The Supreme Court decision arises out of a request by IAG and Ridgecrest for the Court to determine a preliminary question - is Ridgecrest entitled to be paid for the damage arising from each event up to the limit of the sum insured in each case?
The Supreme Court's decision is different to the decisions of the High Court and the Court of Appeal, both of which had decided the preliminary question in IAG's favour - albeit on different grounds.
The Supreme Court decided that Ridgecrest is entitled to be paid for the damage arising from each event up to the limit of the sum insured in each case but the decision is particular to the policy wording and subject to some caveats.
When considering the decision some key points should be borne in mind:
- The decision was reached on the basis of the particular policy wording. As the High Court had previously noted, the context for the preliminary question was "the interpretation of the individual contract in its own commercial context". The wording is not generally seen in material damage policies in New Zealand. In particular:
- It does not contain a general aggregate clause; and
- It does not contain a reinstatement clause which is a procedure for reinstatement of cover after a claim has been met and determines how an insurer's obligations in those circumstances are to be met.
- The fundamental principle of insurance law – the indemnity principle – is confirmed meaning that an insured cannot double count its losses. In this case, Ridgecrest cannot recover more than the reinstatement value of the building because IAG and Ridgecrest are said to have understood that the sum insured was not based on and was less than the replacement value of the building. Where this is not so, an insured may still be limited to a lower sum insured as the measure of its loss, not the reinstatement value.
- While an insured is entitled to cover for damage caused by earlier earthquakes where that damage is unrepaired, the damage is compensated on an indemnity, not replacement, basis. This is because replacement is not, in fact, possible.
Ridgecrest owned a commercial building in Christchurch. The building was insured with IAG.
Ridgecrest was insured for loss or damage to the building, as well as replacement cover for loss or damage that is restored or replaced. The policy provided for a sum insured of $1.984 million as being the maximum amount payable "in respect of any one happening".
During the policy period, the building suffered damage in four earthquakes - 4 September 2010, 26 December 2010, 22 February 2011 and 13 June 2011. IAG commissioned builders to repair the damage to the building caused by the 4 September 2010 and 26 December 2010 events, but this was not completed by the time of the 22 February 2011 earthquake. No further repair work was carried out after the 22 February 2011 earthquake.
As a result of either 22 February 2011 or 13 June 2011 earthquake the building was damaged beyond repair. IAG and Ridgecrest disagree on which earthquake caused irreparable damage, but both agreed that by 13 June 2011 at the latest the building was damaged beyond repair.
IAG paid Ridgecrest the sum insured of $1.984 million but said that its liability for earlier earthquakes was limited to the cost of repairs actually undertaken. Ridgecrest disagreed, saying it was entitled to the sum insured of $1.984 million as well as the estimated cost to repair damage caused by the earlier earthquakes (whether those costs were incurred or not).
The Supreme Court
The Supreme Court decided that there were three questions for it to determine:
- Whether the policy, when construed in the context of the events that happened, required IAG to make payments in relation to the earlier earthquakes.
- Whether the losses resulting from the earlier earthquakes are to be treated as merged or subsumed in the losses caused by the final earthquake. (The basis of the merger principle applied in marine cases is that a smaller partial loss is overtaken by, and subsumed in, the subsequent larger total loss.)
- Whether Ridgecrest's claim is precluded by the indemnity principle, under which an insured is preventing from recovering more than the amount of the loss.
The Supreme Court found that:
- Ridgecrest is entitled to be paid in respect of the damage caused by the earlier earthquakes up to the sum insured for each earthquake as well as the sum insured in respect of the final earthquake. However, for damage caused by earlier earthquakes Ridgecrest was entitled to a payment on an indemnity basis (rather than replacement) for damage sustained in each earthquake.
- As a consequence of the policy resetting after the earlier earthquakes in relation to the building in its damaged damage and providing replacement cover in that state, the damage caused by the earlier earthquakes does not merge with Ridgecrest's entitlement in relation to the final earthquake.
- By reason of the indemnity principle, Ridgecrest is not entitled to recover more than the replacement value of the building and may not double count the losses.
The decision will likely not have general application to all earthquake claims because it is specific to the policy wording in this case. There are some aspects of the decision, however, where the Court has made some findings which are not specific to the policy wording and will be of more general application. That is, that the indemnity principle applies and cover for partial damage from earlier earthquakes is indemnified on an indemnity basis, not a replacement (new for old) basis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.