The Supreme Court has now considered an insurer's liability for multiple events occurring in the same policy period, addressing policy interpretation, the doctrine of merger, and the indemnity principle: Ridgecrest NZ Limited v IAG New Zealand Limited  NZSC 117, on appeal from the decision of the Court of Appeal in July 2013.
Ridgecrest owned a commercial building in central Christchurch, which was insured with IAG under a State "Businesspack" policy. As a result of the Canterbury earthquake sequence, Ridgecrest lodged four claims for earthquake damage, following earthquakes on 4 September 2010, 26 December 2010, 22 February 2011 and 13 June 2011. Each of those "happenings" occurred in the same policy period, and each claim was accepted by IAG.
The parties agreed that the building had suffered successive losses as a result of what the Court defined as the "earlier earthquakes," culminating in the building needing to be replaced as a result of the "final earthquake." Whether the final earthquake was the 22 February earthquake or the 13 June earthquake was not able to be resolved in this appeal.
The Court considered three questions:
- Whether the policy required the insurer to make payments in relation to the earlier earthquakes as well as the final earthquake;
- Whether the losses resulting from the earlier earthquakes should be treated as merged or subsumed in the losses caused by the final earthquake; and
- Whether Ridgecrest's claim is precluded by the indemnity principle.
It held that, on construction of the particular policy wording,Ridgecrest was entitled to be paid for the repairable damage resulting from the earlier earthquakes, up to the limit of the sum insured in respect of each earthquake. Ridgecrest was also entitled to be paid for the loss caused by the final earthquake, again up to the limit of the sum insured.
The Court then considered whether the doctrine of merger should apply, which had not been considered by the Court of Appeal. Merger is basically the margining of a prior partial loss into a subsequent total loss.
After canvassing the leading marine insurance cases on merger, and several authorities on the doctrine of merger in non-marine insurance contexts, the Court concluded that the merger principle is just a component of marine insurance contracts. The State "Businesspack" policy differed in material respects from the marine insurance policies at issue in the merger cases.
The Court held that there was no merger of Ridgecrest's entitlements under the policy. As cover was provided on a "happening by happening" basis, the policy 'reset' after each earlier earthquake, and provided replacement cover for the building in its damaged state. The merger principle would therefore be inconsistent with the scheme of the policy.
Finally, the Court looked at Ridgecrest's claim in light of the indemnity principle, namely that the insured cannot recover more than the loss under the insurance policy.
As the policy provided for both indemnity and replacement cover, it was possible for an insured to recover more than the indemnity value of the building.
The Court felt the indemnity principle did not sit comfortably in the context of a replacement policy, but ultimately determined that the principle would only be engaged if the sum insured was deemed to be the replacement value of the building. Here, it was "well understood" by the parties that the sum insured was not based on, and was less than, the replacement value of the building. Whether this was "understood" when the policy was underwritten or just subsequently agreed is unclear and insureds whose sum insured was based on a valuation for insurance purposes, may have some hurdles relying on this decision.
It seems the Court considered that if the sum insured is less than the replacement cost of the property insured under a replacement policy, an insured will not be over-indemnified if it recovers more than that sum. How this finding would apply to a policy containing an average clause was not considered and is perplexing, as these clauses reduce the insured's recovery by the same percentage or proportion by which the insured property was underinsured.
The Court did record, however, that IAG was not liable to pay for the same damage twice, and that the total of all claims paid could not exceed the replacement cost of the building. The Court observed that if a separately identifiable building element is first damaged and then destroyed by successive events, the insurer's liability would be confined to the replacement cost of that element, and any diminution in value of the element from an earlier event could not be recovered. This is likely to provide fertile ground for dispute and evidentiary battles in future.
This decision will be celebrated by policyholders with sum insured policies. Up until now, there has been uncertainty as to whether the indemnity principle limits their recovery to the sum insured in any one policy period. It is now clear that is not always the case. An insured can never recover more than the value of the loss, but they may in some circumstances recover more than the sum insured, apparently without offending the indemnity principle.
The decision will not have much impact on residential earthquake claims because, until recently, most house policies had no sum insured. The Court observed that where a policy provides both indemnity and replacement cover, but no sum insured, an insurer's discharge of its replacement liability would mop up its already accrued indemnity liability in relation to unrepaired damage from earlier earthquakes.
As with all insurance cases, the outcome turned on the particular policy wording, and it is likely there will be a move to ensure that policy wordings expressly reflect the insurer's understanding of the level of cover being provided, on which the premium is based.
Ridgecrest did not deal with a policy renewal between events, with or without limitations or additional conditions imposed. An insured in that situation would be entitled to seek to recover their loss up to the sum insured for each policy period. Depending on their policy wording, they may now also be able to recover multiple losses, up to the sum insured for each loss, during each policy period.
We anticipate a rash of disputes about if and when a prior insurance claim settlement can be set aside will follow this decision.
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