Body Corporate 398983 v Zurich Australian Insurance Limited

[2012] NZHC 2333

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2012-404-2723 [2012] NZHC 2333

BETWEEN  BODY CORPORATE 398983

Plaintiff

ANDZURICH AUSTRALIAN INSURANCE LTD

First Defendant

ANDFIRM PI 1 LIMITED (FORMERLY KNOWN AS ACM INSURANCES LTD) Defendant

Hearing:         6 September 2012 (by telephone) Counsel:      R G S Hay and L G Cox for plaintiff

W A Holden and B J Sanders for First Defendant
T A Spinka for Second Defendant

Judgment:      11 September 2012

JUDGMENT OF HEATH J

This judgment was delivered by me on 11 September 2012 at 11.00am pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Morgan Coakle, PO Box 114, Shortland Street, Auckland DAC Beachcroft New Zealand, PO Box 106869, Auckland Jones Fee, PO Box 1801, Auckland

BODY CORPORATE 398983 V ZURICH AUSTRALIAN INSURANCE LTD HC AK CIV 2012-404-2723 [11

September 2012]

Introduction

[1]      This is an application for discovery arising out of damage caused to a unit title  complex,  in  Christchurch,  known  as  the  Salisbury  Park Apartments.    The buildings were severely damaged in the February 2011 earthquake.  Body Corporate

398983 (the Body Corporate) sues Zurich Australian Insurance Ltd (Zurich) on a policy of insurance and Firm PI1 Ltd (formerly known as ACM Insurances Ltd) (ACM), its insurance broker.  At issue is the indemnity limit for replacement value cover.

[2]      The Body Corporate contends that, despite the express wording of the policy, an agreement was struck between its agent (ACM) and Zurich that the indemnity limit would be $100 million.1   Zurich denies that.  Its position is that the maximum amount of cover available under the policy is $12.95 million.   For its part, ACM supports the Body Corporate in contending that it did, in fact, reach an agreement with Zurich for replacement value cover of no more than $100 million, plus GST.

[3]      The practical significance of the issues can be seen from the likely cost of reinstatement.   Having obtained appropriate advice, the Body Corporate estimates that will cost something in the order of $22 million.   Zurich’s position is that the likely cost is in the range of $18.75 million.

[4]      A second issue is whether insurance payments to the Body Corporate from Zurich should be assessed as inclusive or exclusive of the contribution already made by the Earthquake Commission (the Commission) under natural disaster cover.  The amount paid by the Commission, at this stage, is approximately $6.8 million.  Thus, on Zurich’s case, if it were inclusive of the Commission payment, it would be liable to  pay  about  $6.1  million,  whereas  if  it  were  exclusive  the  liability  would  be

something in the order of $19.7 million.

1      Unless otherwise stated, all sums are GST exclusive.

The application

[5]      I am asked to determine categories of documents for which tailored discovery should be given under r 8.12(1)(c) of the High Court Rules.  There is a presumption, in this case, that tailored discovery is appropriate because the sums in issue exceed

$2,500,000.2      In  terms  of  the  discovery  check-list,3   the  parties  have  identified

relevant categories of documents.

[6]      On 29 August 2012, counsel submitted a joint memorandum to me, in which they agreed that certain classes of documents should be the subject of a tailored discovery order.   I made an order as requested on 30 August 2012.   I directed the filing and  service of affidavits  of documents,  inspection  of documents  and  any interlocutory applications arising out of the discovery process.

[7]      Counsel informed me that four categories of documents remained, on which they could not agree.  They invited me to rule on whether tailored discovery should be given, in relation to those categories.  A brief hearing was held by telephone on 6

September 2012, at which time counsel spoke to memoranda filed in advance of the conference. At the conclusion of the conference, I reserved my decision.

