Crystal Imports Ltd v Certain Underwriters at Lloyds of London

[2013] NZHC 3513

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-1539 [2013] NZHC 3513

BETWEEN  CRYSTAL IMPORTS LIMITED Plaintiff

ANDCERTAIN UNDERWRITERS AT LLOYDS OF LONDON

First Defendants

SIRIUS INTERNATIONAL INSURANCE GROUP LIMITED Second Defendant

AND

Hearing:                   3, 4 July and 14 October 2013

Appearances:           Z G Kennedy and I Rosic for Plaintiff

B D Gray QC and K R Pengelley for First and Second
Defendants

Judgment:                19 December 2013

JUDGMENT OF COOPER J

This judgment was delivered by Justice Cooper on

19 December 2013 at 4.45 p.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Minter Ellison Rudd Watts, Auckland

DLA Phillips Fox, Auckland

CRYSTAL IMPORTS LIMITED v CERTAIN UNDERWRITERS AT LLOYDS OF LONDON [2013] NZHC

3513 [19 December 2013]

TABLE OF CONTENTS

Introduction ..........................................................................................................[1] The issues to be determined ................................................................................[7] The agreed statement of facts..............................................................................[8] The policy ............................................................................................................[14] First question – extent of the obligation to indemnify

A     Interpretation of the policy

Plaintiff ’s argument......................................................................................[20]

Defendants’ argument ..................................................................................[37]
Discussion ....................................................................................................[47]

B     Merger

Defendants’ argument ..................................................................................[79]

Plaintiff ’s argument......................................................................................[89]

Discussion ....................................................................................................[99] C     Frustration ................................................................................................[123] D     Conclusion on first question ....................................................................[129] Second question – The Average clause ...........................................................[130] Summary ...........................................................................................................[143] Costs ..................................................................................................................[146]

Introduction

[1]      The plaintiff has commenced this proceeding seeking to recover under a policy  of  insurance  losses  that  it  claims  to  have  suffered  as  a  result  of  the earthquakes that struck Christchurch on 4 September 2010 (“the September earthquake”) and 22 February 2011 (the “February earthquake”).   The policy was issued by the defendants.

[2]      The parties agreed that two of the issues in dispute should be heard and determined separately and in advance of the trial of the other disputed issues.  On 22

May 2013 Rodney Hansen J made an appropriate order by consent enabling that to occur.

[3]      The two issues were the subject of argument on 3 and 4 July, on the basis of an agreed statement of facts.  I was advised by the parties that the Court of Appeal had heard argument on 30 May in an appeal that raised similar issues, Ridgecrest

New Zealand Ltd v IAG New Zealand.1    I reserved my decision on the basis that if

1      Ridgecrest New Zealand Ltd v IAG New Zealand [2013] NZCA 291, [2013] 3 NZLR 618

the  Court  of Appeal’s  decision  in  that  case  were to  become  available  before  I delivered judgment the parties would have leave to make submissions on the implications of it for this case.

[4]      The Court of Appeal’s judgment in Ridgecrest was in fact delivered on 10

July, and the plaintiff filed written submissions in response to it on 24 July.  In the course of those submissions counsel sought leave to file a second amended statement of claim, a course that was opposed by the defendants, who asked to be heard on that issue.  It was not possible for that hearing to be arranged until 10 October, when I heard  argument  about  whether  leave  should  be  granted  having  regard  to  the arguments originally run on the agreed statement of facts.  Counsel referred in the course of argument to the implications of the Ridgecrest judgment.

[5]      For reasons that I will explain further below,2 I am satisfied that the proposed amended statement of claim does not raise any matter of substance that had not already been the subject of argument at the hearing in July, when the defendants took no point about the adequacy of the plaintiff’s pleading.  In the circumstances I have concluded that there would be no real prejudice to the defendants if leave to file an amended statement of claim is granted.  Further, granting leave would ensure that the real issues between the parties can be addressed in this judgment without the risk of the matter foundering on a pleadings point.

[6]      I accordingly grant leave to file the amended statement of claim.

The issues to be determined

[7]      The matters that Rodney Hansen J ordered be determined are:

As a matter of construction of the contract of insurance between the parties dated 20 March 2010 (Policy):

(i)        what is the extent of the defendants’ liability to indemnify the plaintiff for the separate damage caused to the plaintiff’s insured properties by the September earthquake?

[Ridgecrest (CA)].

2      At [75]-[76].

(ii)       does the Average clause in the Policy limit the defendants’ obligation to pay the plaintiff the full sum insured for the damage caused by the February earthquake to the plaintiff’s New Brighton Mall property?

The agreed statement of facts

[8]      As recorded in the agreed statement of facts, the plaintiff was at all material times   the  owner  of   five  properties   in   Christchurch   (together,   the   “insured properties”). These were:

(a)       705 Colombo Street, Christchurch (705 Colombo);

(b)      217 Gloucester Street, Christchurch (217 Gloucester);

(c)       15-31 Cathedral Square, Christchurch (15-31 Cathedral Square); (d)        50 Cathedral Square, Christchurch (50 Cathedral Square); and

(e)       126   New   Brighton   Mall,   New   Brighton,   Christchurch   (New

Brighton Mall).

[9]      The sums insured for each of the insured properties were as follows:

705 Colombo  $2,260,000

217 Gloucester  $6,190,000

15-31 Cathedral Square  $5,465,000

50 Cathedral Square  $3,670,000

New Brighton Mall  $3,070,000

[10]   The insured properties were damaged in the September and February earthquakes.  Paragraphs 10 to 15 of the agreed statement of facts were as follows:

10.The September Earthquake caused damage to the Insured Properties and is an event of loss which gave rise to a claim under the Policy.

11.      The February Earthquake caused further damage to the Insured Properties and is an event of loss which gave rise to a claim under the Policy.

12.In October 2011, 50 Cathedral Square was demolished pursuant to a demolition notice issued by the Canterbury Earthquake Recovery Authority.

13.In November 2011, 705 Colombo Street was demolished pursuant to a demolition notice issued by the Canterbury Earthquake Recovery Authority.

14.      In August 2012, 217 Gloucester Street was demolished.

15.The Insured Properties at 50 Cathedral Square, 705 Colombo Street and 217 Gloucester Street have been demolished as a result of earthquake damage.

[11]     Other matters covered by the agreed statement of facts were that the plaintiff had notified the defendants about the damage giving rise to claims under the policy, and that the defendants had paid a total of $68,421.97 towards the cost of investigation and repair of the insured properties.   The sums so paid varied from property  to  property,  in  a  range  from  $1,266.69  (50  Cathedral  Square)  to

$55,448.51(217 Gloucester Street).   Apart from the matters covered by those payments, no repairs were made to the insured properties between the September and February earthquakes.

[12]     Another paragraph in the agreed statement of facts stated:

19.      For the purposes of the Reinstatement of Sum Insured clause at page

29 of the Policy, at no time following the September Earthquake and prior to the February Earthquake was notice given by any of the parties to the Policy of an election not to automatically reinstate the Cancelled Amount.

[13]     Paragraph  20  of  the  agreed  statement  of  facts  is  relevant  to  the  second question that must be addressed about the “Average clause” in the policy.  It stated:

Average Clause

20.The parties cannot agree on the repair or replacement cost of the damage caused to New Brighton Mall by the February Earthquake. However, the following estimates have been obtained:

(a)       depreciated  replacement  cost  indemnity  value  of  New

Brighton Mall, as at 21 February 2011, has been estimated at

$4,580,000;

(b)       the cost of repairing the damage caused to New Brighton

Mall  by  the  February  Earthquake  has  been  estimated  at

$5.3m;

(c)       the  replacement  cost  of  New  Brighton  Mall,  as  at  21

February 2011, has been estimated at $9,569,320;  and

(d)      the cost of rebuilding New Brighton Mall has been estimated at $11.4m.

The policy

[14]     The policy was attached to the agreed statement of facts.   It consisted of a document headed “Material Damage & Business Interruption Insurance Master Certificate  Wording”  (“the  Certificate”)  issued  by  International  Underwriting Agency Limited, and an attached “Material Damage & Business Interruption Insurance Schedule” (“the Schedule”).  The Schedule provided that it was to form part of the Certificate, and it was to be read “in the context of” it.

[15]     Pursuant  to  the  Certificate,  the  underwriter  agreed,  at  the  outset  of  the certificate, to indemnify the insured as set out in the Certificate, in consideration of the required premium. The following clause stated:

Except where provided to the contrary, the Company’s liability will not exceed the Sum Insured and, if more that one Item is included in the Schedule, will not exceed in respect of each Item the Sum Insured applicable to that Item.

[16]     “Section 1 - Material Damage” (“the Material Damage clause”) provided,

subject to various exclusions:

If,  during  the  Period  of  Insurance, Accidental  physical  loss  or  damage happens to Insured Property anywhere in the Territory, the Company will indemnify the Insured for the loss or damage subject to the terms of this Section of the Certificate.

