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.

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.

Courts of Appeal issues decision in fire service levy case

The Court of Appeal has delivered its judgment in New Zealand Fire Service Commission v Insurance Brokers Association of New Zealand Inc & Vero Insurance Ltd [2014] NZCA 179 (joint judgment given by Wild J). In doing so, it upheld the decision of Heath J in the High Court concerning the correct method of computing levies under s 48 of the Fire Service Act 1975 with regards to split tier insurance policies and multi-insured policies.With regards to the (sample) split-tier policies in evidence, the Court of Appeal confirmed that (para 45):

• If a contract of fire insurance provides for the settlement of any claim for damage to or the destruction of the property upon a basis no more favourable to the insured person than its indemnity value, and specifies a sum insured for all claims during the period of the contract of fire insurance that is lower than its indemnity value, the fire service levy payable under s 48(1) of the Act is to be computed on the sum insured;
• For a policy that: (a) provides cover for the indemnity value of the property; and(b) contains a capped sum insured, the maximum levy is that computed on the sum insured. However, if the sum insured exceeds the indemnity value of the property, and the insured provides compliant declarations or valuations under s 48(6)(c), the levy is payable on the indemnity value;
• If a contract or any portion of a contract of fire insurance provides for the settlement of any claim for damage to or the destruction of any item of insured property limited to that part of its value in excess of its indemnity value, then pursuant to s 48(7) of the Act, no fire service levy is payable on that contract or portion thereof;
• To be exempt under s 48(7) it is not necessary that the insured hold a policy that insures all or any part of the indemnity value of the property. It is sufficient if the excess of indemnity policy only insures part or all of the difference between the “as new” replacement value and the indemnity value of the property.

It is worth noting that Court expressed some uneasiness about reliance on sample, rather than actual, policies, although it stopped short of refusing to say there was no jurisdiction. It commented, obiter, at paragraph 14 "had we been sitting as a court of first instance, we would probably have declined to make declarations, at least in relation to the split tier policies. That is simply because there was no actual policy or policies to rule on." The respondents were fortunate that the Court elected not to take what may be described as a narrow approach.With regards to the multi-insured policy in evidence, issued to the New Zealand Ports Collective, the Court was essentially asked to decide whether there was one contract of insurance (with eight policyholders) or eight separate contract of insurance. The Court placed emphasis on the fact that the policyholders were jointly liable for the premium and that the policy could only be terminated by all eight policyholders in concert. The Court of Appeal reviewed the authorities on the nature of joint, and several, obligations in an insurance policy and noted recent academic comments that the approach take in certain English decisions is wrong, and that a composite contract should ordinarily be treated as contained in a single indivisible contract, rather than in multiple contracts. As a consequence, only one fire service levy was payable, calculated with reference to the sum insured, which was $250m.The Court of Appeal was not prepared to make any order as to costs, on the basis that it was a test case.

NZ High Court says deprivation of property is not "damage" in Canterbury earthquake litigation

Today the High Court delivered a result judgment holding that a notice issued pursuant to section 124 of the Building Act 2004, where there was considered to be a direct and continuing threat of further physical damage from certain rockfall hazards which deprived the plaintiffs of the possession of their residential dwelling, constituted neither "natural disaster damage" for the purposes of the Earthquake Commission Act 1993, nor "damage" for the purposes of the relevant insurance policy: Kraal v The Earthquake Commission and Allianz New Zealand Ltd [2014] NZHC 866 (Mallon J).Mallon J said detailed reasons would be provided later.

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)