A preliminary issue

[8]      Unexpectedly, not long before the telephone conference began, ACM filed and served an application for an order that a question be determined separately before trial.  The question concerns the manner in which the Commission’s payment ought to be taken into account. The proposed question is:

Is the Sum Insured for buildings under the material damage section of the contract of insurance between the [Body Corporate] and [Zurich] in respect of the Salisbury Apartments inclusive or exclusive of all amounts payable to the [Body Corporate] from the Earthquake Commission as Natural Disaster Damage  cover  under  the  Earthquake  Commission Act  1993  for  Natural Disaster Damage to the buildings from the 22 February 2011 earthquake?

2      High Court Rules, r 8.9(d).

3      Ibid, Schedule 9, Part 1, cl 3(2).

[9]      Ms  Spinka,  for  ACM,  submitted  that  questions  of  discovery  should  be postponed until such time as the Court had ruled on whether that application should be granted.  No final decisions have been made by the Body Corporate and Zurich on whether to oppose the application.  From what I have learnt so far from the case management process, I consider that it will likely be opposed.

[10]     I am not prepared to defer resolution of discovery issues until such time as the Court resolves ACM’s application.  It is likely that the other causes of action will require resolution, ultimately.   Indeed, it is possible that, if an order were made, a term requiring that no appeals be brought until after the whole proceeding had been determined might be imposed.

[11]     In any event, it will be open to ACM to make an application to recover any wasted costs attaching to the discovery exercise that have been incurred as a result of the insistence of other parties to have discovery completed as soon as practicable. That possibility protects ACM adequately.

The categories of documents

[12]     Zurich, supported by the Body Corporate, seek discovery of the documents in the four categories. ACM resists discovery, primarily on grounds of relevance.

[13]     There are four categories of documents in issue:

Category A

Documents relating to the quotation, negotiation, arranging and placement of the plaintiff’s material damage insurance policy for the 2009/2010 policy period and the renewal of that policy for the 2010/2011 policy period;

Category B

Documents relating to the quotation, negotiation, arranging and placement of the plaintiff’s material damage insurance policy with NZI Insurance prior to the 2009/2010 policy period;

Category C

Documents relating to the drafting and negotiation of the “Brokernet” policy wording;

Category D

Documents relating to the calculation of premium and payment of claims involving any Earthquake Commission Natural Disaster Damage component for material damage policies placed pursuant to the relationship between the second defendant and Boutique Body Corporates Ltd (Boutique).

[14]     ACM has confirmed that it does not have possession or control over any of the documents that fall within Category C.   In that circumstance, Mr Holden, for Zurich, has withdrawn the application in respect of Category C.  That stance has also been taken by the Body Corporate.   It is likely that either Zurich or the Body Corporate will make an application for non-party discovery in respect of the “Brokernet” policy wording.

Legal principles

[15]     Applicable  principles,  on  an  application  of  this  type,  were  discussed  by Asher J  in  Commerce  Commission  v  Cathay  Pacific  Airways  Ltd.4      The  Judge recorded that the new discovery regime, implemented from 1 February 2012 by the

High Court Amendment Rules (No 2) 2011, dispenses with the need to comply with

4      Commerce Commission v Cathay Pacific Airways Ltd [2012] NZHC 726.

the old Peruvian Guano5  test and replaces it  with an “adverse documents” test (standard discovery) or tailored discovery, by reference to specific categories of documents.

[16]     Asher J explained the new regime:6

[12] The concept of proportionality is central to tailored discovery. It is relevant in determining whether tailored discovery is appropriate (r 8.9(a) and checklist cl 1). It is relevant in deciding if there is tailored discovery, whether the categories of tailored discovery are reasonable and proportionate (checklist cl 3(2)(a)(i)).7 And it is also a key concept in determining what is a reasonable search for documents within the scope of a discovery order (r

8.14(2)(e) and checklist cl 2(b)), and the methods and strategies for locating documents (checklist cl 3(2)(a)(ii)). At issue in this application is the definition of specific discovery categories, and whether the category orders sought by the Commission are reasonable and proportionate.