[17]     Among the provisions of the Schedule was a Schedule of Insured Property. This listed the insured properties, specifying against each the sum insured, as set out in the agreed statement of facts.3

[18]     One of the “Section 1- Memoranda” in the Certificate was headed “Natural

Disaster” (the “Natural Disaster memorandum”).  It provided:

This insurance extends to cover loss or damage to Insured Property directly or indirectly caused by earthquake, volcanic eruption, subterranean fire or hydrothermal activity.

3 See [8] above.

[19]     Other relevant clauses of the Certificate and the Schedule are referred to in the discussion below.

First question – extent of the obligation to indemnify

A       Interpretation of the policy

Plaintiff ’s argument

[20]     The plaintiff says that the policy entitles it to claim for and recover separate losses arising from the September earthquake up to the sum insured for each insured property.

[21]     In  making  that  submission,  Mr  Kennedy relied  on  the  Material  Damage clause and the Natural Disaster memorandum, both quoted above.  He submitted that the effect of these clauses was that the defendants are obliged to indemnify the plaintiff for loss or damage caused directly or indirectly by an earthquake.   That obligation arises as soon as there is physical loss or damage to an insured property. As there were two insured events, one in September and one in February, they gave rise to two separate claims in respect of each insured property.  In support of these

propositions Mr Kennedy noted that the policy provides that: 4

Each loss or series of losses arising out of one Event will be adjusted separately.

[22]     Mr Kennedy also referred to the “Reinstatement of Property memorandum”,

another of the provisions of Section 1 of the Certificate. This provides:

Reinstatement of Property

In so far as it can, this Memorandum applies to all Insured Property other than stock unless otherwise provided.

Where any Insured Property to which this Memorandum applies is lost or damaged, then, subject to the Special Provisions set out below, the basis on which the amount payable under Section 1 of this Certificate is to be calculated will be the cost of its Reinstatement.

4      This is part of a clause headed “Deductible” in the General Conditions part of the Certificate.

The full clause is set out below at [53].

[23]     Mr Kennedy submitted that this means that the indemnity will be the cost of reinstatement, or “new for old” cover.   He then referred to the definition of “Reinstatement” in the Certificate, which reads:

‘Reinstatement’ means:

1)        where   property  is  lost   or   Destroyed,   its   replacement   by  an

Equivalent Building or by Equivalent Plant as the case may require.

2)where property is damaged but not Destroyed, the restoration of the damaged  portion  of the property to a condition substantially the same as, but not better or more extensive than, its condition when new, but including any alterations that may be necessary to comply with any Regulations.

[24]     Mr Kennedy characterized the first part of the definition as providing for the cost of replacement, and the second for the cost of restoration.  However, he pointed out that the Policy also provides for circumstances in which the Reinstatement of Property memorandum will not apply.  There are a number of “Special Provisions” relating to the Reinstatement of Property memorandum, one of which provides:

4.        Circumstances Where This Memorandum Does Not Apply

No payment, beyond the amount that would have been payable had this Memorandum not been incorporated in the Certificate, will be made:

(a)       if the Insured elects not to Reinstate the property;

(b)       if the work of Reinstatement is not commenced and carried out with reasonable despatch;

(c)       until the cost of Reinstatement has been actually incurred;

(d)       where a building or structure is damaged, but not Destroyed, and the repair of the damage is not permissible by reason of any Regulations, or by reason of the condition of the Undamaged portion of the property.

Where, by reason of any of these circumstances, no payment is to be made beyond the amount that would have been payable if this Memorandum had not been incorporated in the Certificate, the rights and liabilities of the Insured and the Company in respect of the loss or damage will be the same as if this Memorandum had not been incorporated in the Certificate.

[25]     Mr Kennedy submitted that if pursuant to paragraph (a) the insured elects not to reinstate the property (whether by way of replacement or restoration) the insured

would still be entitled to some form of payment under the policy.   The indemnity would be for the amount that would have been payable had the Reinstatement of Property memorandum not been included in the policy.  The Policy is silent about the basis of indemnity cover in such circumstances;  so that issue has to be addressed on the basis of generally applicable indemnity principles.

[26]     This could be calculated by reference to the cost of replacing or repairing the insured  property  after  making  allowance  for  wear  or  tear  (the  depreciated replacement cost) or by reference to the market value loss, comparing the value of the property immediately before the loss with its value immediately after the loss.5

But  the  effect  of  clause  4(a)  is  that  the  insured  is  entitled  to  elect  either  a

reinstatement remedy or an indemnity payment.

[27]     Mr Kennedy then submitted that while replacement or restoration costs will not be payable until such costs have actually been incurred (paragraph (c) of clause 4 above) the entitlement to be indemnified arises as soon as there is physical loss or damage to an insured property.   He argued that, effectively, the time at which the insurer’s obligation to pay arises is determined by the measure of indemnity elected by the insured.   The election is of either a reinstatement remedy under the Reinstatement of Property memorandum, or an indemnity payment remedy where the insured elects not to reinstate.  In the latter case, there would be an immediate entitlement  to  pay consequent  on  the  election,  and  Mr  Kennedy submitted  that indicates that the entitlement to be indemnified arises as soon as the damage occurs.

[28]     Mr Kennedy referred next to another of the “General Conditions” in the Certificate, headed “Reinstatement of Sum Insured” (the “RSI clause”).   This provides:

Reinstatement of Sum Insured

In the event of loss for which a claim is payable under this Certificate, and in the absence of written notice by the Company or the insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated

5      These are the two main methods for determining the amount of the insured’s loss where the policy does not specify the required approach:  David St L Kelly and Michael Ball Kelly and Ball: Principles of Insurance Law (looseleaf ed, Butterworths) at [12.0120.5].

from the date of loss.  The Insured undertakes to pay such pro rata premium at the rate applicable to the item or items concerned as may be required for the reinstatement.

[29]     Mr Kennedy argued that the effect of the RSI clause is that separate sums insured are available for each event that causes earthquake damage to the properties. Consequently, the full amount stated as the sum insured for each property would be available to meet claims referable first, to the September earthquake, and second, to the February earthquake.   This would not result in double recovery, because the plaintiff  would  not  be  entitled  to  recover  under  its  claim  for  losses  caused  in February, losses that were in fact caused by the September earthquake.   Loss attributable to each loss causing event would need to be assessed as at the date of each event.

[30]     In support of his argument about the meaning of the RSI clause, Mr Kennedy referred to New Zealand Fire Service Commission v Terrace Insurances Ltd in which an insurance policy provided that automatic reinstatement took effect “as and from the date of the loss” and the Court held that because of these words, the written notice would have to be given before the loss occurred.6

[31]     Mr Kennedy also relied on Waitaki International Ltd v Earthquake and War Damage Commission in which the Court of Appeal had to consider the appropriate levies payable to the Commission, and held that the levy had to be calculated on the basis of the sum insured.7    The issue turned on whether there was a renewal when reinstatement of the sum insured under the policy occurred.   The relevant reinstatement clause in the insurance policies considered in that case provided for

automatic reinstatement (in the absence of written notice to the contrary by the insured) of the sum insured “in full from the time of the occurrence”.   The Court held that there was a renewal, and that the object of the reinstatement clause was to readjust the insurance as losses occur so that there was always a total liability of the

specified amount on the underwriters.8

6      New Zealand Fire Service Commission v Terrace Insurances Ltd HC Auckland CL 43/94, 25

February 1997 per Tompkins J.

7      Waitaki International Ltd v Earthquake and War Damage Commission [1991] 1 NZLR 450 (CA).

8      At 457.

[32]     The Court of Appeal’s decision was appealed to the Privy Council which held, contrary to the Court of Appeal, that the levy was to be calculated on the basis of the reinstatement or replacement value of the property, and not on the basis of the sum insured.9    Mr Kennedy relied on the Privy Council’s observation that the sum insured did not represent the overall limit of the insurer’s liability, but only the limit for any one claim.10

[33]     Mr Kennedy also relied on Re Earthquake Commission in which the Full Court had to construe, amongst other provisions, clause 6 of schedule 3 of the Earthquake Commission Act 1993, which provided for reinstatement of insurance on payment by the Commission of any amount in respect of natural disaster damage.11

Mr Kennedy relied on the Court’s conclusion that the purpose of the provision was to provide continuing cover of the stated amount, to ensure that it was available for each occurrence of damage during the period of cover.

[34]     While acknowledging that none of the cases relied on involved the proper construction of a reinstatement clause where claims were made for successive losses during a single policy period, Mr Kennedy nevertheless submitted that the cases showed the courts had recognised that the purpose of reinstatement clauses is to provide for continuing cover.  He argued that in this case, the proper approach is to construe the RSI clause as providing for separate sums insured being available for each earthquake event.

[35]     Mr Kennedy submitted that in the result, in respect of the damage caused by the September earthquake, the plaintiff is entitled to recover the remaining cost of restoring the damaged portion of each building to its condition when new (“the restoration cost”), once such costs are incurred by the insured.  Alternatively, if the plaintiff elects not to or cannot recover the restoration cost, it is entitled to the payment of the remaining cost of repairs less an allowance for wear and tear (the

“depreciated replacement cost”).