Recent case confirms "inducement" requirement in material non-disclosure cases

This article was first published in Law Talk on 29 March 2014

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A recent case confirms the centrality of inducement where material non-disclosure is an issue in a non-marine insurance context.In Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] 1 AC 501, the House of Lords as it then was, redefined English law (for non-marine cases) so that any material non-disclosure would only lead to avoidance if it induced the insurer into entering into the contract. If inducement is not proved as a fact then the insurer may not rely on the non-disclosure to avoid the contract. Pan Atlantic was considered in a number of New Zealand cases, but not directly applied until Jaggar v Lyttleton Marina Holdings Ltd [2006] 2 NZLR 87.That the non-disclosure induced the underwriter into entering into the contract is another way of saying the non-disclosure caused the underwriter to write the risk in the way that he or she did. It does not need to be shown that the risk would have been declined, but only that the insurer would have taken it into account.What this means, in practical terms, depends on the risk in question. For consumer level insurance, the relevant underwriting practices will in effect be codified in a computer programme, with little or no discretion on the part of the operative considering a proposal. Whether the test is satisfied in this context can be ascertained very quickly. This may explain why non-disclosure cases with insurance at this level are now fairly rare.For higher level commercial insurance, and certainly for reinsurance, an actual underwriter will actively apply his or her mind to whether to accept the risk and if so on what terms. The inducement requirement requires evidence from this person as to whether they would have taken the fact into account had they known the correct position. There will be therefore direct scrutiny of their decision-making process.This kind of evidence was considered in New Zealand Local Authority Protection Programme Disaster Fund v New India Assurance Company Ltd [2013] NZHC 1327.LAPP is a charitable trust that maintains a disaster fund for the benefit of local authorities for loss and damage to certain infrastructural assets in the event of catastrophes such as earthquakes. The trust was established by a trust deed executed in 1993. A replacement trust deed which made some changes to the terms of the trust was entered into in 2007. The inducement topic concerned the changes to the trust deed.Following the Canterbury earthquakes, LAPP sought summary judgment on of a sum of money from New India (a following reinsurer to a lead reinsurer) under the relevant insurance contract. It was incumbent on LAPP under the High Court Rules to satisfy the Court that New India had no reasonably arguable defence.New India contended that material changes occurred when the plaintiff adopted the 2007 trust deed in place of the earlier 1993 deed without LAPP knowing. It argued that the provisions of the later deed removed or reduced restrictions on the amounts which insurers such as the defendant might have to pay out pursuant to reinsurance contracts. Therefore the terms of the 2007 deed ought to have been disclosed to the defendant. The failure to do so, it was argued, was a material non-disclosure which permitted the defendant to avoid the policy.The New India witness deposed that he would have been concerned about the change in the deed because the terms of the 2010 policies meant that all loss settlements made by LAPP were unconditionally binding on New India provided that those settlements were within the terms of LAPP’s trust deed and the insurance contract. He stated that he would have wanted to satisfy himself that any change to the trust deed did not impact upon, or affect the trustees’ obligations under the deed.The Court stated that it was reasonably arguable on the basis of the witness’s evidence that if he been told that there had been a change in the trust deed, he would have called for a copy of the original deed. This led to an inference that he may then have gone on to carry out a comparison of the two deeds, reached the view that the terms of the 2007 deed were comparatively disadvantageous, and either declined insurance or offered on different terms.The Court stated that it was sceptical about whether the witness  would have followed up in this way had he been advised that the trust deed had been changed. In simple terms, the witness appear to have said that at the relevant time he was content to leave such matters to the lead insurer. The Court stated that it understood his evidence to say that he was prepared to trust another insurer’s judgement on that issue because the particular structure adopted under the old arrangements had given him a satisfactory level of comfort. The Court then stated at paragraph 43:

If that is so, then when the subscription basis for insurance ended, taking with it the protection or assurance that Mr Balasubramanian took from it, one might have expected to see some evidence of him actively attempting to make his own judgement about what was in the trust deed. He could not have done that without calling for a copy of the current trust deed.

 Nonetheless, this particular issue was not capable of being resolved in a summary judgment context. The Court went on to find, in any event, that the the changes to the trust deed were not material. It granted the plaintiff’s summary judgment application.Inducement as a topic is sensibly the first port of call where material non-disclosure is considered to be an issue. From an insurer’s perspective, this should involve an interview with the underwriter, who will need to demonstrate how the company’s underwriting practices and procedures would have affected his or her judgment about the risk had the relevant facts been disclosed. Strictly speaking, the underwriter’s subjective opinion about the materiality of the fact is not relevant to this inquiry. From the insured’s perspective, it should look to focus on this issue as soon as possible. There will be cases where insurers, potentially for reasons of commercial sensitivity, do not wish to disclose their underwriting practices and may prefer to concede the point.

NZ Supreme Court grants leave in insurance policy interpretation case

The Supreme Court (McGrath, Glazebrook and Arnold JJ) has granted leave to appeal in Firm PI 1 Limited v Zurich Australian Insurance Limited [2014] NZSC 19.The question is whether the sum insured for buildings under the material damage section of the contract of insurance is inclusive or exclusive of sums payable to the insured by the Earthquake Commission under the Earthquake Commission Act 1993 for natural disaster damage to the insured’s buildings from the 22 February 2011 earthquake.