[13] The starting point in such a consideration of appropriate tailored discovery orders must be an analysis of the issues. Discovery categories will reflect the issues and will only be ordered for the discovery of documents that are relevant to those issues. Except in exceptional circumstances, these issues will be discernible from a review of the pleadings. Discovery orders that are essentially of a “fishing” nature are not part of tailored discovery. Orders will not be granted where the categories do not relate to a pleaded relevant issue, but rather a non-pleaded issue which might be pleaded should discovery reveal documents that support such a pleading.

[17]   In this case, while mentioned in written submissions, the question of proportionality does not loom large. The central issue is one of relevance.

Analysis

(a)      The nature of the claims and defences

[18]     The Body Corporate sues  Zurich on two  causes of action relating to  its allegation that the indemnity limit for replacement value cover was $100 million.8

In essence, the cause of action is captured in the claim brought under the Fair

Trading Act 1986 which asserts that an agent of Zurich represented to an agent of

5      The Compagnie Financiére et Commerciale du Pacifique v Peruvian Guano Company (1882) 11

QBD 55 (CA).

6      Commerce Commission v Cathay Pacific Airways Ltd [2012] NZHC 726.

7      The considerations set out at cl 1(c) are also relevant in this regard.

ACM that upon an insurance contract being entered into for the 2009/2010 period an indemnity limit of $100 million would be in place.

[19]     ACM agrees that such a discussion took place.  Nevertheless, it is denied by Zurich.   Plainly, one issue will be whether, in light of industry practice, it was realistic for a limit of that type to be offered, given the premiums involved.  That information would be a relevant commercial consideration in respect of the Fair Trading Act claim and may also provide evidence of pre-contractual negotiations in

relation to the interpretation of the contract.9

[20]     The third cause of action is concerned with whether Zurich is obliged to pay the whole of the replacement indemnity value (whatever that sum may be) before or after taking into account payments from the Commission for natural disaster damage.10  That cause of action is based on cl MD15 of the policy:

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 Natural Disaster Damage clause”)

This issue seems to turn on an interpretation of the policy, possibly in conjunction with some provisions of the Earthquake Commission Act 1993.

[21]     The relevance of each of the categories of documents sought by way of discovery must be assessed by reference to those general claims.

(b)      Category A documents

[22]     Category  A  seeks  disclosure  of  documents  relating  to  the  quotation, negotiation, arrangement and placement of the Body Corporate’s material damage insurance policy for the 2009/2010 insurance year, and the renewal of that policy for

the  following  2010/2011  period.    Zurich’s  position  is  that  these  documents  are

9      See, for example, Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5 (SC); [2010] 2

NZLR 444.

relevant to the context in which the Body Corporate and ACM say that the $100 million limit for replacement cover was agreed.   It is submitted that that context includes not only the negotiations with Zurich but also with other insurers for both the 2009/2010 and 2010/2011 policy years.

[23]     ACM has no objection to the documents set out in Category A, to the extent that they relate to the placement of cover with Zurich.   However, it opposes the inclusion of “documents relating to the presentation of the risk to ... [and] ... Vero ... together with each insurers’ responses, including any breakdown of premium calculations”. ACM says these documents are not relevant.

[24]     In my view, the documents in Category A are plainly relevant to the first cause of action.  They are relevant to determination of the question whether there was, in fact, an enforceable oral agreement made between representatives of Zurich and ACM and whether there was any breach by an agent of Zurich, of s 9 of the Fair Trading Act 1986.   Evidence of ACM’s presentation of risk to other insurers and those other insurers’ responses provides relevant context against which the Body Corporate’s claim should be considered.  In my view, Category A documents should be the subject of a discovery order.

(c)      Category B documents

[25]     Category  B  raises  the  different  issue  of  discovery  of  the  quotation, negotiation arrangement and placement of the Body Corporate’s material damage insurance policy with NZI Insurance in the period immediately before insurance with Zurich was effected in the 2009/2010 period.   Zurich’s position is that these documents are relevant to the question whether it would likely have offered to insure the Body Corporate for $100 million replacement cover, given the prior insurance history.