9      Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC).

10     At 520.

11     Re Earthquake Commission [2011] 3 NZLR 695 (HC).

[36]     In  respect  of  its  February  claim,  the  plaintiff ’s  entitlement  would  differ according to whether the buildings were demolished following that earthquake.  In respect of the three buildings demolished, Mr Kennedy submitted there would be an entitlement to the replacement cost once those costs were incurred, or to the depreciated  replacement  cost  if  the plaintiff elects  not  to  or cannot  recover the replacement cost.  In respect of the two buildings not demolished, the plaintiff would

be entitled to the restoration cost or the depreciated replacement cost.12

Defendants’ argument

[37]     The defendants accept that the full sum insured is payable under the Policy in respect of the buildings demolished as a result of the February earthquake.  However, they dispute that they are liable to pay the unspent cost of repairing damage resulting from the September earthquake.

[38]     Mr  Gray took  issue  with  Mr  Kennedy’s  submission  that  the  defendants’ liability is not limited over the policy period to one sum insured in the aggregate.  He submitted that the wording of the second paragraph at the beginning of the Certificate,13 meant that the insurers’ liability could not exceed the sum insured (for each building) over the period of the policy.14

[39]     Mr Gray noted that the Policy did not refer to the cover being “per event” or for “any one happening”.  Consequently the statement that “the Company’s liability will not exceed…in respect of each Item the Sum Insured applicable to that Item” meant that over the period of the policy the insured’s claims were limited to the applicable sum insured.

[40]     He argued that the presence of the RSI clause15  in the Policy was consistent with this approach.  He submitted that the clause was unnecessary if the sum insured was available per event.  No reinstatement of the sum insured would be required if

each event or happening already had the benefit of the full sum insured.

12     I was told there is a dispute that will need to be resolved at a subsequent stage about whether one of these buildings is repairable.

13 Quoted at [15] above.

14     The “Period of Insurance” is stated in the Schedule, being from 4.00 pm on 20 March 2010 to

4.00 pm on 20 March 2011.

15 Quoted at [28] above.

[41]     Mr Gray submitted that the proper construction of the RSI clause is that there are two prerequisites before reinstatement of the sum occurs:  first there must be a covered loss and secondly the absence of notice to the contrary.  The first is a simple question of fact as to whether such an event has occurred.  The second requirement, that there has been no notice to the effect that there should not be reinstatement, must occur after there has been a covered loss.  While either party can give the notice, Mr Gray submitted that in practical terms it would be the insurer who did so, having made an underwriting assessment of whether or not to replenish the sum insured and on  the  premium  that  is  to  apply.     However,  unless  notice  were  given  the replenishment would occur.   Mr Gray argued that the plaintiff ’s approach that the RSI clause has the result of immediate reinstatement means that there would be no effective opportunity for the notice to be given.

[42]     Mr Gray then submitted that the words “the amount of insurance cancelled by loss will be automatically reinstated from the date of the loss” were only apt to refer to a loss for which a claim is paid, because it only when an amount is actually paid that there has been a depleting effect which the clause is designed to address.

[43]     In relation to Re Earthquake Commission16 Mr Gray pointed to observations by the Courtthat until damage is repaired there is no improvement to the insured property such as to raise the need for additional cover.

[44]     Referring to  Terrace Insurances  Ltd  Mr Gray submitted that the Court’s conclusion that because reinstatement took effect “as and from the date of the loss” the written notice would have to be given before the loss occurred, was obiter.17   He also submitted it was incorrect, for a number of reasons.

[45]     First, this order of events was contrary to the order contemplated by the clause.  Second, the fact that automatic reinstatement took effect from the date of the loss did not require that the notice had to be given before the date of the loss: triggered by the claim payment, the reinstatement could take place retrospectively

from the date of the loss.  Such a possibility had been considered by the Full Court in

16     Re Earthquake Commission, above n 11, at [31].

17     Terrace Insurances Ltd, above n 6, at 20.

Re Earthquake Commission and only rejected because of statutory references to the “continuation” of cover.18    Third, it was inherently unlikely that the parties would have agreed on such an arrangement which would involve, at the time of the agreement,  the notice  provided  for  being  given  speculatively in  advance of  the second of two anticipated further losses.  He suggested that when the contract was made the parties would have no idea in what context the notice might be given.

[46]     Mr  Gray also  submitted  that  the  plaintiff’s  argument  would  result  in  an element of double recovery.   He referred in this respect to the Reinstatement of Property memorandum, noting that the definition of “Reinstatement” envisaged replacement of a destroyed building by “an equivalent building”.   He argued this would require construction of a brand new building, that is, the provision of “new for old” cover.  That would necessarily involve an element of betterment.  Consequently the plaintiff could not properly contend that payment for the September damage would not result in over-indemnification.

Discussion

[47]     In construing an insurance policy the Court adopts the same approach as for contracts generally.19   In accordance with what was said by Tipping J in Vector Gas Ltd v Bay of Plenty Energy Ltd “the ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear”.20

[48]     Nevertheless, in the case of a genuine ambiguity, a court will resolve the ambiguity against the party who proffered the phrase, which is of course generally the underwriter in the case of a contract of insurance.  I adopt here what was said by the Court  of Appeal  in  D A Constable Syndicate 386  v Auckland  District  Law Society:21

[69]     The commentators are agreed that the contra proferentem rule for resolving ambiguity has a place in the interpretation of insurance contracts, as it does in the construction of other contracts. There is some debate about the exact application  of the  principle.  For example,  some  commentators

18 At [45].

19     D A Constable Syndicate 386 v Auckland District Law Society Inc [2010] 3 NZLR 23 (CA) at

[23].

20     Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19].

21     D A Constable Syndicate 386, above n 19, at [69].

suggest the rule has application only once other means of resolving the ambiguity have been exhausted, whilst others refer to a trend in insurance law to adopt a liberal interpretation in favour of the insured and to resort more readily to the contra proferentem rule. What is clear is that in the case of genuine ambiguity, a court will resolve the ambiguity against the party who proffered the phrase, here, D A Constable. Enright and Jess express the principle in this way:

If a word or phrase in an insurance contract after application of [the ordinary meaning and context] principles remains, on an objective view,  genuinely  ambiguous,  a  court  will  resolve  the  ambiguity against the party which offered the word or phrase …

MacGillivray states that it is only where the court is “unable to decide by ordinary principles of interpretation which of the two meanings is the right one” that the rule applies.

(footnotes omitted)

[49]     Against that background I turn to consider the relevant provisions of the policy.

[50]     Under the Material Damage clause the defendants contracted to indemnify the  plaintiff  for  loss  or  damage  subject  to  the  terms  of  “this  Section  of  the Certificate”.   It is clear from the way in which the Certificate is drafted that the reference  to  “this  Section”  is  to  the  provisions  relating  to  material  damage,  as opposed to those that relate to “Section 2 – Business Interruption”, and as opposed to the part of the Certificate headed General Conditions which apparently apply to both Material Damage and Business Interruption cover.

[51]     Although there is an exclusion for loss of damage caused by or resulting from earthquake, there is in  fact  cover for earthquake-related damage because of the interplay of other provisions of the Certificate.  The memoranda to the Certificate include the Natural Disaster memorandum which has been set out earlier, apart from its opening words.   Those opening words, which are in parentheses, state that the Natural Disaster memorandum is “not applicable unless a Special Limit appears in the Schedule”.  There is a special limit set out in the relevant part of the Schedule which, opposite Natural Disaster provides for a limit of $20,655,000.  So the Natural Disaster  Memorandum  applies  and  the  exclusion  for  earthquake  damage  is overridden because of the words under the heading “Section 1 – Memoranda”:

In the event of any conflict or inconsistency between this Section of the Certificate and any memorandum incorporated in this Section, the terms of the memorandum will prevail.  In the event of any conflict or inconsistency between memoranda, the memorandum most favourable to the Insured will prevail.

[52]     It is clear, therefore, that under the Material Damage clause the Certificate provided indemnity in respect of the loss or damage caused to the insured properties by the September Earthquake.   I consider it is also clear that the September Earthquake was an “event” in terms of the definition at the outset of the Certificate. The definition of “event” is “an event or series of events originating from one source or original cause”.

[53]     One of the General Conditions is headed “Deductible” and provides:

Each loss or series of losses arising out of one Event will be adjusted separately.  The adjusted loss will be net of salvage and other recoveries.  In the event that the adjusted loss is greater than the sum insured, then the sum insured  shall  become  the adjusted loss  and  from each  adjusted loss  the amount specified in the Schedule will be deducted.

[54]     Mr Gray submitted that the definition of “event” is only relevant to the RSI clause.  However, such a limitation is not apparent on the wording of the policy and in fact the only relevant use of the word “event” is in the Deductible condition.  I consider that the natural and ordinary meaning of the Deductible condition is that losses arising out of any one event will be adjusted separately up to the limit of the amounts specified in the Schedule for each property.

