Mathieson v Tower Insurance Limited

[2020] NZHC 136

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2019-409-000572

[2020] NZHC 136

BETWEEN

NEIL CAMPBELL MATHIESON and

MOIRE MATHIESON as Trustees of the CLAN MATHIE TRUST
Applicants

AND

TOWER INSURANCE LIMITED

Respondent

Hearing:	5 November 2019
Appearances:	G Jones and L Hill for Plaintiffs M Smith for Defendant
Judgment:	11 February 2020

JUDGMENT OF DUNNINGHAM J

This judgment was delivered by me on 11 February 2020 at 3.30 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Introduction

[1]    The plaintiffs own a large, century-old home, known as “Stoneycroft”, which was significantly damaged by three successive earthquakes in the Canterbury earthquake sequence of 2010-2011. They have made claims against their insurer, Tower Insurance Ltd (Tower), in respect of each event, for the cost of repairs, up to the cap set in the policy.

MATHIESON v TOWER INSURANCE LIMITED [2020] NZHC 136 [11 February 2020]

[2]    However, Tower says it is only required to make one payment up to the cap set by the policy, which it has done.

[3]    The claim by the plaintiffs for additional payment under the policy is being pursued in the Canterbury Earthquakes Insurance Tribunal.1

[4]    The primary dispute between the parties turns on interpretation of the insurance policy. For that reason, the Tribunal has referred the following questions to this Court for its opinion, pursuant to s 53 of the Canterbury Earthquakes Insurance Tribunal Act 2019 (the Act):

(a)The policy contains a warranty that the “maximum sum insured is

$455,000” (the $455,000 Cap). Is the $455,000 Cap (less EQC payments) an overall cap on the amount that the Trust can recover under the policy or does it apply as a cap per earthquake event?

(b)The policy limits the present day value recovery under the policy to “the market value of the property less the value of the land as an unoccupied site” (the Market Value Cap). Is the Market Value Cap (less EQC payments) an overall cap on the amount that the Trust can recover under the policy, or does it apply as a cap per earthquake event?

(c)Or, does the policy apply in some way other than as set out in (a) or (b)?

The proceeding in the Tribunal is adjourned until this Court provides its opinion on the case.

[5]    The plaintiffs accept that if the question is answered in Tower’s favour, the claim in the Tribunal cannot go further. If, however, the question is answered in the plaintiffs’ favour, there may be additional issues of quantification to resolve in that forum.

1      A specialist Tribunal established by the Canterbury Earthquakes Insurance Tribunal Act 2019.

Relevant background

[6]    The case stated for the opinion of this Court was accompanied by an agreed statement of facts. For the purpose of this case, the following background is relevant.

[7]    The plaintiffs are the current trustees of Clan Mathie Trust (“the trustees”), a family trust which owns the house that is the subject of the claim. The house is a large two-storey residential building of 490 square metres situated in Seamount Terrace, Mount Pleasant, Christchurch.

[8]    The trustees insured the house with Tower during the relevant insurance periods, being 6  May  2010  until  6  May  2011,  and  again  from 6  May  2011  to 6 May 2012. The house was insured under a Tower Insurance Provider House Policy. The same policy wording applied in both policy periods.

[9]Particulars of the cover stated in the policy schedules were as follows:

(a)Name of insured  Clanmathie (sic) Trust

(b)Situation:  22A Seamount Terrace, Mount Pleasant, Christchurch

(c)Sum Insured:  Present Day Value

(d)Cover selected:  House Maxi Protection

(e)Excess  $150.00

(f)Interested Parties:  Kiwibank Ltd; Clanmathie (sic) Ltd as trustee of the Clanmathie (sic) Trust being the owners

(g)Standard clauses and warranties:       Warranted that the maximum

sum insured is $455,000.

The terms of the policy were otherwise as provided in the standard Provider House Policy terms and conditions.

[10]   The term “present day value” which was identified as the sum insured was defined in the policy as follows:

Present Day Value means the cost at the time of the loss or damage of rebuilding, replacing or repairing your house to a condition no better than new and up to the same area as shown in the certificate of insurance, plus any decks undeveloped basements, carports and detached domestic outbuildings, less an appropriate allowance for depreciation and deferred maintenance, but limited to the market value of the property less the value of the land as an unoccupied site.

