New Zealand: Insurance: What amounts to ‘damage’?

Last Updated: 16 December 2009
Article by Monique Van Bellen and Crossley Gates

In a leading New Zealand authority, the High Court in Technology Holdings Limited v IAG New Zealand (HC Auckland, CIV-2005-404-3450) defined 'damage' in response to the question of whether there had been 'loss or damage' to the property of Technology Holdings Limited.

Facts

Technology Holdings Limited (THL) is a supplier of eftpos terminals for use in retail premises. In February 2005, THL stored some new units in a basement. These units were to be part of the principal electronic funds transfer (EFT) network in New Zealand. However, the units were rendered valueless after flooding occurred in the basement. THL contended the units no longer held any value as the units' manufacturer withdrew its warranty and the EFT network operator refused to permit the units to be used as part of the network.

THL made an insurance claim for the loss of all of the units with IAG New Zealand Limited (IAG). IAG met the claim in respect of the units that were stored in cartons that came into direct contact with water, approximately one quarter of the total. IAG declined the claim in respect of the remaining units on the basis that there was no loss or damage to them in terms of the policy.

Question for determination

THL and IAG sought determination before trial of a question of construction of the insurance policy. This question was:

Has there been loss or damage to the property for the purposes of the insured's Business Assets insurance policy where the insured cannot prove that the property was physically damaged but, as a result of being stored in premises affected by flooding, the insured is unable to realise the property as intended?' (emphasis added) Justice Woodhouse said the short answer to this question was that no 'loss' had occurred but there may have been 'damage'.

Policy wording

The operative clause of the policy is as follows: 'If during the Period of Insurance specified in the Schedule there happens Loss or Damage unintended and unforeseen by the Insured, except as may be excluded, to the property and expenses insured, then the Insurers will indemnify the Insured in respect of such Loss or Damage as expressed in the basis of loss settlement and in addition the Insurers will indemnify the Insured in the manner and to the extent separately stated herein.' (emphasis added)

Analysis: loss to property

The operative clause in the policy refers to 'Loss or Damage'. Loss and damage are distinct things. In respect of loss, the literal policy wording says 'loss to the property insured' not 'loss of the property'. Justice Woodhouse held that based on contextual indications the words 'loss to the property' in the operative clause mean 'loss of the property'. If this was not the case then there would be no cover for events such as theft or disappearance for some other reason.

Analysis: damage to the property

The issue for Justice Woodhouse to determine in relation to his analysis of 'damage to the property' was whether damage should be read as 'physical damage'. Justice Woodhouse began his analysis by examining the ordinary meaning of damage. Damage means 'harm' or 'injury' or to put it more broadly 'something adverse'.

Justice Woodhouse then examined other clauses in the policy that specifically referred to 'physical loss or damage'. IAG alleged that the use of 'physical damage' in the clauses 12, 20 and 21 made it clear that 'damage' in the operative clause must be read as 'physical damage'. Justice Woodhouse disagreed and stated that the use of the expression 'physical damage' in clauses 12, 20 and 21 indicates the contrary to IAG's submission. This is on the basis that the parties have deliberately turned their minds to the expression. If the parties intended the word 'damage' in the operative clause to be qualified by the adjective 'physical' then, having used the adjective elsewhere in the document, one would have expected them to use it in the operative clause.

Justice Woodhouse concluded that 'damage' in the operative clause of the policy had a wider meaning than 'physical damage'. After this conclusion he then went on to examine the meaning of 'damage' and in doing so he defined the outer limits of damage.

Justice Woodhouse drew on the decision of Chief Justice Green in the Supreme Court of Tasmania in Ranicar v Frigmobile Pty Ltd [1983] Tas.R. 113; (1983) 2 ANZ Insurance Cases 60-525 for his definition of damage. Justice Woodhouse held that there are two important requirements when considering whether there has been 'damage to' property as opposed to 'physical damage to' property. The first element is that something has happened in connection with the property which has impaired its 'value or usefulness'. His Honour noted that this element, a diminution in value or functionality, cannot stand alone because if it did any loss suffered by an insured in respect of property, no matter what the cause, would potentially be covered. This will not be the case if there is an additional element to the definition of 'damage'. The additional element is that something must happen to the property itself followed by the impairment of value or usefulness, for damage to occur. This element will exclude cover from cases of pure economic loss, that is, cases where nothing has happened to the property itself.

In summary, the two elements for 'damage' to occur are:

  • Some external peril must impact on the property.
  • The property's value or usefulness must be impaired as a result.

To establish there had been 'damage to the property', THL needed to show that because the units were stored in premises affected by flooding, the units would malfunction during use in the network on a date earlier than the date on which the units would normally be withdrawn from use, and in consequence they are not fit for their intended use.

Result

Justice Woodhouse held that the answer to the preliminary question is that there had not been 'loss to the property' for the purposes of the policy but that there may have been 'damage to the property'. His Honour was not able to make a final decision on the preliminary question because further evidence was needed about the units' degree of impairment.

Implications

This case provides useful guidelines on what amounts to 'damage' covered by an insurance policy. It is the first New Zealand decision to consider this issue in detail. It will assist both insurers and insureds by providing more certainty about when the insuring clause is satisfied.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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