[55]     Then,  under  the  Reinstatement  of  Property Memorandum,  subject  to  the “Special Provisions” (which are set out following the “Definitions” in the Reinstatement of Property Memorandum) the plaintiff would be entitled to be indemnified in respect of the cost of the “Reinstatement” of the damaged properties. The properties were damaged in the September Earthquake, but not destroyed. Consequently, under clause 2 of the definition of “Reinstatement”, the indemnity would be for the restoration of the damaged portion of the property to a condition substantially the same as, but not better or more extensive than, the condition of the damaged part of the building when new.  However, that outcome would be subject to the Special Provisions.

[56]     As has been seen, the plaintiffs rely on Special Provision 4, which sets out the circumstances where, according to the heading of the Provision, the Reinstatement of Property  Memorandum  “does  not  apply”.    Under  the  terms  of  this  clause,  no payment “beyond the amount that would have been payable” had the Memorandum not been incorporated in the Certificate, is to be made:

(a)       If the insured elects not to reinstate;

(b)The  reinstatement  work  is  not  commenced  and  carried  out  with reasonable despatch;

(c)       Until the cost of reinstatement has been actually incurred;  or

(d)      Repair is not permissible or cannot be carried out because of any

Regulation or the condition of the undamaged part of the property.

[57]     If any of those circumstances apply, the rights and liabilities of the parties in respect of the loss or damage will be the same as if the Memorandum had not been incorporated in the Certificate.

[58]     At this point, the plaintiff’s argument is that even though clause 4(c) defers payment to the point at which the cost of reinstatement has actually been incurred, the entitlement to be indemnified arises at the point at which there has been physical loss or damage to the property.   In my view, this approach is consistent with the drafting of the Special Provision as a whole and the fact that there may be an election not to reinstate the property or there is no reinstatement because the insured is dilatory under clause 4(b) or the building cannot be repaired in the circumstances contemplated by clause 4(d).  The fact that reinstatement costs are not incurred does not mean that an entitlement to indemnity has not already arisen.  This is consistent too with the final paragraph of clause 4 because where the cost of reinstatement has not been  incurred  the rights  of the parties are  to  be ascertained by putting the Reinstatement of Property Memorandum on one side and applying the other relevant contractual provisions.

[59]     The relevant provisions for present purposes are the Material Damage Clause under which the plaintiff is entitled to be indemnified for loss or damage arising from the September earthquake for reasons already addressed. The method by which the amount of the indemnity is to be calculated is not set out in the policy.  In those circumstances, I accept that the issue must be addressed on the basis of generally applicable principles requiring an assessment of the depreciated replacement cost or market value loss.

[60]     The RSI clause has the effect that to the extent that there is cover as a result of damage caused by the September earthquake, the “amount of insurance cancelled by loss” is automatically reinstated from the date of loss.   I accept, as Mr Gray submitted, that there are no express words in the policy referring to indemnity on the basis that it is “per event” or for “any one happening”.  However, I consider that is implicit in the wording of the RSI clause.  Given a loss for which a claim is payable under the Certificate (and in the absence of written notice to the contrary) the amount of insurance “cancelled by loss” is to be automatically reinstated from the date of the loss.  There would be no point in providing for such automatic reinstatement unless it was contemplated that there might be a further claim during the period of the policy.  It seems clear that the intent was to ensure that in the event of such a further event causing loss the full amount of cover would be available for each property in accordance with the sums set out in the Schedule.  Otherwise there would be no need for reinstatement of the sum insured.  The entitlement for each event would simply reduce the balance available for a future event, until such events had used up the full amount.

[61]     I do not accept that the statement at the outset of the Certificate that the underwriter’s liability will not exceed the sum insured means that during the period of the policy the insured’s claims are limited to the applicable sum insured.  Once again, I consider that this would have the effect of robbing the RSI clause of its evidently intended effect.  It should be noted that the provision on which Mr Gray relied begins with the words “[e]xcept where provided to the contrary”.

[62]     It  follows  that  I  reject  Mr  Gray’s  contention  that  the  RSI  clause  was unnecessary if the sum insured was available per event.  It is the RSI clause which has the effect that the sum insured is available per event.

[63]     One of  the bases for Mr Gray’s argument to the contrary was that automatic reinstatement under the clause only occurs after there has been a covered loss, and in the  absence  of  written  notice  to  the  contrary:     there  would  be  no  effective opportunity for notice to be given if the RSI clause had the effect of immediate reinstatement.   I do not accept that proposition.   I see no reason why an effective notice could not be given under the RSI clause after the first loss causing event, and before a second such event.  The fact that reinstatement occurs automatically does not in my view mean that the “notice to the contrary” provided for by the clause needs to be given prior to the automatic reinstatement.  I consider the notice can still be effective if given after the reinstatement, and once given would mean that the reinstatement would not be effective.  In such circumstances there would have been notice to the contrary at the time of any subsequent covered loss.

[64]     However, if there were to be a second event for which cover was available prior to notice being given, that would have occurred in the absence of written notice to  the contrary,  and  a  subsequent  notice would  then be too  late to  prevent  the availability of cover up to the full amount of the sum insured.  The two prerequisites to automatic reinstatement, for which Mr Gray correctly contends, would then exist: the “loss” would have occurred in the absence of notice to the contrary, and there would be nothing to prevent the automatic reinstatement.  Automatic reinstatement would occur.

[65]     On this approach, to be effective, the “notice to the contrary” must be given before the second loss causing event.  If it has been so given, the second event would only be indemnified as to the available remainder of the sum insured.  I consider that this approach is available on the language of the RSI clause, and enables that clause to be read and applied in a manner that is consistent with the other key provisions of the Certificate.   As I observed earlier, the interpretation for which the defendants contend would have the effect of preventing the RSI clause having its intended effect.

[66]     I  also  consider  the  approach  that  I  favour  appropriate  as  a  matter  of commercial reality.  If a notice to the contrary is given as contemplated by the RSI clause, it would enable the parties to consider their position and, if appropriate, make appropriate adjustments.   In the case of the insured, no longer entitled after the notice to indemnity in the full sum insured, that might include making additional or alternative arrangements for cover.  The RSI clause itself contemplates there might be  an  altered  premium  to  pay  where  there  is  reinstatement,  and  the  insured undertakes to pay this as an automatic consequence of any reinstatement.  Clearly, if these considerations are to affect the rights and liabilities of the parties, the extent of cover available, and the premium to be paid, that should occur before the occurrence of any subsequent event.   If the subsequent event occurs before notice is given it seems both reasonable and in accordance with the terms of the Certificate that the reinstated sum insured should be available.

[67]     The defendants also argued that the words “the amount of the insurance cancelled by loss will be automatically reinstated from the date of the loss” should be construed as referring only to a loss for which a claim has been paid.  Mr Gray submitted that this followed because it is only if an amount is paid that there has been a depleting effect which the RSI clause is designed to remedy.  I do not accept that proposition.  The Material Damage clause refers to accidental physical loss or damage happening to the insured property.  The drafting is only apt to refer to the actual  physical  damage  that  is  sustained.   Similarly,  under the  Natural  Disaster memorandum, cover is for loss or damage directly or indirectly caused by an earthquake.  In my opinion such loss or damage occurs when the earthquake strikes.

[68]     The RSI clause refers to a “loss for which a claim is payable” and I consider this language envisages a loss which is or will be the subject of a claim properly payable, at the stage before the claim is met by the underwriter.  The occurrence of the  damage  means  an  event  has  occurred  for  which  there  will  be  cover; consequently the  insurer  will  have  an  obligation  in  respect  of  that  claim.    But reinstatement is immediate (in the absence of notice to the contrary) and the full sum insured  must  be  reinstated  if  there  is  to  be  equivalent  cover  in  respect  of  a subsequent event giving rise to a covered loss.  If it were otherwise, the underwriter

could effectively limit the ambit of the RSI clause, and therefore its liability under the policy, by simply delaying the payment of a valid claim.

[69]     For the reasons given I consider that the policy is to be construed on the basis for which the plaintiff contends.   I do not think it necessary to invoke the contra proferentem rule, because I consider the effect of the relevant terms of the policy is clear when they are read together.   I have not found statements in any of the cases to which I was referred by the parties that suggest a different result.

[70]     Ridgecrest, as with the present case, involved claims based on successive events of damage.22   Reference was made in fact to damage arising from not only the September 2010 and February 2011 earthquakes, but also those of 26 December

2010 and 13 June 2011.  The Court was asked to decide whether the insured was entitled to be paid for the damage arising from each event up to the maximum of the sum insured in each case.

[71]     The relevant policy provided cover under two clauses, clauses C1 and C2. The former provided cover on an “old for old” basis (that is, the reference point was the condition of the building immediately before it was damaged) and did not require the  insured  to  undertake  restoration  or  replacement  before  receiving  payment. Clause C2 provided cover on a “new for old” basis (that is, the cover related to the cost of restoration to as new condition, or if the building was unable to be repaired, the cost of replacement by an equivalent building).  Where clause C2 applied, the insured was obliged to restore or replace the damaged property. The Court of Appeal held that as the claim had been pleaded it was advanced under clause C2 and it was not open to the plaintiff to seek to reformulate its claim on the basis that clause C1 applied.