[11]   On 4 September 2010 the house suffered damage as a consequence of the earthquake centred near Darfield in Canterbury (the September earthquake). The trustees lodged claims with the Earthquake Commission (EQC) and Tower in respect of the damage caused by the September earthquake. EQC initially assessed the cost to repair the damage at $48,840, but has since accepted that the damage was over the statutory cap of $100,000 plus GST, and has paid the trustees up to the cap.

[12]   Except for minor emergency repairs, the damage from the September earthquake remained unrepaired when the house suffered further damage from the  22 February 2011 earthquake. Again, claims were lodged with EQC and Tower, and EQC paid the trustees up to the statutory cap of $100,000 plus GST. On 6 May 2011, the Tower policy was renewed until 6 May 2012.

[13]   The house was still not repaired when, on 13 June 2011, the house suffered further earthquake damage. Again, claims were lodged with EQC and Tower, and again EQC paid up to its statutory cap of $100,000 plus GST.

[14]   The damage from all three earthquakes remains unrepaired, although the house is not damaged beyond repair.

[15]   The trustees have engaged independent experts to assess the damage and the cost to repair it.   They conclude that it would cost $3,030,028.48 plus GST,  as at     2 August 2017, to repair the damage.

[16]   The market value of the house (that is, the market value of the property less the value of the land as an unoccupied site), as at 3 September 2010, was $580,000.

[17]In a letter dated 9 July 2019, Tower advised its position on the claim as follows:

(a)the insurance policy was a “present day value policy” and that meant that the cover available was the lesser of:

(i)the cost at the time of the loss or damage of repairing the house to a condition no better than new, less an appropriate allowance for depreciation and deferred maintenance; or

(ii)the market value of the property less the value of the land as an unoccupied site.

(b)Tower’s liability therefore is, at most, market value less the amount the trustees have already received from EQC;

(c)The policy stipulation that “warranted that the maximum sum insured is $455,000” could further restrict the trustees’ recovery rights.

[18]   The primary issue in dispute is whether the maximum sum insured, $455,000, can be claimed once or in each earthquake event. Related to that is whether, if it can be claimed more than once, the market value of the house, as defined, is an overall cap on the insurer’s liability?

Submissions

[19]The trustees’ case, in summary, is that:

(a)the Market Value Cap sets a limit on Present Day Value;

(b)the $455,000 Cap also sets a limit on the sum insured, but does not render it a “valued policy”;

(c)both the $455,000 Cap and the Market Value Cap reset after each loss;

(d)the $455,000 Cap, being the lower amount, sets the relevant limit of Tower’s liability to indemnify for each loss;

(e)the $455,000 Cap is net of EQC payments so Tower’s liability is to pay a contribution of up to $340,000 (less excess) in respect of each loss.

[20]   The trustees accept that the policy is an indemnity policy. Thus, unlike many New Zealand house insurance policies, it does not provide cover for full replacement value, or for reinstatement to a condition “as when new”.2 Because it is an indemnity policy it precludes the trustees from recovering more than the loss caused by the insured event.3

[21]   However, Mr Jones submits that in accordance with the findings in Ridgecrest NZ Ltd v IAG New Zealand Ltd, the trustees are entitled to claim for all three sets of damage subject to the following three limits:4

(a)there should be no double-counting;

(b)each event gives rise to an entitlement to claim up to the specified cap on liability; and

(c)the total of all claims can not exceed the replacement cost of the building.

[22]   While accepting this is an indemnity policy the trustees submit that there is a difference between the measure of indemnity as between “valued” and “unvalued” policies. The phrase “sum insured” does not amount to an agreed valuation thereby rendering this a valued policy, but merely fixes the maximum sum for which the insurer can be liable on a claim. As a consequence, the sum insured represents the

2      As observed by Asher J in O’Loughlin v Tower Insurance Ltd [2013] NZHC 670; [2013] 3 NZLR 275 at [39].

3      Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117 at [50]; Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZSC 158; [2017] 1 NZLR 352 at [30].

4      Ridgecrest NZ Ltd v IAG New Zealand Ltd, above n 3.

maximum amount for which the insurer will be liable and the only obligation is to indemnify the insured up to this figure. The $455,000 is merely a cap on Tower’s liability to indemnify for each loss.

