New Zealand: Insurance settlement - Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZCA 67

This is an appeal from the High Court's judgment in Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2015] NZHC 1444.

The primary issue before the Court of Appeal was whether a settlement entered into by the insured and insurer can be reopened, or whether the insured assumed the risk of mistake so that it could not rely on the Contractual Mistakes Act 1977. The Court of Appeal also considered two secondary matters: the appropriate measure of indemnity, and the weight that should be given to the evidence of an expert witness in this case.

Background

Prattley Enterprises Ltd (Prattley) 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. The evidence in the High Court showed that there was a conscious decision not to insure for full replacement value.

Prattley entered into a settlement agreement with Vero, accepting $1,050,000 in full and final settlement of its claims.

Revisiting the settlement

The Contractual Mistakes Act 1977 allows relief to be granted if:

  • a contract is entered into under the influence of a qualifying mistake of law or fact;
  • the mistake resulted, at the time that the contract was entered into, in a substantially unequal exchange of values; and
  • the contract had not provided for the risk of mistake, and recorded that one of the parties would bear that risk.

Prattley claimed that they were mistaken about the "full measure of indemnity", including both that the insurance was capped at $1,605,000, and that market value was the correct measure of indemnity.

The Court of Appeal noted that:

"the parties knew market value was not the only measure of indemnity available. The valuations they exchanged referenced other measures, including depreciated replacement cost. So the question is not whether they both failed to appreciate that any alternative to market value was available. The question is whether they were mistaken in their shared belief that market value was a better measure of indemnity than depreciated replacement cost in the circumstances. That is a question not of law nor of fact, but of opinion."

They also decided that Prattley knew that the sum insured did not limit the settlement amount.  Prattley had made three claims, and it was known to the parties that if the property had not been destroyed then the total amount payable may have exceeded the sum insured.

The Court of Appeal then said that:

"However the mistake is framed, it is we think a mistake of a kind that the parties must be taken to have had in mind when negotiating the settlement, for it is a mistake about the subject matter of the settlement; that is, the measure of Prattley's entitlement to indemnity under the policy. That being so, there is no contextual or purposive justification for reading down the general words of the release which, as Dunningham J held, plainly extend to any unknown claim under the policy for earthquake damage to the building; Prattley accepted payment in full and final settlement and discharge of all present and future claims, whether known or unknown, in connection with the damage, the earthquakes and the policy, and on whatever legal or equitable basis such claims might arise."

The Court of Appeal also considered the various valuations that had been conducted in relation to both market value and depreciated replacement cost. They decided that even "assuming a mistake about the availability of depreciated replacement cost as a measure of indemnity, there was no substantial inequality of exchange, viewed as at settlement date."

There being no mistake, no unequal exchange of values, and an assumption of risk by Prattley, the settlement agreement should therefore not be revisited.

Appropriate measure of indemnity value

Having determined that the settlement should not be reconsidered, it was not strictly necessary for the Court of Appeal to determine the appropriate measure of indemnity. Nevertheless, there were some elements that the Court of Appeal decided to comment on.

The policy stated that the insured would be indemnified by payment, or, at Vero's option, repair or reinstatement.  However, there were special notes, which provided that Vero would "repair or reinstate" and would do so by reference to the original design and suitably equivalent materials. The special notes also recorded that the cover reflected the building's original appearance, capacity and design.

The Court of Appeal decided on that basis that:

"In our opinion 'reinstatement' in this policy was not merely a method by which the insurer might discharge its obligation. It was also a primary measure of the material damage indemnity; primary because it reflected the parties' agreement that cover would reflect the special character of the building."

The Court of Appeal said that:

"we prefer the view that as between insured and insurer depreciated replacement cost was an appropriate basis for indemnity on destruction. The policy reflected the character of the building and that must inform the approach to indemnity value. Depreciated replacement cost accordingly better reflected Prattley's loss than did Mr Stanley's realistic market value assessment."

As noted above, in any event the depreciated replacement cost valuations were in the range of the settlement amount agreed.

Expert witness

One of Prattley's expert witnesses was Mr Keys. Mr Keys gave evidence relating to the calculation of depreciation for the replacement cost of the building.  His approach was unorthodox and not supported by literature. Justice Dunningham placed "little, if any, reliance" on his evidence.

In addition to concern about Mr Keys' methodology, Vero challenged his ability to give evidence, on the basis that he is a principal of Risk Worldwide, which advertised itself as advocating for the claimant, and which had a financial interest in the result of the proceedings.

Section 25 of the Evidence Act 2006 says that an expert's opinion is admissible if the trial judge is:

"likely to obtain substantial help from the opinion in understanding other evidence in the proceeding or in ascertaining any fact that is of consequence to the determination of the proceeding."

The Court of Appeal noted that:

"Substantial helpfulness is an amalgam of relevance, reliability and probative value. The assessment is ultimately that of the trial judge, not the parties; a court need not accept the opinion of an expert even where it is uncontradicted."

They went on to say:

"Sections 25 and 26 mark a departure from the common law's traditional willingness to admit expert evidence and treat reliability as a question of weight. They anticipate that evidence may be excluded for want of reliability, for want of impartiality, or for want of compliance with the Code [of Conduct of Expert Witnesses].
...
It is necessary to distinguish impartiality – the primary objective of the Code – from independence. An expert witness need not be independent of the party by whom the expert is briefed. Any potential conflict of interest is ordinarily treated as a matter of weight. That is so because independence goes to the relationship between the expert and the party engaging the witness, while impartiality is a behavioural quality, signifying an attitude of neutrality as between the parties. An expert witness who lacks independence may nonetheless behave impartially."

In this case, the Court of Appeal decided that it was "inescapable" that Mr Keys was not an impartial witness, and that Dunningham J "could not have been faulted had she ruled it inadmissible in its entirety."

A copy of the decision is available here: http://www.courtsofnz.govt.nz/cases/prattley-enterprises-limited-v-vero-insurance-new-zealand-limited/at_download/fileDecision

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.

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