[72]     That meant that quantification of the available cover was dependent on the repairs actually being carried out, and the cover would equate to the cost of doing so.23    The consequence was that the cost of the repairs carried out after the first

earthquake was payable, as was the cost of the completed works following the

22     Ridgecrest (CA), above n 1.

second earthquake.  The insurer took the view that after the February earthquake the building became unrepairable, in  which  case clause C2  required  the cost  of its replacement value to be paid, up to a stated maximum.  Because the replacement cost would exceed that maximum, the maximum was payable.   Since the building was unrepairable prior to the June earthquake there would be no cover for that event.24

[73]     The insured did not agree that the building was unrepairable after the third earthquake.  If that view were correct, application of clause C2 would result in no cover for the damage resulting from the third earthquake because no repairs had been carried out, but the maximum amount payable would apply to the damage resulting

from the fourth earthquake.25

[74]     As a consequence the Court of Appeal held26 that the insured could not claim the  maximum  amount  for  each  event.    In  the  present  case,  the  point  of  the amendment to the statement of claim to which I referred at the outset was to avoid any suggestion that the plaintiff was not seeking to rely on both “new for old” and “old for old” cover.

[75]     As noted above, the plaintiff relies on the availability under the policy of both kinds of cover.   “New for old” would be relevant to a claim based on reinstatement in accordance with the Reinstatement of Property memorandum. However, if the insured  elected not to  reinstate, the insured’s entitlement to an indemnity payment would be calculated on an “old for old” basis.   One of the grounds of the defendants’ opposition to the amendment was that the plaintiff in the present case had not elected not to reinstate.  However, that factual determination is one that must be left for another day.

[76]     The issue presently before the Court is limited to the proper interpretation of the policy.  The plaintiff ’s argument relies on the availability of these alternatives, and that was made clear in Mr Kennedy’s original argument.  The amendment to the statement of claim sought to make this clear in the pleadings.  Because the issue was

advanced in the original hearing, there is no reason not to allow the amendment.

24     At [49]-[50].

25 At [51].

26     Upholding the High Court, but for different reasons.

[77]     Otherwise,  there are material  differences  between  the policies  before  the Court in that case and this.   In particular, the policy in Ridgecrest did not contain terms providing a procedure for reinstatement of cover after a claim had been met,27 as the RSI clause does in this case.   In my view there is nothing in the Court of Appeal’s judgment in Ridgecrest that suggests that the plaintiff’s argument about the interpretation of the policy is incorrect.

B        Merger

[78]     The next issue to be considered is the issue of merger of damage raised by the defendants.

Defendants’ argument

[79]     The defendants rely on the doctrine of merger to submit that the destruction of  the  buildings  in  the  February earthquake  had  the  consequence  that  the  total amount of cover then became payable.  Any prior partial damage the result of the September earthquake merged with the subsequent damage.

[80]     Although Mr Gray argued that application of the doctrine produced the same result  as  the  defendants’ arguments  about  the  interpretation  of  the  policy,  as  I understand the position it is also argued that, in the circumstances of this case, the doctrine  could  independently  result  in  the  limitation  of  cover  in  respect  of  the damage caused by the September and February earthquakes, in aggregate, to the sum insured stated in the Schedule.

[81]     Mr Gray accepted that if it had been possible to repair the partial damage prior to the February earthquake the defendants would have been liable to indemnify the plaintiff for the cost of those repairs.  However, he submitted that where repair of the prior partial loss was not possible, an entitlement to receive money for repairs no longer able to be undertaken (because of the subsequent destruction of the buildings) did not survive.

[82]     Mr Gray acknowledged that the High Court in Ridgecrest28  held that the doctrine of merger did not apply outside the field of marine insurance, but he submitted that conclusion was incorrect,29 and based on a wrong assumption that the doctrine involves merger of claims, as opposed to the merger of damage.  He relied on Livie v Janson,30 Lidgett v Secretan (No 2),31 and British and Foreign Insurance Co Ltd v Wilson Shipping Co. Ltd.32   In the last of those cases Lord Birkenhead LC said:33

The authorities establish the existence of a rule whereby underwriters are not liable for unrepaired damage if there is a total loss before the expiration of the policy.

[83]     Mr Gray noted that in Wright, Stephenson, and Co., Ltd and Others v Holmes the  Court  of  Appeal  found  it  unnecessary  to  determine  a  submission  that  the principle confirmed by the House of Lords in Wilson Shipping Co applied only to marine insurance policies.34   However, the Court of Appeal observed:35

It is difficult, however, to read the broad statement of the law by Lord Birkenhead, L.C., in the Wilson Company’s case without feeling that His Lordship’s remarks there were of wide application, and probably would be held to extend to all contracts of insurance by way of indemnity, of which the present case is a typical instance.

(footnotes omitted)

[84]     The rule set out in the Wilson Shipping Co case finds expression in New

Zealand in s 77(2) of the Marine Insurance Act 1908 which provides:

(2)       Where  under the  same  policy a  partial loss  which has  not been repaired or otherwise made good is followed by a total loss, the assured can only recover in respect of the total loss.

[85]     Mr Gray argued that there are only three significant differences between marine and non-marine insurance, none of which were material in respect of the

application of the doctrine of merger.  The first difference to which he pointed was

28     Ridgecrest NZ Ltd v IAG New Zealand Ltd [2012] NZHC 2954, (2013) 17 ANZ Insurance cases

61-957 [Ridgecrest (HC)].

29 In the Court of Appeal the issue was expressly left open at [53].

30     Livie v Janson (1810) 12 East 648.

31     Lidgett v Secretan (No 2) (1871) LR CP 616.

32     British and Foreign Insurance Co Ltd v Wilson Shipping Co Ltd [1921] 1 AC 188 (HL).

33     At 197.

34     Wright, Stephenson, and Co, Ltd v Holmes [1932] NZLR 815 (CA) at 826.

35     At 826.

that marine insurance recognises constructive total loss, whereas the non-marine insurance recognises only actual total loss.  In the present case, the policy expressly incorporates the concept of constructive total loss with the consequence that this difference is immaterial.

[86]     The second difference to which he referred concerns the practice for hull policies to be valued.  However, that practice is not invariably followed and often hull policies are unvalued, as was the case in Thor Navigation Inc v Ingosstrakh Insurance.36    Mr Gray also pointed out that cargo policies are generally unvalued. Further, non-marine policies may be valued as, for example, was the case in Quorum AS v Schramm (No 1).37

[87]     The third distinction to which Mr Gray referred is that the Average principle applies to marine insurance as a default rule whereas it will only apply to a commercial property policy if specifically incorporated.   Mr Gray referred to Ace European Group v Standard Life Assurance Ltd,38  submitting that it showed that differences between marine and non-marine insurance concerning the calculation of loss could be explained on the basis of the Average principle set out in s 78 of the

Marine Insurance Act 1906 (UK).  In any event, the present policy incorporated an

Average provision so that the difference was irrelevant.

[88]     In summary, Mr Gray submitted that there is no reason not to apply the merger doctrine.  As a consequence the unrepaired September damage merged with that which occurred in February.   Therefore, in respect of each of the insured properties, the total claim could not exceed the specified sum insured.

Plaintiff ’s argument

[89]     Ms Rosic argued this part of the case for the plaintiff.  She submitted that the doctrine of merger does not apply and cannot be invoked to deny the insured’s

entitlement to be indemnified for its September claims.

36     Thor Navigation Inc v Ingosstrakh Insurance [2005] EWHC 19 (Comm), [2005] Lloyd’s Rep IR

490.

37     Quorum AS v Schramm (No 1) [2002] Lloyd’s Rep IR 293 (QB).

38     Ace European Group v Standard Life Assurance Ltd [2012] EWCA Civ 1713.

[90]     She noted that there is no equivalent to s 77(2) of the Marine Insurance Act

1906 in any legislation applying to other types of insurance policies, a point to which Dobson J referred in his decision in Ridgecrest.39     She submitted that despite the doctrine of merger having a long history in the context of marine insurance, no cases established its application in other areas of insurance.  The observations of the Court of Appeal in Wright, Stephenson, and Co, Ltd were obiter and ought not to justify a wholesale importation of the doctrine of merger in all insurance contracts.

[91]     Ms Rosic relied on the discussion in the High Court in Ridgecrest in which

Dobson J observed:

[49] I am not satisfied that the doctrine of merger has been applied to marine insurance policies solely because the underwriters would not be liable for unrepaired damage to a vessel until the expiry of the policy. That seems more likely to be a consequence of the settled approach, rather than the rationale for it. A broader basis for merger is that the policy of mercantile law in regulating interests between underwriters and insured interests operates to moderate the extent of liabilities assumed by underwriters. The essence of such contracts is that the insured will be indemnified for losses actually incurred. This is exemplified in the concern not to produce a profit for the insured, referred to at the end of the extract from Lord Birkenhead’s speech at [40] above.