[23]   To support the argument on how an indemnity policy should respond to loss Mr Jones also refers to the decision in Prattley Enterprises Ltd v Vero Insurance  New Zealand Ltd, where the Supreme Court found:

(a)what is required by way of indemnity will vary depending on the circumstances; and

(b)where the property is to be repaired or reinstated, the estimated costs of repair would usually provide a better basis for calculating loss, and any betterment to the insured can be avoided by an allowance for depreciation.5

[24]   Mr Jones then relies on the approach adopted by the Court of Appeal  in  QBE Insurance (International) Ltd v Wild South Holdings Ltd as to how the indemnity principle should operate in cases where damage from an event is not remedied by the time of the subsequent event causing further damage.6 He focuses particularly on the examples given by the Court of how reinstatement of cover and the indemnity principle operate, as set out at [55]-[58] and [87]-[89] of that decision. In particular, he points out that the Court accepted that the total amount claimable could exceed the sum insured, saying:7

[87]      In the example given … above, we assume that the cover cancelled by loss upon event #1 was $3m and the sum insured of $8m was available for a future event #2.

[88]      Now suppose that later in the policy term event #2 happens, causing additional loss of $7m, again in the form of reinstatement costs. Assume the unrepaired loss from the accumulated damage is $9m, somewhat less than would be the case if separately remedied. That sum is the insured’s actual loss, it is the amount the insured will spend to reinstate the property to the policy standard. The insured may claim that sum notwithstanding that it exceeds the sum insured of $8m, because the amount claimed results from two

5      Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd, above n 3.

6      QBE Insurance (International) Ltd v Wild South Holdings Ltd [2014] NZCA 447; [2015] 2 NZLR 24.

7      At [87]-[88].

events the loss from each of which was less than the sum insured. The amount claimed is also less than the total replacement value of the policy, $12m.

[25]   Applying those principles to the present case Mr Jones says that the trustees’ house was insured to a limit of $455,000, which reinstates, and on each occasion the trustees were entitled to claim up to the limit of $455,000. The trustees acknowledge that such resetting of the policy can not continue indefinitely and that, ultimately, should the cost of repairs exceed the replacement cost, the replacement cost sets the upper limit of the defendant’s policy exposure in accordance with the principles set out in Ridgecrest.8

[26]Thus, allowing for EQC payments, the trustees’ maximum claim on Tower is

$1,020,000 less excesses. As that still leaves the trustees with some $2,100,000 in uninsured repair costs, their case does not offend the indemnity principle. The trustees also accept that if the repairs resulted in a house being worth more than it was pre-earthquake, the indemnity principle might require some reduction in Tower’s obligation to pay, but that is an issue which is outside the question which is referred to this Court for determination.

[27]In summary, the trustees say the questions should be answered as follows:

(a)Does the $455,000 Cap apply per earthquake event?

Yes it does. This is not a valued policy; the $455,000 Cap merely caps the insurer’s liability and the policy expressly provides for automatic reinstatement.

(b)Is the Market Value Cap an overall cap on the amount that the Trust can recover, or is it a cap per earthquake event?

No, it is not an overall cap. The Market Value Cap resets on each event and, absent the $455,000 Cap, the sum insured per event was limited to the Market Value Cap.

8      Ridgecrest NZ Ltd v IAG New Zealand Ltd, above n 3.

Tower’s submissions

[28]   Tower addresses the questions in the reverse order from the order which they were posed. It says the question of whether the trustees’ entitlement is capped at the market value of the house across the earthquake sequence, or whether it can recover up to the market value in respect of each earthquake, is answered in Tower’s favour by the Supreme Court judgments in Ridgecrest and in Prattley.9 It says that an insured’s entitlement cannot exceed what it would be entitled to on a total loss of a property which here, as in Prattley, is the market value of the house.

[29]   In respect of the first question, which considers whether the stipulation that the maximum sum insured is $455,000, caps the trustees’ entitlement at $455,000 across the earthquake sequence, or caps it in respect of each earthquake, Tower submits that the proper interpretation is that it provides an agreed cap to Tower’s market value exposure for this house. As a consequence, Tower argues that it is not obliged to pay the trustees more than $455,000 across the entire earthquake sequence. However, if the Court finds that the $455,000 cap resets after each earthquake, then its overall entitlement is restricted to the market value of the house, being $580,000 across the earthquake sequence.

