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

Case comment: Southern Response v Avonside [2015] NZSC 110

The New Zealand Supreme Court has delivered its decision in Southern Response Earthquake Services Ltd v Avonside Holdings Ltd [2015] NZSC 110.The policyholder's property was damaged in the Canterbury earthquakes. It is in the residential red zone. The policyholder accepted the Crown’s offer to buy the land but retained its rights against Southern in relation to the improvements. The parties agreed that the house is beyond economic repair.   The policyholder elected to buy another house as it was entitled to under the terms of the insurance policy.  The policy provided that the cost of the other house can be no more than “rebuilding your rental house on its present site”. The policy provided for the insurer to pay the "full replacement cost" when rebuilding on the same site.The appeal concerned whether there should be a sum for contingencies and the extent of an allowance for certain professional fees when calculating the amount payable under the policy, in light of the fact that the rebuilding was never going to happen.The Supreme Court has essentially confirmed the decision of the Court of Appeal below, which itself reversed the decision in the High Court. In essence the Supreme Court has held that contingency costs are payable where the insurer is liable to pay to the policyholder the full replacement cost.The gist of the insurer's position, reflected in the underlying costing analysis of its quantity surveyor, was that if the rebuilding works were never going to happen there was no risk of expenditure going over budget. A contingency sum deals with risk, and, in fact, there was no risk because the entire exercise was notional. So it was appropriate for a zero sum to be attributed to contingencies.I wrote about the Court of Appeal's decision here. In that article I expressed the view that the insurer's argument had logical appeal, but the Court of Appeal's reasoning, substantially adopted in the Supreme Court's judgment, was defensible as a matter of contract interpretation. Further, it is more understandable if you accept that a commitment to pay full replacement costs is not really indemnity insurance at all, it is something altogether more economically advantageous to the policyholder. It is something that, by its nature, may include a "windfall" element in certain cases. In this particular case, the policyholder will be receiving an additional sum of $143,200 towards the purchase of its new dwelling. This was the amount calculated for contingent events that never happened and will never happen.It is completely understandable that the insurer wished to take the point because, presumably, it is an issue that affects many outstanding settlements.  This insurer and indeed all of the others will have received welcome clarity on this issue, even if they do not agree with it.As an aside, it is noteworthy to see that insurers are now offering full replacement insurance for property but in relation to specific perils (fire mainly) and not natural disaster. This is interesting because it is a partial return to the days of specified perils rather than "all risks" style material damage wordings.

Steve KeallBarrister23 July 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

NZ Supreme Court allows appeal in fire service levy case

This appeal raised two separate issues relating to the way the fire service levy is calculated under the Fire Services Act 1975. Here is the press release (judgment to follow). I wrote about the Court of Appeal decision here.The Supreme Court has unanimously allowed an appeal from the Court of Appeal decision, which itself dismissed an appeal from the High Court. That is to say the Supreme Court has found that both the Court of Appeal and High Court did not reach the correct decision.In business terms, the net effect of the Supreme Court's decision is that more levy is payable in the particular instances reviewed by the Court.More to follow on the substance of the arguments when the decision is made fully public.In any case, the fact that so many judges can disagree (four altogether in the High Court and Court of Appeal on the one hand, and five in the Supreme Court on the other) underscores the need for law reform, and a general rethink about the way the fire service levy is collected. It is understood that this is of interest to the current New Zealand government. Other options include council rates and a levy on motor vehicles. A general review and consultation of all of the relevant options would be very welcome. The current model is not fit for purpose.

Steve KeallPark Chambers13 May 2015

Update/ post-script: here is the full decision.

NZ Supreme Court grants leave in EQ contingency costs case

The Supreme Court has granted leave to the appellant-insurer in the case of Southern Response Earthquake Services Ltd v Avonside Holdings Ltd.The question on which leave was granted was whether the Court of Appeal was correct to find that the respondent insured was entitled under its insurance policy with the appellant-insurer to claim allowances for contingencies and for professional fees given that the respondent has elected to purchase a replacement property.I wrote about the Court of Appeal decision here.