[50]      Marine insurance does not contemplate “replacement” of a vessel, at least within an existing hull policy.  Once either a constructive or actual total loss has been established, that exhausts the insurance over a vessel. A vessel built or acquired to replace one that is lost by a marine peril is a new insurance prospect.   In contrast, in theory at least, a replacement for an irreparable building could be insured under the same policy.  In that sense, the occurrence of a “total loss” under a marine hull policy brings an end to the contract, whereas a pay-out for what is a constructive total loss of a building may not.  Merger applies in marine insurance policies to subsume lesser liabilities that have become a matter of indifference within an insurer’s ultimate liability.   In those terms the proposition is supported by common sense in a way that arguably justifies a wider application.  It certainly invites analogy with arguments for the doctrine of frustration to apply, which is considered below.

(footnote omitted)

[92]     Dobson  J  considered  that  the  Court  of Appeal’s  observations  in  Wright, Stephenson and Co, Ltd were insufficient foundation for treating the doctrine of merger as applying to wider categories of material damage insurance.  His reasoning

was clearly influenced by the fact that the policy to be applied in Ridgecrest created

39     Ridgecrest (HC), above n 28, at [53].

a liability to indemnify as soon as damage arose, as opposed to the marine insurance context in which the insurer will only be liable for damage to the vessel when repairs are effected. He observed:40

It is materially easier to justify the merger of one or more pending claims than it is to re-cast the character of one or more existing claims.

[93]     The  Judge  also  expressed  the  view  that  the  fact  that  material  damage insurance involves indemnities for loss actually incurred could not justify imposing a rule that merger should apply automatically or uniformly.  He thought it significant that under the policy the insurer might be liable for “more than indemnification and what amounts to betterment” if the insured restored a damaged building to a new condition claiming the cost of doing so under the policy.41

[94]     He  concluded  that  the  greater  variety  in  the  terms  of  general  insurance contracts, and the absence of any equivalent to s 77(2) of the Marine Insurance Act

1908 counted against “the uniform adoption of merger as applying automatically to all general insurance, or material damage insurance policies”.42

[95]     Ms Rosic submitted that this reasoning was essentially correct and reflected the distinctive features of marine insurance, including:

(a)      The principle that the insured’s loss is to be assessed at the date of the termination of the policy because the insured’s rights crystallise at that point43    whereas   under   material   damage   policies   generally   the insured’s loss is assessed as at the date of the loss.

(b)The fact that the doctrine of merger had been developed in the context of valued marine insurance policies.   While accepting that not all marine insurance policies are valued nor that all policies for the insurance of other property are unvalued, Ms Rosic referred to Kastor

Navigation Co Ltd v AXA Global Risks (UK) Ltd (The Kastor Too)

40 ` At [51].

41 At [52].

42 At [53].

43     A proposition which she based on Wilson Shipping Co, above n 32.

(referred to subsequently as “Kastor Too”).44   In that case the Court of Appeal, discussing the Wilson Shipping Co case, referred to the rule established in marine insurance that there was no claim for unrepaired partial loss until the end of the policy period and then said:45

We suppose a different rule might have been established, but the rule makes good sense in a relationship where a ship is usually insured at an agreed value which is paid on total loss whatever might be her true value and there is therefore the danger that an owner will be overcompensated if he can claim both for unrepaired partial loss and for a total loss all within the policy period.

(c)      The fact that in a marine insurance policy, once a constructive or actual total loss occurs, the insurance is exhausted and the policy is effectively at an end.  This could be contrasted with the policy in the present case in which the parties had stipulated (by the Reinstatement of Property memorandum) that in the event of a total loss the insured property will be replaced with an equivalent new building.  Notionally at least, the new equivalent building would be covered by the same policy.  In short, the policy responds to multiple losses, including total losses in a single policy period.

[96]     Ms Rosic also noted that the effect of the RSI clause was to reinstate the available cover in respect of subsequent losses, a process that could occur on a number of occasions without limitation.  She acknowledged that in practical terms the risk of there being more than one “total loss” in the policy period was “non- existent”, nevertheless the policy does not provide for the insurance to be exhausted, or for cover to terminate, upon the occurrence of a total loss.  In these circumstances Ms Rosic argued that to apply the doctrine of merger would be contrary to the express terms of the policy.

[97]     Relevant also is the fact that double recovery would not arise because the

plaintiff’s claim for losses arising from the February earthquake could only relate to

the buildings in the state they were immediately prior to that event.

44     Kastor Navigation Co Ltd v AXA Global Risks (UK) Ltd (The Kastor Too) [2004] EWCA Civ

277, [2004] 2 CLC 68 [Kastor Too].

45 At [70].

[98]     In view of these considerations, she submitted that the doctrine of merger could not be applied in the present case.

Discussion

[99]     Ms Rosic is correct that there are no reported cases in which the doctrine of merger has been applied to insurance claims other than those arising in the context of marine insurance.  The question however is whether the doctrine must necessarily be confined to that context by reason of the inherent nature of its subject matter.

[100] The principle addressed in the Wilson Shipping Co case was based on authorities including those to which Mr Gray referred in argument.  In Livie v Janson a ship set out on a voyage from New York to London in breach of an embargo then in place.46     The ship and goods that it was carrying were damaged at sea. Subsequently, the ship was seized by the American government for breach of the embargo and condemned.  The question was whether having regard to the total loss

consequent on the seizure and condemnation, the insured had any right to recover in respect of the previous partial losses attributable to the damage at sea.  The Court held that there was no such right.  Lord Ellenborough CJ said:47

Considering the deterioration of the ship and cargo then as the extent of what is referable to the head of sea-damage, we think we may lay it down as a rule, that where the property deteriorated is afterwards totally lost to the assured,  and  the  previous  deterioration  becomes  ultimately  a  matter  of perfect indifference to his interests, he cannot make it the ground of a claim upon the underwriters.  The object of a policy is indemnity to the assured; and he can have no claim to indemnity where there is ultimately no damage to him from any peril insured against.  If the property, whether damaged or undamaged, would have been equally taken away from him, and the whole loss would have fallen upon him had the property been ever so entire, how can  he  be  said  to  have  been  injured  by  its  having  been  antecedently damaged?

[101]   In Lidgett v Secretan a ship was insured under two policies, the first for a voyage from London to Calcutta, and the second from Calcutta to London.48   On the voyage out to India the ship was damaged when it foundered on a reef and had to jettison some of the cargo to float free.  On reaching Calcutta she was repaired and

during  the  repair  process  the  first  policy  expired.    The  ship  was  then  totally destroyed by fire.  The plaintiffs claimed under the first policy the whole of the loss resulting from the ship striking the reef without regard to the extent to which that damage had been repaired at the time of the fire.

[102]   The Court held that under the first policy the insured was entitled to recover the amount of the vessel’s depreciation at the expiration of the risk as a result of the damage she had sustained on the outward voyage.   It held that under the second policy, the insured was entitled to recover for a total loss without reference to the claim under the first policy.  The doctrine of merger did not apply because the two events arose under separate policies.

[103]   The judgment contained some statements of principle relevant to the present discussion. Thus, Willies J observed:49

There is another case, viz. where, after the vessel has sustained damage, but has not been repaired, and has subsequently, and during the currency of the policy, been totally lost by a peril excepted out of the policy, and in respect of which the owner was his own insurer.   Such was the case in Livie v Janson.  In such a case, the assured puts himself in the same position that the underwriter would have been in if he had insured against a total loss generally;   and therefore, when such loss arises, the underwriter must be considered by the terms of the contract to be in the same position as if he had so insured and had paid for a total loss, and consequently the claim for a partial loss falls to the ground.  It appears to me that the authorities and the reasoning upon this subject go together.  The former shew that the rule in question is limited to the happening of the total loss during the time covered by the policy;  and the reason of the thing applies to the same period.

(footnotes omitted)

[104]   It  was  against  the  discussion  of  these  and  other  authorities  that  Lord Birkenhead made the observations that have been quoted above in Wilson Shipping Co.   It is important for present purposes to see those observations in their wider context.

[105]   Lord Birkenhead referred with apparent approval to observations by Lindley

J in Pitman v Universal Marine Insurance Co as follows: 50

49     At 625-626.

50     At 197, citing Pitman v Universal Marine Insurance Co (1882) 9 QBD 192 at 197.

“Against what do the underwriters agree to indemnify the insured?  Surely against such loss as he may in fact sustain by reason of the perils insured against.  That this is so is plainly proved by those cases which decide that, where a ship has been injured and not repaired, the assured must wait until the expiration of the risk before he can sue the underwriters for the loss he has sustained.  The assured has no vested right of action when the injury is sustained.  If in such a case the ship is lost whilst the policy is running by a peril not insured against, the assured has no right of  action at all;  and if she is lost by a peril insured against  the assured can only claim for a total loss; he cannot claim both.”