[30]   In making this submission, Tower focuses on the fact that the sum insured is stipulated to be present day value and such cover is expressly limited to the market value of the house. Mr Smith submits that applying Ridgecrest10 and Prattley11, it would be contrary to the indemnity principle for the trustees to receive more than the market value of the house (plus any repair costs actually incurred in respect of the earlier earthquakes, before the final earthquake). The concept that the insured should not recover more than it has lost, that is, “what the building was worth when the sequence of earthquakes started”, applies in the present case.12

[31]Thus, Tower submits the questions should be answered as follows:

9      Ridgecrest NZ Ltd v IAG New Zealand Ltd; Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd, above n 3.

10     Ridgecrest NZ Ltd v IAG New Zealand Ltd, above n 3.

11     Prattley Enterprieses Ltd v Vero Insurance New Zealand Ltd, above n 3.

12     Citing Prattley at [48].

(a)Does the $455,000 Cap apply per earthquake event?

No it does not. The $455,000 Cap is an overall cap on the amount that the Trust can recover under the policy, not a per event cap, because the natural and ordinary interpretation of the warranty that the maximum sum insured is $455,000 is that it operates as a warranty to the maximum market value of the house.

(b)Is the Market Value Cap an overall cap on the amount that the Trust can recover or is it per earthquake event?

If the $455,000 is not the overall cap, then, yes, the market value (less EQC payments) is an overall cap on the amount that the Trust can recover under the policy.

Legal principles applying

[32]   The parties agree that this is an indemnity policy. This means “that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified”.13 However, beyond that, the question of how the policy is to respond in the present case rests on the interpretation of the contract. As is said by the authors of Insurance Claims in New Zealand; “the policy pays what it says it will pay”.14

[33]   The New Zealand approach to interpretation of insurance contracts (on deciding what a policy says it will pay), was succinctly explained in O’Loughlin v Tower Insurance Ltd as follows:15

In New Zealand, insurance contracts are interpreted in the same way as all other contracts. There are no special rules that apply. Thus, the initial focus  is on the words and the plain meaning. The context of the words in the policy and the matrix of surrounding facts are also relevant to the process of interpretation. While it makes sense to start with the actual words of the contract, there is no presumption in favour of ordinary meaning. A meaning that appears plain and unambiguous when devoid of context may not

13     Castellain v Preston (1883) 11 QBD 380 (CA) at 386.

14     Paul Michalik and Christopher Boys Insurance Claims in New Zealand (LexisNexis, Wellington, 2015) at 40.

15     O’Loughlin v Tower Insurance Ltd, above n 2, at [35].

ultimately be what the parties intended when considered in that context and other relevant circumstances. The doctrine of contra proferentem by which a Court may resolve a clear ambiguity against the party who prepared the contract can be applied.

(footnotes omitted)

Discussion

[34]   Applying these principles to the contract in question, the parties accept that if damage occurred to the house under the policy as a result of a single event, the maximum that the trustees could have claimed was $455,000, less the policy excess, and less any amount paid by EQC in the case of earthquake damage. The sum insured is “present day value” and the final part of the definition of “present day value” limits the amount payable to the market value of the house. That is then further limited by the contractual warranty which expressly provides that “the maximum sum insured is

$455,000”.

[35]   Where the parties diverge is whether the maximum sum insured can be repeatedly claimed, on successive losses, to put towards reinstatement of the house as long as such payment does not result in betterment to the home owner (with the trustees acknowledging that any betterment would be recoverable by the insurer).

Is the $455,000 a per event limit?

[36]   The trustees’ view that $455,000 was a per event limit relied on the reasoning in Ridgecrest,16 where it was held that the sum of $1,984,000 was a per event limit and could be repeatedly claimed, so long as there was no double-counting, and so long as it did not exceed the replacement value of the building.

[37]   However, I consider there are clear distinctions to be made between the policy in Ridgecrest and the present case. In Ridgecrest, the limit specified was clearly expressed to be “the maximum amount you can claim under any Part [of the policy] in respect of one happening”.17 That can be contrasted with the present policy where it is expressed as a cap to the sum insured. Furthermore, in Ridgecrest, the policy

16     Ridgecrest NZ Ltd v IAG New Zealand Ltd, above n 3.

17 At [7].

provided for both indemnity and replacement cover (the latter being dependent on repair or replacement actually being carried out), but the terms of the policy precluded the recovery of more than the replacement value of the property.

