NZHC 3120
The plaintiffs, the Marriotts, are the owners of two small commercial buildings in Christchurch. These properties were insured by the defendants. The properties suffered damage in both the September earthquake and the February earthquake. The Marriotts take the view that the buildings suffered further damage in a third earthquake in June 2011, but Vero considered that the building had already been destroyed.
The parties agreed that certain questions of law should be answered as a preliminary matter. These questions were:
- "When is the building destroyed under the policy?
- Does the sum insured reinstate after each earthquake event?
- Are the Marriotts entitled to repair costs up to the sum insured for the damage caused by each earthquake event?
- Is the excess deducted from the amount of the loss or from the payment due under the policy?"
When is a building destroyed?
The issue here was whether a building was considered to be "destroyed" for the purposes of the policy when the extent of the damage was such that the building was not able to be repaired (a purely physical test), or whether a building is "destroyed" when it is a constructive total loss, in the sense that it would be uneconomical to repair (a physical and economic test).
Justice Dobson decided that:
"the distinction between the two concepts of destroyed and damaged is intended to reflect the physical state of the property after the occurrence giving rise to any particular claim. The insured property will be destroyed when the extent of damage renders it impracticable to repair it in a way that restores it to its pre-occurrence condition."
He went on to say:
"I accept the interpretation contended for by the Marriotts, namely that the assessment reflects only the physical state of the property after the occurrence, and that a property is only to be considered "destroyed" rather than "damaged" where it is not reasonably practicable to restore it by way of repair to the condition it was in, prior to the occurrence giving rise to the claim."
The insurance policy had a reinstatement clause, which provided as follows:
"MM20.3.5 Reinstatement of amount of insurance clause
It is understood and agreed that in the event of loss as insured by this Policy and in the absence of written notice by the Company or the Insured to the contrary, the amount of the insurance cancelled by loss is to be fully reinstated as from the date of occurrence, the Insured undertaking to pay such necessary premium as may be required for such reinstatement from that date."
The parties have different interpretations of this clause. Vero's opinion is that the clause entitles it to give notice that it will not reinstate the policy from the date of an occurrence at any time until it has paid the Marriotts for the loss for that occurrence. In contrast, the Marriots view is that the reinstatement clause operates from the occurrence of a first loss, and that any notice from Vero that it will not reinstate could also have prospective (and not retroactive) effect.
Justice Dobson decided that he did not need to infer an implied term that the notice would be given in a reasonable period of time, as Fogarty J did in Wild South Holdings Ltd and Maxims Fashions Ltd v QBE Insurance (International) Ltd  NZHC 2781. Instead, he decided that
"the reinstatement clause is to be interpreted so that the event of loss (that is, the date of occurrence) operates as a trigger for a claim against the policy, leading to a reduction in the extent of the insurance available to the insured. The proposition that reinstatement will occur from that point does not need to await the finite quantification of the amount by which the original sum will be reduced...
The practical constraint on giving notice is simply that it must be given prospectively. The rationale for that limit in giving business efficacy to the contract is that the bargain struck between the parties contemplated that, from the time of an event giving rise to a claim, the policy was to be treated as being reinstated to the full sum insured, subject to the insurer notifying that reinstatement would not occur. This alternative course must occur before the insured's reasonable reliance on reinstatement estops the insurer from denying that it had occurred."
The sum insured therefore reinstates after each earthquake event that causes loss. Notice that reinstatement is not going to occur can only be given prospectively.
Repair costs for each event?
Justice Dobson confirmed that a party could not claim for repair costs not actually incurred:
"even if plans had been made to effect repairs after a first earthquake, but they were not undertaken because of the occurrence of a second earthquake, then the claim for such proposed costs does not survive."
He went on to say that:
"To the extent that reasonable costs of reinstatement were actually incurred by the Marriotts, they would be entitled to an additional payment under the reinstatement memorandum up to the policy limit, to the extent that such costs exceed the indemnity payment."
This policy has an excess of 2.5% of loss in relation to earthquake risk. The parties were in disagreement about whether this should be deducted from the policy limit, or from the total loss.
Justice Dobson agreed with the approach of Fogarty J in Wild South, where he said that:
"It does not make any commercial common sense for there to be a limit on the sum insured agreed by the insurer, but with the deductible coming off a much larger sum which was never going to be payable by the insurer."
Justice Dobson commented that:
"The process for settling claims ought to apply consistently as between fully insured and under-insured property owners. The rationale for having a deductible is that it represents a portion of any loss caused by a particular form of risk, for which the insurer does not assume liability. To effect that outcome in the case of a claim by a fully insured property owner, the deductible is the last amount subtracted before the insurer makes payment. There is no justification on the wording of the policy to suggest that the sequence of the calculation ought to be any different in the position of an under-insured."
The excess is therefore to be deducted from the payment due under the policy.
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