UK: The Time For Payment Of Indemnity Value: Show Me The Money!

Last Updated: 23 April 2013

Article by Dean Carrigan, Gareth Horne and Leah Hewish.

A recent judgment of the High Court of New Zealand indicates how New Zealand courts will approach indemnity disputes associated with commercial property damage caused by the Christchurch earthquakes. TJK (NZ) Limited v Mitsui Sumitomo Insurance Company Limited1(TJK v Mitsui) concerned the distinction between the indemnity value and reinstatement value of damaged property, with a focus on when these amounts become payable. The decision is consistent with and reinforces Australian principles in relation to the timing of payments under commercial property policies.

Background

TJK (NZ) Limited (TJK) was the owner of Clarendon Tower (the Property), a high-rise office building that suffered extensive damage in the 2010 and 2011 Christchurch earthquakes. The Property has been demolished in accordance with the direction of the Canterbury Earthquake Recovery Authority (CERA).

TJK held a business indemnity policy with Mitsui Sumitomo Insurance Company Limited (Mitsui) in relation to the Property (the Policy) that included an extension for earthquake risks. Extension MD020 allowed TJK to recover the indemnity value of TJK's loss and extension MD022 provided full reinstatement cover following damage caused by an earthquake.

Under extension MD022, "Reinstatement" meant either replacement of lost or destroyed property, or repair of the damaged property "to a condition substantially the same as, but not better...than, its condition when new." Importantly, extension MD022 contained a provision (special condition 4) that stated that no payment of more than the indemnity value will be paid "until the cost of reinstatement has been actually incurred."

TJK v Mitsui

TJK claimed interlocutory declaratory relief seeking immediate payment of the indemnity value of the Property. Mitsui agreed that the indemnity value of the Property was "the least amount that Mitsui must pay" but asserted that it was liable to pay only when TJK had actually incurred the costs of reinstatement. The question before the High Court of New Zealand was whether the payment of indemnity value was due immediately, or only after the cost of reinstatement had been incurred by TJK.

Focusing on the terms of special condition 4, Miller J outlined the differences between indemnity value and reinstatement cost, noting that:

  • A payment in respect of indemnity value reflects loss arising from the diminution in the market value of the relevant property as a result of the happening of the insured peril.  Therefore, TJK's right to obtain indemnity value accrued at the time that the Property was damaged. 
  • Reinstatement value, as defined in the Policy, related to the cost of repairing or replacing the Property to its pre-damage state. 

His Honour found that Mitsui's obligation to reimburse TJK for the indemnity value of the Property arose the moment the damage occurred and cited a number of Australian authorities in reaching that conclusion. However, it was separately found that Mitsui was not liable to pay the reinstatement value until the reinstatement costs had been incurred by TJK. 

Support for Australian case law on basis of settlement

Miller J cited with approval the seminal Australian case of CIC Insurance Ltd v Bankstown Football Club Limited2(CIC) which concerned the liability of a property insurer for a building damaged by fire. That case was focused on whether the insured had complied with its obligations under the insurance policy to commence restoration work on the damaged building with "reasonable despatch". The failure to do so would have entitled the insurer to reduce its liability so that the insured could only claim indemnity value.  While there are some factual differences between the New Zealand decision and CIC, the New Zealand High Court approved the principle outlined in CIC that indemnity value is payable "at the time of the happening of the damage". 

The New Zealand High Court also cited with approval a number of other leading Australian decisions relating to the interpretation of commercial property policies including Brescia v QBE3and Vinitex Pty Ltd v Lumley General Insurance Ltd4.

Miller J noted that commercial property policies in different jurisdictions, such as the United Kingdom and Australia, are drafted in very similar terms to wordings available in New Zealand. His Honour added that while case law in those jurisdictions is not determinative, it is persuasive:

"...insured risks are much the same everywhere and the authorities suggest a common heritage in English law and practice." 

The case is due for final hearing in August 2013 when the court will consider whether the demolition order made by CERA had the practical effect of rendering the insured's option of effecting repairs to the Property and then recovering under the Policy's reinstatement provision redundant, thereby leaving Mitsui liable only for indemnity value. At that time the court will also consider quantum issues.

Comment

The interlocutory decision in TJK v Mitsui importantly clarifies the obligations of commercial property insurers in New Zealand in relation to the timing of indemnity value payments.  In doing so, the New Zealand High Court provided significant judicial support for the construction of basis of settlement provisions adopted in Australia under the standard form ISR policy, and similarly worded policies in wider common law jurisdictions. 

The matter also raises important questions about whether an insured is entitled to reinstatement costs for a building which is subject to an order for demolition made by a public authority. The New Zealand High Court is likely to consider that issue in this case later in the year.

We will follow developments in the case and report further when the substantive decision is handed down.

Footnotes

1 [2013] NZHC 298

2 (1997) 187 CLR 384

3 [2007] NSWSC 598 

4 (1991) 24 NSWLR 627

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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