ICNZ Earthquake case heading to Supreme Court

In University of Canterbury v Insurance Council of New Zealand and Ors [2014] NZSC 13 the Supreme Court has granted leave to appeal on the following issue:

"Where a building is an earthquake-prone building in terms of s 122(1) of the Building Act 2004, is a council entitled under s 124(1)(c)(i) of the Act to require the building to be strengthened to an extent greater than is necessary to ensure that the building will not have its ultimate capacity exceeded in a moderate earthquake (as defined in reg 7 of the Building (Specified Systems, Change the Use and Earthquake-prone Buildings) Regulations 2005)?"

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.

Standard of proof for "follow the settlement" provisions

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In a decision late last year the English High Court confirmed that the relevant standard of proof for "follow the settlement" type provisions is arguability rather than balance of probabilities: Tokyo Marine Insurance Ltd v Novae Corporate Underwriting Ltd [2013] EWHC 3362.Justice Hamblen held that he was bound by earlier Court of Appeal authority on the topic.It is understood that the case is under appeal.The outcome of the appeal will be of interest to any lawyer or litigant currently involved in a New Zealand reinsurance dispute.Traditionally, there have been very few cases involving reinsurance in the New Zealand Courts. The Canterbury earthquakes changed all that, with several reinsurance cases being reported in 2013  (each linked to an arbitration context).Toyko Marine concerned retrocession insurance, i.e., the insurance of reinsurance, but the principle under scrutiny will be applicable to relevant reinsurance disputes.

Supreme Court allows appeal in Steigrad case

On 23 December 2013, the Supreme Court delivered what was presumably its last civil decision of the year: BFSL 2007 Limited & Ors and Bridgecorp Ltd & Ors v Steigrad, Houghton v AIG Insurance New Zealand Limited & Ors [2013] NZSC 156 (mercifully shortened to "Steigrad" for easy reference) .In short, the Supreme Court allowed an appeal from the decision of the Court of Appeal. Sandy versions of this decision are no doubt being consulted by members of the profession on beaches all around New Zealand.  Some will be whooping for joy, others may feel more like flinging the document into the ocean. Longer analysis to follow shortly.Read the full decision here:- Steigrad Supreme Court judgment.