Steve KeallPark Chambers4 May 2015

NZ Supreme Court delivers judgment in solicitor negligence case

The NZ Supreme Court has delivered its judgment in Tauranga Law v Appleton [2015] NZSC 3.This was a case of solicitor negligence in the context of the Bluechip investor scheme. It was accepted that a duty existed and that the duty was breached. The contentious issue was whether the breach of duty caused the loss in question. Lawyers and professional indemnity insurers are always interested in causation because in the eyes of the common law you can be as negligent as you like so long as you do not cause any loss or damage for which a remedy is available.The High Court and the Court of Appeal determined that Tauranga Law breached duties of care owed to Mr Appleton/ his trust in relation to the purchase of an off-plans residential investment property from a company in the Blue Chip group. When the Blue Chip group collapsed, the deposit of approximately $90,000 paid to Blue Chip was lost.The High Court found that the negligence was not causative of loss of the deposit because Mr Appleton would have proceeded with the transaction even if he had received appropriate advice.  Mr Appleton was content to proceed and for the deposit to be paid notwithstanding the advice he had received from Tauranga Law.  While the Judge held the advice given to be inadequate and in breach of duty, he considered that, despite its inadequacies, it “would have given most investors reason to pause”.The Court of Appeal overturned the High Court's determination of the causation issue. The Court of Appeal considered that the errors in the advice were more serious than they had been treated in the High Court.  Reevaluating the evidence bearing on causation in that light, the Court considered that the High Court had been wrong to dismiss Mr Appleton’s evidence that, had he understood that his deposit was not secured in a trust account, he would have done his best to extricate himself from the agreement. The evidence suggested he could have obtained release from the agreement without payment of the deposit or penalty either through exercising a statutory right to withdraw available for two weeks after the agreement was entered into or by refusing to pay the deposit, a course of action Blue Chip was likely to have accepted. In the Court of Appeal, therefore, judgment was entered for Appleton against Tauranga Law.The Supreme Court disagreed with the Court of Appeal's approach. The Supreme Court was of the view that the terms of the letter of 31 May (containing the advice in question), the context provided by the agreement and dealings between Mr Appleton and the broker, and the absence of reaction by Mr Appleton (either to the letter or to the advice that the deposit had been paid to Blue Chip) all supported the conclusion reached by the High Court that the legal advice he received was immaterial to Mr Appleton because of his confidence in the investment.The Supreme Court noted that the letter of 31 May clearly advised that the deposit under the contract entered into was to be paid “immediately”. Mr Appleton was advised in bold type and large font that if the vendor failed or the developer did not complete, he would “be a concurrent creditor and may then lose the entire deposit”.  This conveyed the information that the money was being advanced for the use of the vendor and that, in the event of liquidation, Mr Appleton would simply be a creditor who could lose the deposit.  This was not information that could reasonably have been reconciled with the deposit being held in a solicitor’s trust account as Mr Appleton had said he believed.Regarding causation, the High Court considered “the heart of the matter” was reached with Mr Appleton’s evidence that he did not take much notice of the letter from Tauranga Law because he “felt confident with what I had”.  The Supreme Court agreed.  It agreed with the assessment of the High Court that the breach of duty was not causative of the loss suffered by Mr Appleton and his family trust. It therefore set aside the decision of the Court of Appeal.Litigants who have already settled similar Blue Chip claims must be scratching their heads wondering about whether any settlement was at the correct level. However, Appleton is probably best thought of as a case on its own facts because of the Mr Appleton's evidence that he did not take much notice of the letter of advice from the solicitors. The compass of the case was focussed on causation, and moreover very specific evidence about causation. Other cases are unlikely to have fallen into this category.

Steve KeallPark Chambers7 March 2015

High Court delivers ruling in EQ flood damage case

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

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

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

Steve Keall14 December 2014

NZ Supreme Court news: Canterbury earthquake cases

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

Steve KeallBarrister4 November 2014

When was the last time you stole something?