[26]     There are no documents to prove that Zurich did, in fact, agree to provide cover of $100 million during the relevant period.  That being so, it will be necessary for the Body Corporate to prove, on a balance of probabilities, that an enforceable

commitment was given.  That case will, no doubt, be supported by evidence from

ACM as to the discussions that took place and the context of them.

[27]     In those circumstances, I consider the documents sought under Category B

are relevant and ought to be disclosed.

(d)      Category D documents

[28]     Category D documents relate to the calculation of premium and payment of claims for any natural disaster damage component for the interior damage policies that have been placed pursuant to the alleged relationship between ACM and Boutique.  While Zurich has suggested that any arrangements it made with ACM, were on behalf of Boutique, that is denied by ACM.  It is also contrary to the Body Corporate’s assertion that it was the relevant insured.

[29]     The grounds on which these documents are sought is set out in the written submissions made by Mr Holden:

17.      As above, it is [Zurich’s] position that the genesis of the transaction, the background, the context and the market in which the parties are operating is relevant to the interpretation of the insurance contract.  That context and market includes:

(a)       the split (if any) between the government (EQC) earthquake component and the company (insurance) earthquake component of the premium;

(b)       The basis on which claims have been paid involving any EQC natural disaster damage component.  This is relevant as post   contract   conduct   capable   of   providing   objective guidance as to the intended meaning of clause MD15 (and its equivalent in the market);

(c)      [ACM’s] knowledge of (a) and (b) above.

[30]     Ms Spinka has opposed inclusion of these documents within discovery on the ground that they are not relevant.  She submits:

... [ACM] agrees to provide discovery of all documents relating to the calculation of premium for the [Body Corporate]’s policies with [Zurich], which are relevant to this claim.  The premium calculations for other risks placed by or through [Zurich] or [Boutique] are not relevant.  To the extent that [Zurich] wishes to provide evidence of industry market practice, it is

open to [Zurich] to do so.   However, [ACM] should not be compelled to discover documents which are not otherwise relevant to the matters at issue, simply on the basis that [Zurich] hopes that they might support its argument in relation to general market practice.

[31]     At this stage, I am not convinced that this category of documents is relevant to determination of an issue in the proceeding.  Market evidence will, no doubt, be available  to  Zurich  in  respect  of  the  way  in  which  private  and  Commission earthquake insurance has been divided.  If Zurich seeks to adduce such evidence and it were relevant to the interpretation of cl MD15 of the policy, discovery can be reconsidered  at that time, having regard to the observations of members of the

Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd.11   At the moment, I

regard Zurich’s claim for discovery of Category C documents as somewhat of a

“fishing” expedition, for which a tailored discovery order is not appropriate.

Result

[32]     I make an order for tailored discovery in respect of Categories A and B.12   I decline to make an order in respect of Category D.  No order is required in respect of Category C.13   The timetable previously established for completion of the discovery process also applies to these categories of documents.14

[33]     Zurich  has  been  substantially  successful  in  its  application  for  discovery. Costs  are  awarded  in  its  favour  on  a  2B  basis,  together  with  reasonable disbursements, against ACM.   Both costs and disbursements shall be fixed by the Registrar.

[34]     As the Body Corporate took little part in the argument, no order for costs is made in its favour or against it.

11     Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5 (SC); [2010] 2 NZLR 444 at para [4] (Blanchard J, with whom Gault J agreed), para [23] (Tipping J) and para [64] (McGrath J); cf paras [119]–[127] (Wilson J).

12     See para [13] above.

13     See para [14] above.

14     Body Corporate 398983 v Zurich Australian Insurance Ltd (Minute (No 4)) HC Auckland CIV

2012-404-2723, 30 August 2012, at para [2].

[35]     The Registrar shall liaise with counsel as to an appropriate date for a further

conference to consider procedural aspects of ACM’s application to have a discrete

question determined before trial.

P R Heath J

Delivered at 11.00am on 11 September 2012