[38]   In interpreting the contract, the Court considered the fact the limit applied “in respect of any one happening” allowed successive claims up to the cap of replacement value.18 That is not the case here. There is nothing to suggest that the sum of $455,000 is a per event limit, rather it is the limit on the sum insured, which is clearly expressed to be indemnity value only. The only way a second claim could be made within the term of the policy is where the damage for the first claim is repaired before a second claim is made, or where the present day value  of repairing the damage from the   first claim is less than $455,000.

[39]   The policy provides for automatic reinstatement of cover although, unlike the examples in Wild South Holdings Ltd, it is not reinstated “from the date of loss or damage”19 but “after we [Tower] meet any claim”. That supports my view that there is no automatic reinstatement of the sum insured on each loss. Rather, the parties intended that reinstatement would occur when the first claim had been settled and the parties had the opportunity to consider whether to cancel or to reinstate the policy.

[40]   Thus, the sum of $455,000 is not a per event limit, but a limit on the sum insured by the policy.

Is the market value of the house an overall cap on the amount the Trust can recover?

[41]   In this case, where the sum of $455,000 was an express limit on the sum insured during the policy period rather than a per event limit, the insured can only be paid out a maximum of $455,000 in a policy period, unless the house has been repaired.

[42]   However, I consider a different approach must be taken when the insurance policy  was  renewed  on  6  May  2011  as  renewal  results  in  a  fresh  contract  of

18 At [7].

19     QBE Insurance (International) Ltd v Wild South Holdings Ltd, above n 6, at [22].

insurance.20 However, again, Tower was only obligated to pay for the loss of present day value, as defined, in respect of a claim and, again, that was subject to the limit of

$455,000.

[43]   Putting that in practical terms, when Tower agreed to insure the house again on 6 May 2011, it must be taken to have made a fresh agreement to pay up to the market value of the already damaged house, or $455,000, whichever was the lesser. If the damage which occurred up to 5 May 2011 had reduced the market value of the house to zero (in other words, the property could only be sold for its land value), there was, arguably, no consideration provided by Tower for the contract.21 However, if the house had some residual market value at 6 May 2011 and there was a diminution in the value of the house following the June 2011 earthquake, the trustees would be entitled to an additional payment of the difference between the $455,000 payment to which they became entitled to the year prior (being the maximum sum insured under the warranty) and the market value of the house, which is the express measure of indemnity under the contract. The total of the two payments could not exceed $580,000 of the house, as that is the measure of indemnity.

[44]   Thus, the answer to the second question is yes. However, a further payment could only be made in respect of the June 2011 earthquake if the house had some residual market value at the commencement of the second period of insurance, and the loss of market value of the house in that period exceeded the payment received from EQC in respect of that damage.

Outcome

[45]In summary, the questions are answered as follows:

(a)Is the $455,000 Cap (less EQC payments) an overall cap on the amount that the Trust can recover under the policy, or does it apply as a cap per earthquake event?

20     Robert Merkin and Chris Nicoll. Colinvaux’s Law of Insurance (11th ed, Sweet and Maxwell, London, 2016) at 1-078.

21     Although the house no doubt needed to be insured to be entitled to the EQC payment.

I have found that $455,000 is an overall cap on the amount the insured can claim within one policy period. There remains a residual possibility, dependent on the facts (albeit it seems unlikely), that a further payment could be made in the second policy period to take the total payments (less EQC payments) up to $580,000.

(b)Is the Market Value Cap (less EQC payments) an overall cap on the amount that the Trust can recover under the policy, or does it apply as a cap per earthquake event?

The market value is not a cap per earthquake event. However, in the unlikely event discussed above,  that  the  losses  incurred  in  the  first period of insurance did not reduce the market value of the house to zero, and a further claim for damage  was  made  following the June 2011 earthquake, then the market value would operate as an overall cap on the amount that the Trust could recover from the insurer.

[46]   As these answers cover the issues raised, I  do  not  need  to  answer  the  third question. Therefore, in practical terms, therefore, Tower has succeeded in its argument that the $455,000 is not claimable per earthquake event.

[47]The question of costs is reserved.

Solicitors:

Themis Law, Tai Tapu Gilbert Walker, Auckland