[106]   Lord  Birkenhead  went  on  to  refer  to  the  existence  of  the  rule  whereby insurers are not liable for unrepaired damage if there is a total loss before the expiration of the policy.  He rejected the suggestion, based on some of the language used by Lord Ellenborough CJ, that that should only be the case where the previous

damage had become “ultimately a matter of perfect indifference” to the insured.51

[107]   Later Lord Birkenhead referred to the judgment at first instance in the Wilson Shipping Co case and adopted a statement made Bailhache J that whether or not the underwriter is liable for unrepaired damage could not be ascertained until the expiration of the policy.52    If there were a total loss prior to the expiration of the policy then the underwriter would not be liable to pay for earlier unrepaired damage sustained during the currency of the same policy.   The passage adopted by Lord Birkenhead continues:53

The true doctrine is that the smaller mergers in the larger and the rule is not limited to the ground upon which it was based by Lord Ellenborough – namely, that there was no continuing prejudice…..   The question in every case must be, did the total loss happen before the underwriter’s liability for the unrepaired damage accrued?  If yes, he is not liable;  if no, he is liable.

[108]   Pausing here, it can be seen that there are statements in the authorities which favour the argument advanced by both parties in the present case.  One strand of the reasoning suggests that with an indemnity policy, if there is damage during the period of the policy followed by later damage resulting in a total loss, if the former damage remains unrepaired it is subsumed in the later damage.   Other statements suggest that the crucial question is whether the total loss occurred after the underwriter had become liable in respect of the first occurrence of damage.

[109]   However, there is nothing in the particular reasoning which I have set out which suggests that the principles discussed have a basis that is particularly and exclusively relevant to contracts of marine insurance.  It seems to me that the key issues identified are whether the separate events giving rise to damage (the second of which  causes a total  loss) arose during the same period  of insurance,  and  also whether, at the time of the second event, the underwriter has a liability in respect of the first event.

[110]   Having considered these cases I have arrived at a view similar to that which the five Judges of the Court of Appeal expressed in Wright, Stephenson, & Co, Ltd v Holmes, namely that Lord Birkenhead’s statement of principle should be treated as of wide application and, subject always to the particular policy wording,   ought to

extend to all contracts of insurance by way of indemnity.54

[111]   I note also that a similar view appears to have been reached by the learned authors of Colinvaux’s Law of Insurance in which it is said:55

The assured is entitled to successive partial losses to the insured property even if those losses in aggregate exceed the limit of indemnity for a total loss, subject to policy provisions which restrict recovery in any one year by reference to the number of losses or to the sum insured. A partial loss which is not repaired merges into a subsequent total loss, so that the assured can recover only for the latter.

[112]   It can be noted that no authority is cited for this proposition.  There is merely a cross-reference to a discussion in a subsequent chapter, chapter 24, of the book dealing with marine insurance and the subsequent reference refers to the cases that I have already discussed.

[113]   There is also a discussion in Kelly and Ball: Principles of Insurance Law56

which states that whether the doctrine of merger applies to non-marine insurance is

“unclear”.  The discussion refers to of Dobson J’s judgment  in Ridgecrest. It also

54     Wright, Stephenson & Co, Ltd, above n 34.

55     Robert Merkin (ed) Colinvaux’s Law of Insurance (9th ed, Sweet & Maxwell, London, 2010) at

[10-005].

56     Kelly and Ball, above n 5, at [12.0120.45].

refers to a statement of Tomlinson J in Kastor Navigation Co Ltd v AXA Global Risks

(UK) Ltd that:57

Wilson is no authority for the proposition that an accrued cause of action can be defeated by a subsequent loss.

[114]   With  respect  to  Ridgecrest  I  agree  with  Dobson  J’s  conclusion  that  the doctrine of merger has not been applied to marine insurance policies solely because the underwriters would not be liable for unrepaired damage to a vessel until the expiry of the policy.58  With him, I think that seems more likely to be the result of the settled approach, rather than the reason for it.  There are other aspects of the cases which I have discussed that also, naturally, reflect the fact that they have arisen in the

context of marine insurance claims.  That includes the dicta that refer to the practice that the insurer’s obligation to indemnify will be assessed at the end of the voyage. But I do not agree that such considerations create a substantial reason for drawing a bright  line  between  marine  and  other  insurance  policies  with  respect  to  the application of the doctrine of merger.  I infer from Wright, Stephenson, and Co, Ltd that the Court of Appeal must also have been of that view.  I also accept Mr Gray’s submissions about the immateriality for present purposes of the distinctions between marine and other kinds of insurance.

[115]   With respect, I am unable to agree with what appear to be Dobson J’s main reservations as to the application of the merger doctrine outside the field of marine insurance.  First, it is not clear to me why the fact that a replacement for a building that  is  a total  loss  could  theoretically be insured  under the same policy as  the destroyed building should be thought significant.   The merger doctrine applies in relation to two sets of damage and the implications of the fact that the replacement building  is a “new insurance prospect” can be adequately dealt with by mechanisms such as the RSI clause discussed earlier in this judgment.

[116]   As to the fact that policies such as those before the Court in Ridgecrest and in the present case create liability as soon as the damage arises, I do not see that as a

reason counting against application of the merger doctrine.  There is some difficulty

57     Kastor Navigation Co Ltd v AXA Global Risks (UK) Ltd, [2002] EWHC 2601 (Comm), [2003]

Lloyd’s Rep IR 262 at [12].

58 At [49].

with this point arising out of Lord Birkenhead’s adoption of Bailhache J’s statement identifying the crucial question as being whether the total loss happened before the underwriter’s liability for the unrepaired damage accrued.  However, the question of when the underwriter’s liability for damage arises is one which can receive different answers according to the wording of particular policies.  I do not see why it should be decisive as to the application or non-application of the merger doctrine.

[117]   In a contract of indemnity the insurer undertakes, as in this case, to indemnify the insured for the loss or damage.  Where a building is damaged in one event and totally lost as a consequence of a second event there is an inherent logic in the proposition that the insured can no longer assert that indemnity involves both payment for the destroyed building and the same building in its previously damaged state.  It is, I think, no answer to say that in some circumstances the application of relevant provisions of the insurance policy will give the insured rather more than a simple indemnity.  The example given by Dobson J was where betterment can arise as a result of restoring a damaged building to a new condition where that is the consequence of the policy wording.  The possibility of that outcome, however, does not alter the fact that the basic nature of policies such as the present is to provide indemnity cover.   In simple terms, it is illogical to characterise as an indemnity, payment for the cost of repairs that will never be carried out because the building has been destroyed.

[118]   That conclusion also responds to the submission made by Ms Rosic that to conclude that the doctrine of merger should be applied in the present case would somehow be contrary to the terms of the policy.  The answer is that the policy is one that is intended to indemnify the insured for the loss suffered.  Given the total loss of the insured buildings, the objective of providing indemnity cover can be met if cover up to the sum insured is provided in respect of each building.  While the September damage was covered, and there are extant claims in respect of it, once the February earthquake took place, the unrepaired damage sustained in the September event was no longer a loss for which indemnity needed to be provided.

[119]   As  has  been  seen,  one  of  Dobson  J’s  concerns  was  about  “the  uniform

adoption of merger as applying automatically to all general insurance, or material

damage insurance policies”.59   I accept that caution would be needed before adopting such a broad proposition, although I note that the present argument has not illustrated any  adverse  consequences  that  would  flow  from  doing  so.    However,  no  first instance decision of the High Court can be authoritative other than in relation to the facts  on  which  the decision  was  based.   And in  that  respect  it  is  important  to emphasise in this case the wording of the Material Damage clause, the specified sums insured, and the wording at the outset of the certificate that the insurer’s liability will not exceed the sum insured.  In a case of this nature the words used by the Court of Appeal in Kastor Too, quoted at [95(b)] above, are just as apposite as they are in the case of a marine insurance policy:  it makes “good sense” to apply the

doctrine of merger in this setting.60

[120]   Finally, I am not persuaded that the absence of any statutory equivalent to s 77(2) of the Marine Insurance Act 1908, applicable to other contracts of insurance, has any significance.   While s 77(2) incorporated the common law rule insofar as marine insurance is concerned, the provision has no necessary implications for the common law applicable to other kinds of insurance.  Statutes covering other aspects of insurance law do not purport to cover the field.  For example, the Insurance Law Reform Acts of 1977 and 1985 were both enacted (to quote from the long titles) “to effect certain reforms in the law governing contracts of insurance”.  The common law remains a vital source of the law in this field and there is of course no reason why it should not continue to have effect.

[121]   The defendant accepts that it was, and remains, liable under the policy for the sums already paid out with respect to the damage caused by the September earthquake.   It follows from the conclusion that I have earlier set out about the proper interpretation of the policy that the effect of the RSI clause will have been to reinstate  the  sum  insured  in  respect  of  the  amounts  paid.    Otherwise,  I  have concluded that the doctrine of merger should apply.

