[2014] NZSC 147

This is an appeal from the decisions of the High Court (Body Corporate 398983 v Zurich Australian Insurance Ltd and Firm PI 1 Ltd [2013] NZHC 1109) and the Court of Appeal (Zurich Australian Insurance Ltd v Body Corporate 398983 and Firm PI 1 Ltd [2013] NZCA 560, (2013) 18 ANZ Insurance Cases 62-002), which we have previously summarised.

The proceedings relate to the Salisbury Park Apartments complex at 226–242 Salisbury Street, Christchurch, which was badly damaged in the earthquake of 22 February 2011. The cost of rebuilding the apartment complex is estimated at $25 million plus GST, but the sum insured under the policy is $12.95 million. EQC has paid $6.8 million ($100,000 for each of the 68 apartments) to the Body Corporate.

The issues

The proceedings dealt with one specific issue:

"whether the amount payable under the policy is inclusive or exclusive of the amounts payable to the Body Corporate under the Earthquake Commission Act 1993."

This issue raises a question about the interplay between section 30 of the Earthquake Commission Act 1993 and clause MD15 of the Zurich policy.

Section 30 was intended to ensure that where a property owner held an insurance policy, that policy would respond ahead of the statutory cover, with the EQC only making up the difference. However, section 30(2) qualified section 30(1) so that it would apply only "to the extent that the contract provides for cover in excess of the amount to which cover is provided under this Act".

Clause MD15 provided:

"MD15 Natural Disaster Damage
In the event of the Insured having insured residential property for which compulsory Natural Disaster Damage cover under the Earthquake Commission Act 1993 applies then in the event of such property suffering Natural Disaster Damage during the Period of Cover and covered by Natural Disaster Damage cover, then the Insurers liability will be limited to the amount of loss in excess of the Natural Disaster Damage cover."

The parties were in agreement that clause MD15 triggered section 30(2), so that the statutory cover responded first. The question to be determined is:

"whether, in addition to the EQC's payment, Zurich is liable to pay the full amount of reinstatement value as recorded in the contract, that is, $12.95 million, or whether it is liable to pay only the difference between the $6.8 million that the Body Corporate has received from the EQC and the reinstatement value of $12.95 million, that is, $6.15 million."

In the High Court

Justices Heath and Courtney decided that the sum insured is exclusive of all amounts payable to the plaintiff from the EQC. They noted that the applicability of this decision to other claims depends on the exact terms of the policy and that there were other policies which limited the insurer's liability to the difference between the sum insured and the amount payable by EQC.

Zurich appealed the High Court's decision.

In the Court of Appeal

The Court of Appeal disagreed with the High Court's analysis. It decided that:

"cl MD15 provided that Zurich's "liability would be limited" to the "amount of loss" in excess of the statutory cover. This language indicates that the clause set a limit which differed from the sum insured that would otherwise cap Zurich's liability. If so, that limit can only have been the difference between the sum insured and the statutory cover."

The Court of Appeal went on to say that:

"We consider that when construed with appropriate regard for the commercial context in which the policy was agreed, cl MD15 limited Zurich's liability for natural disaster damage from a single event to the difference between the maximum statutory cover, $6.8m, and the sum insured, $12.95m."

The appeal was therefore allowed, overturning the decision of the High Court, and the Court of Appeal answered the question before it as follows:

"the Sum Insured for buildings under the material damage section of the Zurich policy included all sums payable to the Body Corporate by EQC for natural disaster damage to the Salisbury Park Apartments buildings from the 22 February 2011 earthquake."

Firm PI 1 Ltd then appealed the Court of Appeal's decision.

In the Supreme Court

The Supreme Court noted that when the policy was originally issued, it comprised both the policy document and a certificate, which among other things set out how the premium was calculated. The premium for non-natural disaster cover was calculated in the basis of the sum insured, the EQC levy was calculated in accordance with the amount payable by EQC (as required under the EQC Act), and the premium for the natural disaster cover was calculated on an amount that was the difference between the sub insured and the amount payable by EQC.

The Supreme Court also noted that under the requirements of the Unit Title Act, the Body Corporate was required to obtain insurance for the replacement value of the buildings. It was not open to the Body Corporate to knowingly underinsure.

The Supreme Court decided that:

"Viewing the matter objectively, it is difficult to see that Zurich would have offered replacement cover on the buildings for an amount in excess of the replacement estimate provided by the Body Corporate, or that the Body Corporate would have sought such cover, given the replacement estimate's role as the sum insured and limit of liability."

In a split decision (3:2) the Supreme Court therefore upheld the decision of the Court of Appeal.

A copy of the decision is available here: http://www.courtsofnz.govt.nz/cases/firm-pi-1-ltd-v-zurich-australian-insurance-and-body-corporate-398983/at_download/fileDecision

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.