The Law of Liability Insurance: heavy but worthwhile reading

This book review was first published in Law Talk on 6 December 2013A contract of liability insurance is a promise to the insured to provide cover by way of indemnity to the insured against the insured’s own loss because of his or her liability to a third party. If you keep double-clicking this basic proposition, you end up with a textbook, specifically the new, third, edition of The Law of Liability Insurance, a two volume work that apparently weighs more than some bicycles. It is a “must have” for any practitioner serious about practising in the area of liability insurance. Despite ostensibly being a specialist text, it also provides a useful general resource on the principles of insurance law.The Law of Liability Insurance, or “Derrington” as it is more affectionately known, is the trusted handbook for any New Zealand practitioner delving into the subject of liability insurance. Emphasis is properly placed on the word “delve” when used in connection with the recently published third edition, because the act of physically diving into the work, or crouching behind it to avoid a colleague, is not completely beyond the realms of imagination. If size truly does make one great, then it should be noted that its 3437 pages trump McElroys’ copy of the authorised King James Version of the Holy Bible (both testaments, 1400 pages) and Leo Tolstoy’s epic novel of Napoleonic Russia, War and Peace (New American Library version, 1440 pages) put together. Asked to guess the weight of the two volumes*, a colleague volunteered “more than my bicycle” (a fancy carbon frame number, granted) and another, perhaps less familiar than others with weights and measures, volunteered “thirty kilograms” before quickly changing it to “ten.” One wonders whether it will become the liability insurance equivalent of Marcel Proust’s In Search of Lost Time; a book many people claim to have read, but few have actually finished. A feat your correspondent did not quite achieve, while attempting to acquit himself of the task of reviewing it as best he could in the time available. All of this is intended to raise a serious point about how information is best presented, and how technology can lend a hand. More about this later.The Law of Liability Insurance, first published in 1990 and then again in 2005, was officially launched as a third edition in Brisbane on 20 November this year. The publishing information states that the recommended retail price for the hard copy book alone is AU$395, which if you think about in terms of a per word basis may make it one of the best value legal works ever produced. Firms wishing to save money should note that it is not possible to purchase only one of the two volumes by offering half of the price, if only for the functional reason that the index only exists in volume two.The authors remind us that until about 1880, with the exception of marine insurance, liability insurance was considered to be against public policy and therefore legally of no effect. It was believed to remove the perceived deterrent to being negligent created by the possibility of loss through liability to a claimant. Thinking about this topic evolved. Ever since, the growth of liability insurance seems to have tracked the growth of the law of common law negligence. The authors note that after a rash of poisoning from cockroach poison in England, poison insurance for piemakers gained currency in the 1890s. Cover of this general kind gained increasing popularity “when snails were alleged to have a propensity to find their way into stone bottles of ginger beer, for which the manufacturer would be liable to any ultimate customer who might become shocked on this discovery.”The Law of Liability Insurance is an Australian text produced by two Australian authors. It therefore has, without any embarrassment, a dominant Australian flavour, constructed within a framework of historic and modern English cases. The Australian focus is evident in the regular section heading Statutory Intervention which usually leads with the Australian Insurance Contracts Act 1984. This approach should not cause any difficulty for the New Zealand practitioner, who, fresh from reading the newly minted Trans-Tasman Proceedings Act 2010, will appreciate that a “blended” understanding towards many of the legal principles is helpful and in any event inescapable. Anyone familiar with CCH’s Australia and New Zealand Insurance Law series will appreciate this. The authors deliver a text that will no doubt happily sit on the shelves of Australian, New Zealand and indeed English law firms as a comprehensive survey of the legal principles in this area.The authors also promise, and deliver, material from America, regarding which they say with characteristic flourish: “it is a crop too rich to be ignored, even though it be necessary to sort the grain out from the weeds. The abundant use of American authorities complements and enhances the usual suspects of English, Australian and New Zealand cases. An example is the reference in the United States to the principle that “the proper focus regarding issues of coverage under insurance contracts is the reasonable expectation of the insured.” This is an approach which has been disavowed in English cases: see Smith Tak Offshore Services v Youell & Ors [1992] 1 Lloyd’s Law Reports 154.A further example is that in the United States a breach of duty of good faith must involve a conscious and deliberate act that unfairly frustrates the agreed common purpose and disappoints the reasonable expectations of the other party by denying the benefits of the contract. We are reminded that under American law the performance of all contracts is attended by obligations of utmost good faith in the discharge of all duties and the exercise of all rights.Defining what constitutes a lack of good faith, and specifically when the duty exists, remains an open-ended topic, so thinking from other jurisdictions is certainly helpful. A tangent to this is Paul Michalik’s thought-provoking observation elsewhere that “the insurer’s side of the duty of good faith has no known content”**. So, a recharacterisation of the duty as having a higher threshold for breach is germaine when you consider that it may be a duty which rests solely on the shoulders of the insured and not the insurer.The Law of Liability Insurance is not just about liability insurance. It contains a detailed and useful survey of basic insurance principles in chapters two, three and four: The Contract of Insurance, Construction (i.e., interpretation) and Utmost Good Faith and Disclosure which finishes on page 686. If you make it this far and read no further, you will have achieved a very good grounding in a lot of the basics. In this section, we are reminded of the nature of insurance.  It is a contract where the insurer contracts to indemnify the insured upon determinable contingencies. It is a loss distribution mechanism where the parties wager against the occurrence of a particular event (including a claim). The insurer insurers risks, not certainties. It is a commercial contract, but “with its own special baggage that often defies the application of pedestrian commercial law principles.”Chapter three, Construction, begins with the dry understatement with regard to policy wordings: “not uncommonly their composition is less than ideal.” It goes on to canvas many topics, including forms of analytical reasoning in interpretation. It also contains a useful and detailed alphabetical list of particular expressions including “and”, a word without which a lot of litigation may have never occurred, and other potentially vexing phrases such as “arising from or out of”, “attributable to” and “in connection with.” The chapter also includes thoughtful observations such as that a dictionary does not necessarily provide a definitive meaning for a word, but rather a lexicon of potential meanings which will vary according to context.A text book of three and half thousand pages raises the question of whether it is useful for it to have a “physical” form at all. On initial publication, the publisher made available to firms a garden-variety pdf of the text, which, due to its length, was just as unmanageable, because it took an age for anything to happen. It has since been subject to the rigours of conventional e-publishing, and will be available to firms as an e-book (or “Practitioner’s Book Online, “PBO”) within the publisher’s conventional on-line offering early next year. The PBO made available for this review was as ergonomic as any other and also presented a welcome respite to clinging to the physical volumes on the number 274 bus down Mt Eden Road.More generally, the publisher, along with others no doubt, is looking at forms of “e-lending.” This is an intriguing idea, according to which a firm would have a licence to the e-book, and “lend” virtual copies of the book out to staff in accordance with its licence, who may each record their own individual annotations, which are then stored in the cloud. So, it seems that the future is – almost – here. In five years time all legal reading and research will be conducted from tablets, which, one should think, may be carried out comfortably on the bus- and even on a bicycle, with an appropriate level of care, and with suitable insurance in place. 

