Two new Bills are set to provide some interesting times ahead for New Zealand insurers. In this Update we look at these upcoming legislative changes along with some recent decisions impacting on insurance policies.
Residential Tenancies Amendment Bill (No 2)
This Bill proposes to reduce the subrogation rights of residential property insurers.
The Bill does this by limiting a tenant's liability for damage done to residential premises to a maximum of four times the weekly rent if:
- The tenant did not cause the damage intentionally or recklessly.
- The landlord's insurance cover is not prejudiced by the tenant's actions.
Insurer's have already had their subrogation rights in relation to commercial premises severely curtailed by the Property Law Act 2007. This Bill intends to make a similar change for residential property.
Curiously, it adopts a different approach to the Property Law Act 2007. It merely limits the liability of the tenant (to four times the rent), whereas the Property Law Act 2007 excludes liability in total.
The Bill says a court 'may' apply the limitation, but it does not give any guidelines as to when to exercise that discretion.
Unit Titles Bill
With the increasing trend in people residing in apartments, the government has decided it is time to modernise the Unit Titles Act 1972.
The insurance provisions in the rewrite of the existing Unit Titles Act contain some practical improvements for insurers. Under the existing Act, a mid-term notice of cancellation by an insurer must be served on every proprietor of the body corporate and every mortgage notified to it. For body corporates of large apartment blocks with many proprietors, this is administratively burdensome. Under the Bill, the notice will only have to be served on the body corporate itself as well as every mortgage notified to it.
The Bill continues the current provisions for mortgage redemption policies. The rationale behind these policies is hard to follow. They insure against the 'liability to repay the whole or any part of the sum secured to the mortgagee in the event of the destruction or damage of the unit'. However, if the body corporate has insured its buildings as it is required to, that destruction or damage will be covered under that policy, and the security for the mortgagee's loan (the unit) will be reinstated by it. On the face of it, the policy repays the proprietor's loan even although the unit is rebuilt - a happy outcome for the proprietor, but surely not what is intended. Perhaps the policy is only meant to apply if the body corporate's policy for some reason does not respond. However, the Bill does not say that.
Insurers are left in a quandary as to what the terms of this statutorily created insurance policy are meant to be. The rewrite of the Act would be a useful time to clarify this issue for the future.
Defective product exclusion - resultant damage
The English Court of Appeal in CA Blackwell (Contracts) Ltd v Gerling Insurance Co  EWCA Civ 1450 considered the correct application of a policy exclusion for defective products.
Blackwell was a contractor. It contracted to carry out earthworks required on a stretch of motorway. As part of those earthworks, it cut the initial embankments for the motorway and then added various sub-layers of material to the roadway to ready them for another contractor to add the finishing layers of asphalt.
Heavy rain occurred during the earthworks and temporary drainage installed by Blackwell could not cope. Damage occurred to the sub-layers it had formed.
Blackwell lodged a claim under its Construction Policy with Gerling. The only dispute was over the correct application of an exclusion in the following terms:
'This policy excludes loss of or Damage to and the cost necessary to replace repair or rectify:
- Property insured which is in a defective condition due to a defect in design plan specification materials or workmanship of such Property insured or any part thereof.
Exclusion a) above shall not apply to other Property insured which is free of the defective condition but is damaged in consequence thereof.'
Thus, damage to any defective property is excluded, but resultant damage to any other property that is not defective is covered.
The insurer argued that the word 'property' referred to the works as a whole. It then argued that as the drainage was defective and this was part of the works as a whole, the exclusion applied to the works as a whole, including the sub-layers.
In the High Court, the Judge did not accept this and said the clause required property to be divided into its constituent parts. The property damaged was the sublayers. The temporary drainage was not 'property' but rather operations applied to the works. The property itself (the sub-layers) was not defective even if the drainage was.
The Court of Appeal agreed. It noted the purpose of the exclusion was to prevent the insurer from having to pay for the repair of property that was defective at the time of the occurrence of the peril that caused the loss. In relation to the word 'property', it noted the exclusion referred to 'the property insured or part thereof', and 'other property insured'. These phrases indicated that the property insured had to be divided in some way, and that if a separate part was defective then that did not prevent the insured recovering for the remaining parts that were not defective.
The Court of Appeal commented that if the insurer's argument was right it would not be liable if there was a defect in any part of the insured property. This rendered the resultant damage proviso redundant.
The approach taken by the Court of Appeal gives meaning to the common formula found in some policy exclusions of distinguishing between initial damage (excluded) and resultant damage (covered). This case confirms the courts will always strive to give practical effect to such provisos.
New Zealand High Court finds the words 'negligent act, error or omission' in a PI Policy cover more than negligence
While most professional indemnity policies cover 'civil liability', some still only provide cover for a 'negligent act, error or omission'. The scope of those words were at issue in Auckland District Law Society v D A Constable Syndicate 386, Auckland High Court CIV 2005-404-4322.
The Auckland District Law Society became embroiled in three separate proceedings relating to action taken by it against a law firm in the course of investigating complaints under the Law Practitioners Act 1982. The law firm alleged that the Law Society had acted unlawfully during its investigation of the complaints against the law firm.
The Law Society eventually had to pay sums to settle the three proceedings and it incurred its own legal costs in the process. It sought to recover the settlement sum and the costs under its professional indemnity policy.
The main issue at stake under the professional indemnity policy was that although the Law Society's actions may have been unlawful, they had not been negligent. Did this come within the words 'negligent act, error or omission' in the insuring clause?
Following a line of Canadian and English cases, the High Court held that the word 'negligent' stood on its own, and did not qualify the words: 'error' or 'omission'. An error or omission by the Law Society triggered the insuring clause even though it was not a negligent act. Thus, the Law Society's claim came within the insuring clause.
Some New Zealand insurers still offer professional indemnity policies that refer to 'negligent act, error or omission' in the insuring clause. It now seems clear from this decision that these policies are not confined to allegations of negligence only.
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