[122]   That conclusion will be reflected in the answer given to the first question.

C       Frustration

[123]   Given  the conclusion  just  expressed it  is  not necessary to  deal  with  the frustration issue, but I do so briefly in case this matter goes further.

[124]   In Ridgecrest Dobson J held that the contract of insurance had been frustrated on the basis that:61

…the parties would have agreed that the scope of liability for subsequent happenings during the term of the insurance would not extend to require payment of sums greater than was necessary to effect repairs that were able to be undertaken before the building became irreparable.

[125]   The Court of Appeal however disagreed with that conclusion.62   It considered that on the basis of the Judge’s conclusions about the meaning of the contract, the proposed implied term (that was the vehicle by which the doctrine of frustration was to be applied) would be contrary to the express terms of the contract.

[126]   Although Mr Gray argued that frustration was an available approach in the present case, his argument was advanced before the Court of Appeal’s decision in Ridgecrest was delivered.   He did not address the frustration issue in subsequent submissions.

[127]   I do not consider that frustration can properly be advanced in the context of the present policy, and for the same reasons that the Court of Appeal considered that it was unavailable in Ridgecrest. In short, having determined that the policy in the present case provided cover for damage arising from both the September and February earthquakes, there could be no proper basis for implying a term to negative that conclusion.   Nor would doing so be necessary to give the contract business efficacy.

[128]   The contrary conclusion would be in effect to find that an insured event had resulted  in  the  frustration  of  the  contract.    I  consider  that  would  be  wrong  in principle.

D       Conclusion on first question

[129]   It follows from the conclusions earlier expressed that the answer to the first question turns on the application of the doctrine of merger.  I have concluded that the defendants’ liability to indemnify the plaintiff for the separate damage caused to the insured properties by the September earthquake is limited to the sums that had already been paid at the time of the February earthquake.  Thereafter, the liability is limited to the maximum amount set out in the Schedule as the sum insured for each building.  For the avoidance of doubt, that amount would be the full sum insured, without deduction for the September payments.

Second question – The Average clause

[130]   The second question asks whether the Average clause in the Policy limits the defendants’ obligation to pay the plaintiff the full sum insured for the damage caused by the February earthquake to the property at New Brighton Mall.63    I have earlier set out paragraph 20 of the agreed statement of facts which relates to this question.64

[131]   Mr Kennedy advised that the parties are in dispute as to whether or not New Brighton Mall is a total loss, and that is an issue to be determined at the quantum trial.  The Court is now asked to assume for the purposes of determining the second issue that the relevant clauses in the Schedule to the Policy apply.

[132]   The relevant provisions are contained in the Schedule of the Policy and provide:

Underinsurance –

Applicable only if Average Clause is shown as Applicable under Application of Warranties & Additional Conditions.  The meaning of the Average Clause is as defined below to comply with the Insurance Law Reform Act 1985.

Average can only apply if the Insured Property insured by the Certificate of Insurance is underinsured at the time of the Loss and in such event the following rules apply:

a)   If a total loss, the provision will have no effect.

b)   If a partial loss, the maximum amount recoverable will bear the same proportion  to  the  actual  loss  as  the  amount  for  which  the  Insured Property is insured bears to the full value of the Insured Property.

c)   Whatever the loss, in no case will payment be greater than the amount for which the Insured Property is insured.

Example:  If Insured Property is worth $20,000 and insured for $10,000 in the event of a loss of $5,000, as the Certificate of Insurance is “Subject to Average” the maximum amount recoverable will be $2,500.

….

Average Clause –

Applicable  if  at  inception  or  latest  renewal  of  this  Certificate  the valuation is greater than 3 years old.

a)   (Omitted)

b)   In respect of loss by earthquake, if the sum insured is less than 90% of the value of the Insured Property at the time of any loss or damage, the Company will not pay the full amount of the loss.  Instead, the amount payable will be such proportion of the loss as the sum insured bears to the value of the Insured Property.   For the purpose of this clause, the basis  of  valuation  is  to  be  the  same  as  would  be  used  under  this Certificate to  determine  the  amount  of loss  following destruction  of Insured Property.

[133]   Mr  Kennedy  submitted  that  for  present  purposes  there  is  no  material difference between these two clauses and I did not understand Mr Gray to express a contrary view.

[134]   Mr Kennedy noted that the Average clause provides a formula by which the insured’s actual recovery is calculated (if less than a total loss).  The formula is able to be expressed as follows:

Sum Insured

x        Amount of loss   =  Actual recovery

Value of property

[135]   The plaintiff argues that the measure of value of the property should be the depreciated replacement cost of the New Brighton Mall as at 21 February 2011, estimated to be $4,580,000.   The defendants argue that the measure of the value should be the full replacement cost as at 21 February 2011, estimated at $9,569,320. If the plaintiff’s approach is accepted the proportion of actual recovery is limited to

67.03 per cent ($3,070,000/$4,580,000) of the amount of loss.   If the defendants’ approach is accepted, the proportion of actual recovery is limited to 32.08 per cent ($3,070,000/$9,569,320) of the loss.

[136]   The correct approach depends on what is meant by the “value of the Insured Property”  as  those  words  appear  in  paragraph  (b)  of  the Average  clause.    The plaintiff says that the meaning is to be derived from paragraph (b) of the Average clause itself which provides that the basis of valuation is to be the “same as would be used under this Certificate to determine the amount of loss following destruction of Insured Property”.   Mr Kennedy submits that this has the consequence that the calculation of the value of the insured property will depend on the basis on which the insured elects to be indemnified.

[137]   However, Mr Gray contends that while that approach would be consistent with the plaintiff’s overall argument on the meaning of the policy, it is inconsistent with the proper interpretation of the policy as a whole and with the purpose of an under-insurance clause.   I have already held against Mr Gray on the interpretation issue.   As to the purpose, he argued that in order to ensure that a premium is commensurate with the risk undertaken, insurers require the insured to obtain a valuation of the insured property using the same measure as the basis of settlement under the policy.   In the case of a replacement policy such as the present, they require a replacement cost valuation at the proposal stage which is used to set the premium.    The  second  approach  is  by  means  of Average  clauses  such  as  the

present.65

[138]   Mr Gray described the present policy as a “replacement policy”, with the default basis of settlement being the cost of reinstatement;  the insured must elect not to reinstate if the “lesser” alternative of an indemnity value payment is to apply. Unless this approach were taken, the insurer would not know at the time of the proposal what their potential liability would be.

[139]   The difficulty with Mr Gray’s argument is that had the Average clause been intended to relate only to the cost of reinstatement, it could have provided for that

65     Kelly and Ball, above n 5, at [12.0130].

outcome in clear terms.  Instead, the drafting approach adopted was to refer to the basis of valuation that would be used to determine the amount of loss following destruction.  That language was apt to embrace not only reinstatement, but also the situation that would apply if the insured elected not to reinstate.

[140]   I  am  not  persuaded  that  the  approach  for  which  Mr  Gray  contends  is necessary for the practical reasons on which he purported to rely.  While it would give  the  underwriter  more  certainty  in  setting  the  amount  of  the  policy  at  the proposal stage, the underwriter knows that it needs to determine a premium for a policy that might or might not involve reinstatement and can assess its risk position on that basis.  In any event, I consider that the plaintiff’s argument accords with the wording used in the Average clause.

[141]   Consequently, where the Reinstatement of Property memorandum does not apply, the plaintiff can properly proceed on the basis of the depreciated replacement cost.   I understand that on the basis of the figures set out in paragraph 20 of the agreed statement of facts, the result would be a figure just in excess of the relevant sum insured which would mean that that sum would apply.

[142]   This conclusion means that the value of the insured property for the purposes of the Average clause will reflect the basis or recovery elected by the plaintiff in respect of covered damage to that property.  If the plaintiff elects not to reinstate the insured  property,  the  answer  to  the  second  question  will  be  no,  based  on  the estimates contained in paragraph 20 of the agreed statement of facts.

Summary

[143]   I grant leave to file the amended statement of claim in the form of the draft

attached to the plaintiff ’s submissions of 24 July 2013.

[144]   The first question is answered as follows:

The defendants’ liability to indemnify the plaintiff for the separate damage caused to the insured properties by the September earthquake is limited to the sums that had already been paid at the time of the February earthquake. Thereafter, the liability is limited to the maximum amount set out in the Schedule as the sum insured for each building.  For the avoidance of doubt,

that  amount  would  be  the  full  sum  insured,  without  deduction  for  the

September payments.

[145]   The second question is answered as follows:

The value of the insured property for the purposes of the Average clause will reflect the basis of recovery elected by the plaintiff in respect of covered damage to that property.   If the plaintiff elects not to reinstate the insured property, the answer to the second question is no, based on the estimates contained in paragraph 20 of the agreed statement of facts.

Costs

[146]   I reserve questions of costs.

[147]   If there is any issue about costs that cannot be resolved by agreement the parties should file memoranda within 25 working days of delivery of this judgment.