 * Weight: approximately 4.9 kilograms, both volumes, measured unscientifically on the uncalibrated family bathroom scales.

** Insurance Law- a Practical Guide, NZLS seminar paper, 2012.Here's a pdf: Law of Liability Insurance- heavy but worthwhile reading

Concerning causes in insurance law

This article was first published in Law Talk on 1 November 2013pdf :- Concerning causes in insurance lawInsurance law has its own way of thinking about causation. Anyone instructed in respect of an insurance coverage dispute would be well-advised to gain awareness of this perspective.Mention of an insurance company relying on an exclusion of liability to decline a claim sometimes meets a knowing nod and a sigh from members of the general public. Anyone who believes they had a valid insurance claim, in circumstances where in fact they do not, deserves sympathy. However, it pays to understand that this expectation may be based on a misconception about how insurance policies work, and the specific effect of the language used, particularly with reference to exclusion clauses. The “missing link” in people’s understanding is sometimes the requirements of causation, as it is reflected in the language of the policy. This is a needy concept that deserves more care and attention than it generally receives.Insurance companies are in the business of earning premium and paying claims. How this fits together in a way that works commercially is a matter of underwriting. This should enable the company to pay all eligible claims and at the same time make a profit by investing the difference between all of the premium collected from customers less the amounts it must pay in claims. A properly conducted underwriting analysis should set the premium at a level which makes into account the probability of a particularly event occurring giving rise to an eligible claim, and also taking into account other factors. The relevant probabilities are a matter of actuarial analysis.This analysis is reflected in the language used in an insurance policy. Some risks will be met, others will not. In respect of risks which are excluded, it is not necessarily the case that there needs be a direct causal link between that risk and the loss or damage the customer seeks to cover. That is a product of the language used in the agreement. This language will usually be selected deliberately to reflect that, from an actuarial perspective, it is difficult or perhaps impossible for an insurer to gauge the likelihood of the risk occurring. It is not generally reflective of a desire by an insurance company to shirk its responsibilities.The lesson to be learnt is that wording of the policy is absolutely central to a properly conducted analysis. A view of the world that an insurer has deep pockets and a customer is being hard done by where a claim is excluded will not greatly assist the client. As set out below, in an insurance context, causation is dominantly a matter of contractual analysis. A judge will generally not be moved to depart from this analysis without good reason.When does one thing can be said to have caused another is a question of almost universal application in civil litigation practice. At law school we are raised on a steady diet of common law tort, where the purpose of the inquiry is to identify who is - and who is not- at fault. This attribution of responsibility is the key area of interest. This sometimes leads to a subtle blending of causation and duty/ breach of duty concepts. Further, the characterisation of causation may sometimes be motivated by considerations of fairness and public policy.On the other hand, an insurance coverage dispute by its nature is concerned with an insurance contract where the key terms are contained in an insurance policy. The Court will therefore ordinarily limit its inquiry to what the policy says about causation.These different approaches may produce different outcomes. Consider the case of Miss Jay Jay [1987] 1 Lloyd’s Rep 32. If a yacht has been negligently designed or built, and then breaks up while at sea, in calm waters, the tort lawyer is interested in whether a breach of duty by either the designer or the manufacturer, or both, can be said to have caused the damage. In Miss Jay Jay the Court was required to address causation in the context with insurance against perils of the sea. Once the Court had located a proximate cause – the incursion of seawater (being the relevant peril), the inquiry ended.To what extent the Court was required to keep searching depending on the provisions of the policy. So, where there are a range of potential causes “if one of these causes is insured against under the policy, and one of the others is expressly excluded from the policy, the insured will be entitled to recover” (an extract from Halsbury, quoted with approval in Miss Jay Jay at 36 and 40). It followed that “where there were no relevant exclusions or warranties in the policy the fact that there may have been another