New Zealand: New Christchurch earthquake judgment - Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd

Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd

[2015] NZHC 1444

Prattley Enterprises Ltd owned a building on Worcester Street, just east of Cathedral Square. The building sustained damage in the earthquake on September 2010, further extensive damage on the Boxing Day earthquake (after which the Council red-stickered the building, and Prattley's engineering report confirmed that it was "clearly not safe for occupation"), and additional damage in February 2011, when sections of the roof and upper floor collapsed. The building was demolished in September 2011.

Prattley insured the building with Vero, with cover on an indemnity rather than replacement value basis. The policy recorded an indemnity limit of $1,605,000, but valuations obtained by both Prattley and Vero after the earthquakes did not support that figure.

Prattley entered into a settlement agreement with Vero, accepting $1,050,000 in full and final settlement of its claims, but has now issued proceedings attempting to overturn the settlement.

This judgment looked at a number of issues, including Prattley's entitlement under the policy, and whether the settlement agreement should be set aside.

Measure of loss

Justice Dunningham noted that there is no definitive way to calculate the indemnity value for a building. Instead:

"the measure of loss for which the insured is indemnified may depend on the insured's intentions for the property and the reasons for owning it. That is a factual enquiry and must be made in light of the circumstances applying in each claim event."

She decided that it was clear that after the first earthquake there was an intention to repair the building. After the Boxing Day earthquake the evidence showed that Prattley was considering alternatives, but that it obtained advice on a repair strategy, and indicated to tenants that the building would be repaired. Justice Dunningham therefore considered that even after the Boxing Day earthquake, Prattley intended to repair the building. It was not until after the February earthquake that repair was no longer an option. After this time, Prattley was looking at its various options, including developing the site in another way, or selling the property. It also investigated rebuilding, but the estimates showed that a rebuild would cost more than a finished building on that site would be worth.

Justice Dunningham decided that based on the evidence before her, Prattley would not rebuild, and that therefore "the proper measure of the plaintiff's loss is the market value of the building."

Calculation of depreciated replacement cost

Justice Dunningham observed that although she had found that market value was both an available measure of loss under the policy and was an appropriate measure of loss in all the circumstances, there was a disagreement in how to calculate depreciated replacement cost, if that was the appropriate measure for indemnity, and that this disagreement should also be resolved.

The local valuers who provided valuations all applied a single depreciation rate to the entire building, while Prattley's valuer, from the United States, used an "elemental approach", which depreciated different parts of the building at different rates, including many of the internal components (for example, plumbing and structural walls) not being depreciated at all.

Justice Dunningham confirmed that the use of the single depreciation rate is the appropriate method:

"The Australian and New Zealand Valuation Guidance Note 13 does not provide support for an elemental approach to depreciation as it consistently refers to the physical life of an asset not of its component parts."

Modelling of damage

Prattley relied in part on a computer modelling approach to determine the extent of damage caused by earth earthquake event. Justice Dunningham commented on the usefulness of the modelling, saying:

"While I accept Dr Jain's modelling will have utility where there is a more conventional building structure and a lack of reliable recorded evidence as to the extent of damage the building suffered in each claim event, I do not consider it assists in the present case. The allocation of damage which the model arrives at as between the three earthquake events is so at odds with the observed damage that I do not think it is a reliable tool to calculate what in fact needed repair after each event.
Furthermore, I do not think the model's percentage allocation of damage to each event can be directly translated to a share of the total repair or reinstatement cost as Prattley has assumed. Costs will not increase in a uniform or linear fashion depending on the stress the building was placed under. Instead, costs will rise in a non-linear fashion with each earthquake event, as they will depend on whether the damage sustained reaches the threshold where it warrants a cosmetic repair, a major repair, or total replacement of the damaged item."

This serves as a useful reminder that while modelling can have its benefits, it is no substitute for evidence of an actual assessment of the damage.

When was the building destroyed?

There was disagreement between Prattley and Vero as to whether the building was destroyed in the Boxing Day earthquake, or the February 2011 earthquake. Justice Dunningham approved the decision of QBE Insurance (International) Ltd v Wild South Holdings Ltd [2014] NZCA 447, [2015] 2 NZLR 24, which said that "the question of whether the insured property has been destroyed is a question of fact to be answered in all the circumstances".

In this case, the policy defines "destroyed" as being "so damaged that the property, by reason only of that damage, cannot be repaired". Justice Dunningham decided that:

"This definition clearly focuses on the feasibility of repair rather than incorporating any measure of economic practicality into that definition.
Thus, while Eliot Sinclair's engineers doubted the economic viability of repair after the Boxing Day earthquake (a conclusion which I found plausible), they concluded it was feasible to repair the building. It was only after the February earthquake, where the building was so damaged that it had to be demolished, that Worcester Towers could be said to have been "destroyed" in terms of the policy definition."

Therefore in this case, even though the building was uninhabitable after Boxing Day, it had not been destroyed in terms of the policy.

Prattley's entitlement under the policy

Prattley's policy provided for reinstatement after each event, but Dunningham J noted that:

"while I accept that Prattley Enterprises is entitled to make a claim for each earthquake event, I need to consider how the indemnity principle applies in successive claims, where I am satisfied there was no intention to rebuild Worcester Towers."

The indemnity principle states that "the insured cannot recover more than its loss under the policy, or the insured cannot make a profit". In this case, although damage was incurred in each event, no substantial repairs had been carried out. After the February earthquake, the building was destroyed. Justice Dunningham said that:

"If Prattley is paid for each event, it would be receiving money for repairs that had not been, and now could not be, carried out, that is, loss which it had not suffered."

Justice Dunningham noted that the "situation would have been different for Prattley if I had accepted that a rebuild of Worcester Towers was going to take place", but went on to say that:

"I have found that Prattley was entitled to the market value of Worcester Towers after the third event, and payment of that sum properly compensated Prattley for its losses, because it never would incur the losses of the repairs following the first two events."

Justice Dunningham also found that based on the evidence before her, the market value of the building was less than the amount paid to Prattley by Vero pursuant to the settlement agreement.

Setting aside the settlement agreement

Having decided that the amount received under the settlement agreement was more favourable to Prattley than they would have otherwise been entitled to, the validity of the agreement did not need to be considered. However, Dunningham J did comment on the various arguments put forward.

Prattley suggested that Vero had breached the Fair Trading Act 1986, by advising Prattley that its entitlement was limited to the market value of the building. Justice Dunningham confirmed that as noted above:

"there was not a single method of calculating indemnity value. As a result, its subsequent assertions that it considered market value applied could only be read as Vero's opinion on the option to apply in the present case. That is not misleading or deceptive conduct."

Prattley also claimed that there was a mistake, in terms of the Contractual Mistakes Act 1977, as to their entitlement. Justice Dunningham said that the settlement agreement included a "full and final settlement" clause, and that:

"I am satisfied this clause covers the risk that Prattley might be mistaken to the extent of its entitlement under the policy for damage to the property, which is a risk it is prepared to assume, in consideration of the payment being made to it under the Agreement. In other words, this clause expressly covers a claim, such as is now being made, for further or better entitlement under the policy which neither party was aware of at the time of signing the Agreement."

Justice Dunningham therefore decided that the settlement agreement was binding.

A copy of the decision is available here

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