The High Court, in Prattley Enterprises Limited v Vero Insurance1 has had its first opportunity to determine whether an insured is able to reopen a settled insurance claim.
In short, the Court said that 'no'; an insured could not reopen its claim once it had signed a binding cash settlement agreement. The reasons why the Court came to this decision are worth noting.
The insured, Prattley Enterprise Limited ("Prattley"), owned Worcester Towers, an older commercial building on Cathedral Square in the heart of Christchurch. It negotiated a cash settlement with Vero after its building was damaged in multiple earthquake events. In August 2011, Prattley accepted a cash payment of $1,050,000 plus GST from Vero. The parties accepted that this was the market indemnity value of the building at the time of loss.
Prattley, in the usual manner, signed an agreement recording that the payment was in full and final settlement and discharge of its claims, whether known or unknown, against Vero.
After signing the settlement agreement, Pratley was advised by a third-party that it was entitled to more than the market value payment it had received. The building had been damaged in successive earthquake events. It was destroyed in the February 2011 event. According to the advice it received, this meant Prattley could receive the cost of repairs after each event in addition to the cost of rebuilding after the 'total loss' event. Prattley's sum insured was $1,650,000 plus GST.
Prattley invited Vero to make a much larger payment than it had already made based on a cost to rebuild the building. Vero refused. Prattley took their claim to the High Court. The Court considered two central questions:
- Could Prattley re-open its settlement agreement with Vero?
- Was Prattley entitled to more than the $1,050,000 plus GST it received in settlement from Vero?
Could Prattley re-open its settlement agreement with Vero?
The Court ultimately held that Prattley could not re-open its settlement agreement.
Prattley had submitted four grounds on which it believed the settlement agreement should be set aside, none of which were accepted by the High Court:
- First, the Court found that Vero had acted openly, fairly and frankly in its negotiations and discussions with Prattley and that Vero had not breached its obligation to act in good faith. Prattley had also relied on its own legal advice over its entitlements under the policy before signing the settlement agreement, and that advice matched Vero's understanding of its policy obligations.
- Second, Prattley claimed Vero had breached the Fair Trading Act. The Court found that Vero's honestly held opinion of its policy obligations could not constitute misleading or deceptive conduct under the Fair Trading Act. In any case, Prattley had not, in fact, relied on Vero's opinion, having sought its own legal advice.
- Third, the Court held that even if Prattley and Vero were both under a mistaken belief over Prattley's entitlements at the time they entered into the settlement agreement, nevertheless, the agreement was drafted specifically so that Prattley accepted the risk of being mistaken as to its policy entitlement.
- Finally, Prattley claimed that the settlement agreement was not in fact a compromise and that there was no consideration for the settlement. However, the Court held that Prattley's entitlement under the policy was not a set figure and there was scope for either party to debate that entitlement. Prattley received the benefit of Vero's promise to pay an agreed amount without needing to engage in litigation. The Court found that both parties had given up valuable rights and had entered into the agreement in good faith. Therefore, there was valid consideration.
The Court therefore determined that the settlement agreement was valid and binding and, even if Prattley was entitled to more than it had received, it should not be set aside.
Was Prattley entitled to more than it received from Vero?
Even if the Court was wrong in deciding that Prattley could not re-open the settlement agreement, Her Honour held that Prattley would not have been entitled to receive an enlarged payment from Vero anyway.
Prattley had not undertaken any repairs after the first earthquake or subsequent event before the building was effectively destroyed during the 22 February 2011 earthquake. Relying on the QBE Insurance (Wild South) Court of Appeal decision, the Court found, the cost of repairs was overtaken by the costs which represented Prattley's loss following the 22 February 2011 event.
On the evidence, Prattley had no intention of rebuilding, so the loss it suffered, and for which it was entitled to be indemnified, was measured by the value of its building. This was no more than the market value payment already received from Vero.
In fact, the Court remarked that the market valuation of $1,050,000 plus GST, on which the parties settled, was unreliable as it included incorrect rental yields. The Court said that a more realistic valuation was $520,000 plus GST. However, as the parties had already agreed to the former figure, the Court did not need to make a finding on this point.
The decision shows that the courts will be reluctant to reopen a settlement agreement unless an insured can impeach it, by pointing to clear instances of deception, duress or misleading conduct by their insurer during negotiation or formation of the agreement.
The decision reinforces the need for home and building owners to obtain independent legal and cost assessment advice before entering into a binding, full and final settlement agreement with their insurers.
1 NZHC 1444 per Dunningham J
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