proximate cause did not call for specific mention since proof of a peril which was within the policy was enough to entitled the plaintiffs to judgment” (Miss Jay Jay, page 37). On this view of things, any negligence by the designer or manufacturer does not make any difference to the policy analysis.So far so good. But in fact “causation” is not always a term that is expressly identified in a policy, rather, it is a concept implicit in the words used and the approach towards interpreting them.In the past, occurrence based insurance policy would helpful listed out the “perils” to which the policy would respond if one of those perils caused accidental damage: fire, tsunami, a plague of locusts and so on. Such a policy may have also contained a list of exclusions. So, the inquiry included a consideration of whether something was “in” (ie there was a listed peril which was the proximate cause of the damage) or “out” (excluded). Nowadays, an occurrence based insurance policy is more likely to be formulated on an “all risks” basis for accidental loss or damage. That is to say something should be covered, other things equal, unless the loss or damage is caused by something that is excluded. The causation focus is therefore more on exclusions.The causation focus also tends to be more on exclusions with regards to liability policies. Liability policies ordinarily respond to claims made during the policy period (and are subject to other terms and conditions outside the scope of this brief paper). Other things equal, either there is a claim to which the policy responds or there is not. Any causation issues are more likely to focus on whether the claim is excluded.All of the above is most usefully demonstrated by example, with reference to the recent case of IAG v Jackson [2013] NZCA 302. According to the judgment, a Christchurch couple, the Marchands, engaged an insurance broker, Mr Jackson, to arrange insurance cover for their home and contents, motor vehicles and a medical practice. Mr Jackson placed business interruption cover for the medical practice, but he arranged none of the other insurance. This was initially an oversight. On several occasions he assured the Marchands he had placed cover with NZI whereas he had not. The Marchands’ home was badly damaged in the 4 September 2010 Canterbury earthquake. Mr Jackson then attempted to arrange cover with NZI by submitting an application form which he dated 30 August 2010.The Marchands sued Mr Jackson for their uninsured loss. Mr Jackson joined IAG, his professional indemnity insurer. IAG applied for defendant’s summary judgment relying, amongst other grounds, on an exclusion for dishonesty. The Marchands succeeded at trial against Mr Jackson. IAG did not participate. An Associate Judge declined IAG’s application for summary judgment, concluding that dishonesty would need to be decided on the facts at trial. IAG appealed against that ruling resulting in the present judgment.The IAG policy contained an exclusion which provided that Mr Jackson was “…not insured for civil liability in connection with any dishonest, fraudulent, criminal or malicious acts or omissions by you…”.The Court of Appeal was required to decide what “dishonest” meant in this setting and what the connection needed to be shown between the insured’s dishonest conduct and his civil liability.On the evidence, the Court concluded that Mr Jackson had no case to answer to IAG’s allegation that he acted dishonestly.The next question was whether Mr Jackson’s dishonest acts or omissions were “in connection with” his civil liability to the Marchands. The question arose because it was apparently common ground that Mr Jackson did not act dishonestly when he first incurred a liability to the Marchands by failing to act on their instructions to secure cover for their home, contents and vehicles. The relevant dishonesty occurred later.The Court stated that IAG was required to establish a nexus or relationship between dishonest conduct and civil liability. It noted that the dishonest act “did not need to be the direct or proximate cause of the civil liability, and it need not precede the liability in time” (para 29). However: ‘“in connection with” does demand some causal or consequential relationship between the two things in this setting” (para 29).The Court considered whether IAG has discharged that burden. It had been agreed that Mr Jackson had acted honestly when he first failed to place cover. He incurred a liability for breach of this retainer at that time. However, the trial judge held that had Mr Jackson not hidden the truth from the Marchands, they would have secured cover before the earthquake. That being so, the required nexus was established. The exclusion therefore applied. The Court therefore permitted the appeal (the procedure aspects warranting separate consideration).POST SCRIPT (added 30 December 2013): nzinsurancelaw is aware that Mr Jackson has requested leave to appeal in the Supreme Court.