Legal practice isn't science, it's art. New Zealand lawyers like all good artists therefore should be relentless in their theft of useful ideas from other parts of the world. Like all good thieves, let us first go for the low hanging fruit. First up, two concepts from English civil litigation practice: pre-action letters and a general form of witness statement.The Civil Procedure Rules, broadly the English equivalent of the New Zealand High Court Rules, provide for a "pre-action" regime to apply in many cases. This entails sending a detailed written letter of a claim before commencing litigation. There are specific requirements for different kinds of subject-matter (personal injury, and so on) and a general expectation that a general form of letter will be sent if a specific "pre-action protocol" does not apply.The benefits of this approach are legion. It encourages parties and their advisors to think carefully about their case, and "get it right the first time". Failure to abide by the relevant pre-action protocols may have costs consequences later, even if the party succeeds. It is flexible. It does not apply where there is genuine urgency or where there is some other good reason. It encourages meaningful dialogue generally, and earlier.The only potential downside, in New Zealand specifically, is that the High Court Rules do not expressly provide for the recovery of costs for any work undertaken during this time, whereas in England it is more likely to be regarded as incidental to the preparation of proceedings.In English civil procedure there exists a creature called the witness statement. It is a written statement of facts, verified by a "statement of truth" to which the witness attests. It is not sworn or witnessed. It is a general form of document used whenever a written statement from someone is needed. Its particular significance is that it is generally an acceptable substitute for an affidavit. The retirement of the affidavit from regular civil practice in New Zealand would be welcome. It is an unproductive administrative burden on solicitors. The act of swearing or affirming adds nothing; it is a grim business which is disposed of as quickly as possible. It is delusional to think it makes someone think twice about their evidence, particularly when it has already been prepared.It is nice to think that every firm in the land has a holy book at reception, and equally it is telling that it will almost certainly not be consulted; it is a an attractive paper weight.A submission to the NZ Rules Committee on the above will have the support of this humble periodical. This benign form of borrowing certainly has a precedent. The recently recast High Court rules, the reform of the legal profession and the regulatory framework for the provision of financial services all owe a great deal to British sources. Why reinvent the wheel when you your old cousin is making their spare available for free? (Whether they know it or not).

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 prepares to wind back the intervention rule

In New Zealand, a barrister is a lawyer who specialises in dealing with disputes and disagreements, including litigation. The traditional rule is that a barrister can only receive instructions from a solicitor. This is known as the intervention rule. The intervention rule is about to be radically redefined.The New Zealand legal profession is based on the English model, which has the same rule. New Zealand is somewhat different however, because the boundaries were blurred from the very beginning (all New Zealand solicitors are also barristers) and due to the way that legal practice has evolved. For better or for worse, barristers have increasingly accepted instructions directly from clients for certain kinds of work, with either notional or non-existent involvement from a solicitor. It is certainly accurate to say that a solicitor's involvement in litigation varies greatly.Under the current rules of professional conduct, the starting point is that the intervention rule applies, but with numerous exceptions; employment dispute advocacy, for example.The New Zealand Law Society has drafted rules which flip this around. Once the rules have been made into law, the starting point will be that there will be no intervention rule, subject to several exceptions, the most notable being the conduct of litigation. This sounds like a fairly significant exception, but in fact much of a barrister's work these days is devoted to non-litigation work such as dispensing general legal advice and providing legal opinions on specific topics. Work of this kind will not need to involve a solicitor at all, in terms of the regulations.This is a welcome change, because it essentially ratifies what is already occurring in practice. Where a client wishes to instruct a barrister directly, it may do so, without the barrister fearing a technical breach of the professional rules.It is understood that the rules were due to be signed of by the then Minister of Justice, Judith Collins. Unfortunately, the minister experienced a number of distractions and then resigned. The acting Minister of Justice is Chris Finlayson QC, also the Attorney-General. It seems optimistic to think that Mr Finlayson QC will, in his capacity as a member of the profession, give some priority to putting through this desirable law change. In all likelihood it will occur after the imminent New Zealand General Election, and when a new full time Minister of Justice is appointed. 

Steve Keall12 September 2014

NZ Court of Appeals delivers judgment in conjoined Canterbury earthquakes appeal

Here it is: QBE Insurance (International) Limited v Wild South Holdings Limited [2014] NZCA 447 (10 September 2014).It will only take one of the six parties to apply to the Supreme Court for leave to appeal, in which case all of the others are likely to be involved as well. That being the case, a Supreme Court hearing on all of the issues seems to be highly likely.

