NZHC 3513, (2013) 18 ANZ Insurance Cases 61-997
The plaintiff, Crystal Imports Ltd, was the owner of five commercial properties in Christchurch. These properties were all insured by the defendants. The properties suffered damage in both the September earthquake and the February earthquake; three have already been demolished.
Small amounts (totalling $68,421.97) have been paid by the defendants for the cost of investigation and repair of the properties to date.
The parties agreed that the issues to be determined were:
"what is the extent of the defendants' liability to indemnify the plaintiff for the separate damage caused to the plaintiff's insured properties by the September earthquake?"
"does the Average clause in the Policy limit the defendants' obligation to pay the plaintiff the full sum insured for the damage caused by the February earthquake to the plaintiff's New Brighton Mall property?"
The plaintiff's insurance policy had a "reinstatement of sum insured" clause, which provided that:
"In the event of loss for which a claim is payable under this Certificate, and in the absence of written notice by the Company or the insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The Insured undertakes to pay such pro rata premium at the rate applicable to the item or items concerned as may be required for the reinstatement."
The judgment did not refer to the recent decision of Wild South Holdings Ltd v QBE Insurance (International) Ltd; Maxims Fashions Ltd v QBE Insurance (International) Ltd  NZHC 2781, but came to a similar conclusion. Justice Cooper said:
"The fact that reinstatement occurs automatically does not in my view mean that the "notice to the contrary" provided for by the clause needs to be given prior to the automatic reinstatement. I consider the notice can still be effective if given after the reinstatement, and once given would mean that the reinstatement would not be effective. In such circumstances there would have been notice to the contrary at the time of any subsequent covered loss.
However, if there were to be a second event for which cover was available prior to notice being given, that would have occurred in the absence of written notice to the contrary, and a subsequent notice would then be too late to prevent the availability of cover up to the full amount of the sum insured. The two prerequisites to automatic reinstatement, for which Mr Gray correctly contends, would then exist: the "loss" would have occurred in the absence of notice to the contrary, and there would be nothing to prevent the automatic reinstatement. Automatic reinstatement would occur.
On this approach, to be effective, the "notice to the contrary" must be given before the second loss causing event. If it has been so given, the second event would only be indemnified as to the available remainder of the sum insured."
Doctrine of Merger
The defendants claimed that the doctrine of merger means that the destruction of the buildings in the February earthquake had the consequence that the total amount of cover then became payable, and that any prior partial damage the result of the September earthquake merged with the subsequent damage.
The plaintiff argued that following the decision of Ridgecrest NZ Ltd v IAG New Zealand Ltd  NZHC 2954, the doctrine of merger was restricted to maritime insurance law only.
Justice Cooper decided that:
"there is nothing in the particular reasoning which I have set out which suggests that the principles discussed have a basis that is particularly and exclusively relevant to contracts of marine insurance. It seems to me that the key issues identified are whether the separate events giving rise to damage (the second of which causes a total loss) arose during the same period of insurance, and also whether, at the time of the second event, the underwriter has a liability in respect of the first event."
Justice Cooper specifically said that he disagreed with Dobson J's decision in Ridgecrest on this point, and said that:
"The merger doctrine applies in relation to two sets of damage and the implications of the fact that the replacement building is a "new insurance prospect" can be adequately dealt with by mechanisms such as the RSI clause discussed earlier in this judgment."
He went on to say that:
"That conclusion also responds to the submission made by Ms Rosic that to conclude that the doctrine of merger should be applied in the present case would somehow be contrary to the terms of the policy. The answer is that the policy is one that is intended to indemnify the insured for the loss suffered. Given the total loss of the insured buildings, the objective of providing indemnity cover can be met if cover up to the sum insured is provided in respect of each building. While the September damage was covered, and there are extant claims in respect of it, once the February earthquake took place, the unrepaired damage sustained in the September event was no longer a loss for which indemnity needed to be provided."
There is a dispute regarding whether one of the plaintiff's properties, at New Brighton Mall, is a total loss. Arising from that is a question of whether the average clause in the insurance policy limits the defendant's obligation to pay the full sum insured for the damage to this property.
The average clause takes into account the sum insured compared with the value of the property. The difficulty is that the value of the property can be calculated in different ways. In the agreed statement of facts, the parties said:
"The parties cannot agree on the repair or replacement cost of the damage caused to New Brighton Mall by the February Earthquake. However, the following estimates have been obtained:
- depreciated replacement cost indemnity value of New Brighton Mall, as at 21 February 2011, has been estimated at $4,580,000;
- the cost of repairing the damage caused to New Brighton Mall by the February Earthquake has been estimated at $5.3m;
- the replacement cost of New Brighton Mall, as at 21 February 2011, has been estimated at $9,569,320; and
- the cost of rebuilding New Brighton Mall has been estimated at $11.4m."
Justice Cooper decided that based on the wording of this policy, the value of the insured property depends on the election made by the plaintiff in terms of whether or not to repair or reinstate the property, and that if reinstatement does not occur then the depreciated replacement cost indemnity value would apply.
Based on the above, Cooper J answer the questions before him as follows:
"The defendants' liability to indemnify the plaintiff for the separate damage caused to the insured properties by the September earthquake is limited to the sums that had already been paid at the time of the February earthquake. Thereafter, the liability is limited to the maximum amount set out in the Schedule as the sum insured for each building. For the avoidance of doubt, that amount would be the full sum insured, without deduction for the September payments."
"The value of the insured property for the purposes of the Average clause will reflect the basis of recovery elected by the plaintiff in respect of covered damage to that property. If the plaintiff elects not to reinstate the insured property, the answer to the second question is no, based on the estimates contained in paragraph 20 of the agreed statement of facts."
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