Imagine being legally forced out of your house indefinitely because the Canterbury earthquakes increased the risk of large rocks from a nearby hillside breaking loose and smashing into it, endangering your life. Your house is untouched, but you are deprived of its use. Does your house insurance cover this? Mallon J's initial reaction at the beginning of the High Court hearing for Kraal v EQC and Allianz NZ Ltd was that it ought to. However, she concluded, and the Court of Appeal has recently agreed, that deprivation of use is not 'physical loss or damage to the property'. This means that the physical loss of use is neither covered by the Earthquake Commission (EQC), nor topped-up by private insurance.
Shortly after the 22 February 2011 earthquakes, civil defence authorities required Mrs Kraal to leave her house because of the perceived risk of further rock falls from hills immediately across the road. On 13 July 2011, on receipt of geotechnical advice, Christchurch City Council issued a notice under section 124(1) of the Building Act 2004. The effect of the section 124 notice was to make it an offence for any person to use or occupy the house or permit another person to use or occupy the house.
The house suffered some shaking damage in the earthquakes; however, the estimated repair cost for that damage fell well within EQC's cover. Mrs Kraal received the government's red-zone offer but pursued her claim against EQC and her private insurer in the hope of receiving a larger sum. She claimed both covers responded because of the physical loss of use of the house.
In the High Court, Mallon J found against Mrs Kraal. Mrs Kraal appealed to the Court of Appeal.
Court of Appeal decision
The key to Mrs Kraal's success was establishing there was cover under the Earthquake Commission Act 1993 (Act). This was because without cover, the Allianz policy was unlikely to respond (as it was designed to only provide top-up cover above the level of cover provided under the Act).
Both the High Court and the Court of Appeal noted that the cover under the Act required 'physical loss to property'. The use of the word 'to' was critical. The physical loss must be in relation to the property itself. This was to be contrasted with physical loss of use of the property, which refers to the owner and not the property itself.
The Court of Appeal decided that the plain meaning, the context, the legislative history, and the relevant authorities in New Zealand, Australia and England, all support an interpretation of the Act that limits the meaning of natural disaster damage to physical damage to the property that arises from a natural disaster.
The Court of Appeal concluded that physical loss or damage requires a disturbance to the materials or structure of the building or other object. This was not the case here. Since EQC was not liable under the Act, the top-up cover under the Allianz policy was not available either.
Commerce Commission releases Unfair Contract Terms Guidelines
The Commerce Commission has published its final version of the Unfair Contract Terms Guidelines and its approach to enforcing the new unfair contract term sections incorporated into the Fair Trading Act 1986, which took effect from 17 March 2015. The Guidelines include a section relating to insurance contracts.
The unfair contract terms provisions only apply to standard form domestic insurance policies. Even then, they only apply to insurance contracts entered into with an insurer for the first time after 17 March 2015. They do not apply to variations of the terms of existing insurance contracts or to the renewal of existing insurance with an insurer.
For new domestic insurance policies entered into after 17 March 2015, some terms are deemed to be reasonably necessary to protect the interests of the insurer and are exempt from being declared unfair terms. These are terms that:
- identify the subject matter or risk insured against, including terms identifying an uncertain event;
- specify the sum(s) insured;
- exclude or limit the liability of the insurer to indemnify the insured;
- describe the basis on which claims may be settled or that specify any sums to be contributed by the insured, such as an excess;
- provide for the payment of the premium;
- relate to the duty of utmost good faith owed by all parties; and
- specify the requirements for disclosure or relate to the effect of any non-disclosure or misrepresentation by the insured.
What remains are the general conditions of the policy that benefit the insurer, which are often one-sided without a corresponding justification. In light of the new unfair contract term sections to be incorporated into the Fair Trading Act 1986, a term giving the insurer an unfettered right to vary or cancel the policy mid-term may be at risk of being determined unenforceable.
The Commerce Commission can apply to the District Court or High Court for a declaration that a term is an unfair contract term. A declaration to this effect by the District Court or High Court has the effect of making an existing term unenforceable and prohibits the party relying on the term from continuing to use the term any further.
Professor Robert Merkin QC
We are proud to announce that, in February 2015, Professor Robert Merkin, Special Counsel in our insurance team, was appointed Queen's Counsel Honoris Causa in England and Wales under letters patent issued by the Crown.
This honorary appointment is reserved for lawyers who are not practising barristers, and only a handful of appointments are made every year. Professor Merkin was appointed an honorary QC for his contributions to the law of insurance and arbitration over the last 20 years. The Lord Chancellor presented the honorary title to Professor Merkin at Westminster Hall.
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