Steve Keall11 September 2014

Will Ridgecrest v IAG analysis impact on automatic reinstatement cases?

Some interesting analysis of the NZ Supreme Court's recent decision in Ridgecrest v IAG can be found in this recent Bell Gully article.In the policy in question in Ridgecrest v IAG, there was a per "happening" (ie event) limit of liability. The Supreme Court held that the policyholder holder could claim up to this full limit for each event, subject to the proviso that it could not claim in respect of the same damage twice by dint of the indemnity principle.In contrast to the IAG/ Ridgecrest provision, many relevant material damage policies instead have an aggregate limit for all damage caused by all events during the policy period. On the face of it, this may suggest the Ridgecrest reasoning can be confined. However, these latter policies also tend to contain a provision reinstating the limit after each loss. The authors note that various High Court cases, the subject of a recent conjoined appeal to the Court of Appeal (Wild South Holdings Ltd v QBE Ltd, Maxims Fashions Ltd v QBE Ltd, Marriott v Vero Insurance Ltd and Crystal Imports Ltd v Certain Underwriters at Lloyd’s of London & Anor, 5 August 2014, in respect of which it is understood a decision is still awaited) have held that  these reinstatement provisions mean that a policyholder is able to claim a sum in excess of the stipulated aggregate limit if there are multiple losses during the policy period.The authors state:

It remains to be seen whether the courts will apply the Supreme Court’s analysis of the Ridgecrest policy to material damage policies with aggregate limits and automatic reinstatement clauses. If so, the Ridgecrest decision will be of much broader significance in interpreting and applying material damage policies.

This is an interesting question, and it is suggested the initial answer will lie in the Court of Appeal's anticipated decision mentioned above. Presumably the learned judges will take into account the Supreme Court's decision in Ridgecrest while preparing their judgment. Watch this space.

Steve Keall8 September 2014

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

UK insurance law reform in Britain will interest NZ insurance industry

The British government has introduced a business insurance law reform bill, following an almost decade long period of consultation.The prosaically named "Insurance Bill" is beginning its journey through the Westminster parliamentary systems which on 17 July started with its first reading in the House of Lords.Among other topics, the bill deals with warranties, and the consequences of a business policyholder breaching one. The historical position in England has been that a breach of warranty may deprive a policyholder of cover even where the breach has not caused or contributed to the loss in question. This is sometimes given the short-hand of a "non-causative breach".The preponderant view is that the deprivation of cover following a non-causative breach is unfair, and it does not make good sense as a matter of economics. In New Zealand, this topic is dealt with by s. 11 of the Insurance Law Reform Act 1977, the effect of which is to disentitle the insurer from relying on the relevant provision if the policyholder shows on the balance of probabilities that the loss in respect of which the policyholder seeks to be indemnified was not caused or contributed to by the happening of the event or circumstances in question. The Insurance Bill provides that the insurer’s liability should be suspended, rather than discharged, in the event of a breach of warranty. Cover is restored after the policyholder has remedied the breach.The Insurance Bill needs to be read alongside the UK Consumer Insurance (Disclosure and Representations) Act 2012, which took effect in April 2013 and which, as the name suggests, applies only to consumer insurance. The Insurance Bill applies to business, non-consumer insurance. The NZ Insurance Law Reform Act 1977 does not make any distinction.

Maintenance and champerty live on

Maintenance and champerty are concepts that more often than not hide behind the curtains at the party of legal arguments; mentioned only in the context of threatened extinction.With great gusto they are back: centre stage, at a coming-out ball in Fleetwood Apartments [2014] NZHC 1514: a recent High Court case which has upheld an objection to an assignment of a cause of action for reasons of public policy, and offending the rule against maintenance and champerty.This case will be of interest to anyone looking to include the assignment of a claim in the context of a settlement agreement. In any situation where there is any prospect of the assignment being deemed to be void, it would pay for the settlement agreement to be reversible in the event that the assignment is later rendered void.