New Zealand: Earthquake judgment summary - Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZSC 158

This is an appeal from the High Court's judgment in Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2015] NZHC 1444 and the Court of Appeal's judgment in Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZCA 67, [2016] 2 NZLR 750.

The issues before the Supreme Court were:

  • the nature and extent of Vero's liability under the insurance policy; and
  • 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

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. Prattley's first (and undisclosed to Vero) valuation was for $700,000, while a later joint valuation based on different assumptions was $1,050,000. 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

Prattley challenged the settlement on the basis that they were mistaken about how indemnity should be calculated.

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.

The Supreme Court decided that "Prattley's first two arguments fail: there was no common mistake as alleged and the settlement was distinctly favourable to Prattley." Unfortunately, the Supreme Court then decided that it therefore did not need to consider whether the contract required Prattley to bear the risk of a mistake. They noted that:

"By settling its claims against Vero in the terms that it did, Prattley abandoned any entitlement to go back to Vero for more money. The other side of the coin to this abandonment might be thought to be an acceptance by Prattley of the risk that it may have been mistaken as to its entitlements, particularly in light of the fact that the settlement was said to be in full and final settlement of any claims, both existing and future and known or unknown. At first sight, such acceptance might appear to engage s 6(1)(c) and thus to disqualify Prattley from relief. But despite the attractive simplicity of this analysis, we have some reservations whether it is necessarily correct. The reality is that a party to a contract is unlikely to seek relief under the Contractual Mistakes Act unless required by the contract to "assume the risk" of the mistake. If not so required, such a party would have no need to seek relief but would instead simply rely on the contract. It follows that if s 6(1)(c) is construed broadly, there would be little, and perhaps no, scope for relief under the Contractual Mistakes Act, which would thus be at risk of becoming a dead letter. This may suggest that some specificity as to, and not merely a general, assumption of risk may be necessary to engage s 6(1)(c). Working out how to resolve all of this may not be easy and we see it as a task best deferred until a case arises where such resolution is critical to the result."

There is therefore no final decision from the Supreme Court on whether the "full and final settlement" clause in the settlement agreement was sufficient to say that Prattley was required to bear the risk of any mistake.

Appropriate measure of indemnity value

In deciding that there was no mistake, and that Prattley had received a favourable settlement, the Supreme Court considered the way in which indemnity was calculated.

Prattley had argued that the policy, which said "You will be indemnified by payment or, at our option, by repair or by replacement of the lost or damaged property", meant that the indemnity value should be calculated by reference to the cost of repair or reinstatement. The Supreme Court said that "we consider that the argument advanced by Prattley is based on a distinctly unorthodox interpretative approach."

The Supreme Court went on to say:

"The obligation of Vero is to 'indemnify' Prattley for damage suffered. Prattley's primary entitlement was to indemnity by payment, but Vero, at its option, was entitled to provide indemnity 'by repair or replacement'. Insurers reserve this option to themselves to limit moral hazard. It does not signify that indemnity payment is necessarily to be calculated by reference to the cost of repair or replacement. We do not accept that Mr Cooke's re-ordering of this obligation accurately captures its essence.

The calculation of what is required by way of indemnity will vary depending on the circumstances, but this is always calculated against the background that the purpose of an indemnity payment is to make good the insured's actual economic loss.

If the property has been destroyed and is not to be reinstated, the most obvious basis for calculating indemnity is its market value. This is particularly likely to be so in the case of a property held for investment purposes."

In this case, the Supreme Court decided that:

"what was insured was the indemnity value of the building, that is, what it was worth. It would be a clear breach of the indemnity principle for Prattley to recover more than it had relevantly lost, that is what the building was worth when the sequence of earthquakes started."

Since the settlement resulted in Prattley receiving far more than its true entitlement, the Supreme Court decided that "it has no legitimate grounds for complaint."

A copy of the decision is available here

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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