zealand decision which holds that in any situation where the original claimant has purported to assign the underlying claim to an assignee, any FTA claim will need to be stripped out of the relevant bundle of available claims. This will be welcome news to any liability insurer facing the consequences of such a claim, because of the Court's broad powers of relief under the FTA once a finding of liability has been established.

NZ Court of Appeal rules against insurer in Canterbury Earthquake case

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).

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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):

1. How was the amount payable by Tower to be calculated if an insured party’s claim was to be settled by Tower paying the cost of buying another house;
2. Was it Tower’s choice whether the claim was to be settled by paying the cost of buying another house or, if Tower settled by making payment, whether it is to be made based on the cost of rebuilding, replacing or repairing the house; and
3. In the circumstances, did Tower make an irrevocable election to settle Skyward’s claim by making payment based on the full replacement value?

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:

1. The full replacement value of Skyward’s house at its current location. That meant the costs actually incurred in rebuilding, replacing or repairing the house to the same condition and extent as and when new and up to the same area as shown in the certificate of insurance;
2. The full replacement value of the house at another site chosen by Skyward, providing the cost was no more than the cost of rebuilding the house on its existing site;
3. The cost of buying another house. This alternative is subject only to the same limitation as the first two alternatives – the cost must not be greater than the cost of rebuilding the house on its existing site;
4. The present day value, which was defined as the cost of repair or replacement, less depreciation, but limited always to the market value of the house when damaged less land value.

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:

1. Tower reserved the right to pay only present day value “if you [the policyholder] choose not to build or repair your house, (the first alternative) or buy another house (the third alternative);
2. Tower reserved the right to disallow Skyward from either building on another site (the second alternative) or buying a house (the third alternative), if the existing house was not damaged beyond economic repair. This right of veto could only be exercised once Skyward had made the underlying choice. In other words, it assumed that Skyward was generally at liberty to make the choice, then restricted the company’s ability to choose options two or three to the case where the existing house is not economically repairable (emphasis added);
3. The second alternative provided for full replacement value of the house “on another site you [the insured] choose” – that is, it is the insured’s right to choose. (underlining added)

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)

Angus v ACE Insurance Ltd: proving arson

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In DW Angus and Ors v ACE Insurance Ltd and Anor [2014] NZHC 258 the High Court concluded it was more likely than not that one of the plaintiffs, Mr Dennis William Angus, had committed arson. The insurers were therefore justified in not paying an insurance claim for loss and damage resulting from fire to a building. The only legal issue was the standard of proof, which warrants attention. Most of the judgment is a careful review of the evidence resulting in a determination adverse to Mr Angus. This also merits scrutiny because it is a case study in how to satisfy the Court that arson has occurred.His Honour Justice Cooper's judgment runs to 91 pages (339 paragraphs). Most of the decision is devoted to an extremely careful examination of the factual and expert evidence. The word "extremely" is used advisedly, and without any exaggeration. As a result of the degree of care taken in this aspect of the judgment, it seems highly unlikely that any appeal court would seek to disturb the findings made.While this makes it, by definition, a case decided on its own facts, it still makes worthwhile reading. The decision appears to be the end result of a very thorough case assembled by the insurers' legal team. An insurer looking to decline a claim on the basis of fraud or fraudulent conduct such as arson would be well advised to consider the way the insurers presented their case in this litigation.A procedural issue arises in this case which would make it easy to inadvertently misreport. The specific factual findings in the case culminated in the conclusion that Mr Angus had deliberately started the fire in question. It followed that the insurers were not liable to indemnify the plaintiffs which consisted of different combinations of Mr Angus, his wife Mrs Angus, and a trustee. The inclusion of the trustee as a party resulted solely from the trustee' earlier appointment to family trusts and he played no part in the litigation. Responsibility for the arson should be restricted to Mr Angus only, on the basis of the Court's specific findings of fact.The physics of fire and the frailty of the human condition mean that arson cases come up with sad regularity in the law reports. In one sense, it is a very insurance-y type of situation, because at its heart the question is whether there was a fortuity. In another sense, it involves almost no issues of legal principle concerning insurance contracts or interpretation. Usually the situation is either that, on the evidence, arson is proved (insurer must pay the claim) or it is not (the claim is forfeit by dint of fraud and in any event the policy is not triggered).The legal issue that tends to arise, and did so in this case, is the standard of proof. The Court referred to the Court of Appeal's decision in AMI Insurance Ltd v Devcich [2011] NZCA 266, also an arson case. In Devcich the trial judge, His Honour Justice Lang, had made many factual findings adverse to the owners but in the end held that the insurer had not established its claim to the required standard. The evidence left the Court in a state of “genuine uncertainty” and that the judge was not “sufficiently sure” that Mr Devcich started the fire. In discussing the standard of proof, Justice Lang had noted that the relevant insurer, AMI, had a reasonably heavy onus, because it had to establish that Mr Devcich had been guilty of conduct that was criminal in nature, and involved allegations of fraudulent conduct. Lang J described that standard as not as high as the criminal standard of proof beyond reasonable doubt, but not far removed from it. He considered that AMI was required to adduce “clear and convincing evidence” that its allegations were correct.The Court of Appeal in Devcich considered that this was to suggest that because of the nature of the allegations the standard of proof required was higher than the ordinary balance of probabilities test in civil cases. This was incorrect, it said. There is no intermediate test between the criminal and civil standards, as was held by the New Zealand Supreme Court in Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 where the Supreme Court stated at paragraph 107:

The civil standard has been flexibly applied in civil proceedings no matter how serious the conduct that is alleged. In New Zealand it has been emphasised that no intermediate standard of proof exists, between the criminal and civil standards, for application in certain types of civil case. Balance of probabilities still simply means more probable than not. Allowing the civil standard to be applied flexibly has not meant that the degree of probability required to meet this standard changes in serious cases. Rather, the civil standard is flexibly applied because it accommodates serious allegations through the natural tendency to require stronger evidence before being satisfied to the balance of probabilities standard.

Cooper J applied this approach in the instant case. He stated at paragraph 18:

I consider this means that in a case such as the present, where the crucial issues turn on the credibility of Mr Angus, the assessment of the evidence must take into account the seriousness of the allegations and the fact that there is no evidence he has previously acted dishonestly. These are considerations which mean that there needs to be strong evidence that supports the defendants’ allegations in order to meet the balance of probabilities standard.

In doing so, Angus adds further weight to Z v Dental Complaints Assessment Committee and Devcich that in all civil cases the standard of proof is on the balance of probabilities and no higher standard, but in "serious cases", strong evidence will be required to meet the standard.One might meekly comment that strong evidence being required to meet a lower standard constitutes, in effect, a higher (potentially intermediate) standard. Greater minds than your correspondent will be left to the task of considering that thought.