Toomey v IAG New Zealand Limited

[2019] NZHC 2882

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2017-409-000659

[2019] NZHC 2882

BETWEEN

JEROME ANTHONY TOOMEY and JOSIE LOUISE SIMPSON and CANTERBURY

TRUSTEES (2016) LIMITED as trustees of the TOOSIM FAMILY TRUST

Plaintiffs

AND

IAG NEW ZEALAND LIMITED

Defendant

Hearing:

11 October 2019

Appearances:

C Johnstone and B Burke for Plaintiffs

M Ring QC and R Hargreaves for Defendant

Judgment:

6 November 2019

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me at 10.00 am on 6 November 2019 pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors:

Harmans Lawyers

Duncan Cotterill, Auckland

TOOMEY, SIMPSON and CANTERBURY TRUSTEES (2016) LTD as trustees of the TOOSIM FAMILY TRUST v IAG NEW ZEALAND LTD [2019] NZHC 2882 [6 November 2019]

Introduction

[1]    The trustees of the Short Family Trust (Short) owned a property at 11 Jacob Street, Christchurch (Jacob Street) that suffered earthquake damage in the Christchurch earthquakes. Jacob Street was insured with IAG under a policy that provided claims would be settled by IAG meeting reinstatement costs in the event Short elected to restore the home (the reinstatement benefit), or, otherwise by an indemnity value payment.

[2]    Short made claims to the Earthquake Commission and IAG in respect of the earthquake damage and the claims were settled and repairs were carried out.

[3]    The trustees of the Toosim Family Trust (Toosim) purchased Jacob Street from Short and took an assignment of any residual rights that Short had in respect of any insurance claim made, or that might arise, from the Christchurch earthquakes. Toosim later discovered that Jacob Street had suffered undiagnosed earthquake damage (the Underfoot damage).

[4]    Toosim’s claim is to be paid the reinstatement benefit to repair the Underfoot damage. IAG applies to strike out the statement of claim or, alternatively, summary judgment against Toosim. In reliance upon the Supreme Court decision in Xu v IAG New Zealand Ltd,1 IAG argues that Toosim has no reasonably arguable cause of action because, as at the date of the assignment, Short had not incurred the cost of restoring the home to repair the Underfoot damage so as to satisfy the condition of the reinstatement benefit, nor did Short have any accrued right to any payment from IAG pursuant to the reinstatement benefit in respect of the damage.

[5]    IAG also contends that Toosim has no alternative claim to an indemnity payment under the policy as Short did not suffer any indemnity value loss which Toosim, as assignee, can recover from IAG.

1      Xu v IAG New Zealand Ltd [2019] NZSC 68.

The facts

[6]    Short acquired Jacob Street on 23 October 2009. Jacob Street was insured with IAG under a BNZ PremiumCare insurance policy. There was a change to the policy wording from 27 November 2010 (BNZ 2010 policy). It is agreed that for present purposes the change is immaterial.

[7]The BNZ 2010 policy wording reads:

Part One – cover for your home What you are covered for:

You are covered for sudden and accidental loss to the home during the period of insurance.

What you are not covered for:

…

Earthquake Commission

You are not covered for loss to the extent it is covered by the Earthquake Commission Act or that would have been covered but for:

1.the deduction of the Earthquake Commission’s excess, or

2.the Earthquake Commission exercising its power to decline a claim for that loss.

Where the Earthquake Commission agrees to cover it, but your loss exceeds the Earthquake Commission payment, the most we will pay is the difference between what the Earthquake Commission pays, or would have covered, and your maximum entitlement under this Section 1 – Home Insurance.

…

What we will pay:

Repair or rebuilding costs

If you repair or rebuild the home, following a loss covered by this Section 1

– Home Insurance, we will pay either:

1.the repair cost for the damaged part of the home, using current materials and methods, where in our opinion it is able to be economically repaired, or

2.the rebuilding cost, using current materials and methods, to a condition as similar as possible to when it was new, where in our opinion the home cannot be repaired.

If you do not repair or rebuild the home, we will pay the value of the loss, based on the present value of the home.

[8]    Jacob  Street  was  damaged  by  earthquakes  on  4  September  2010  and  22 February 2011. At that time, Short notified claims to the Earthquake Commission.

In 2013, Fletcher EQR carried out repairs. A description of the works was given to IAG.

[9]    Short also notified claims to IAG in November 2011 and December 2012 in respect of damage to a concrete patio, a driveway and pathways. IAG cash settled these claims and Short paid its own contractor to do the repairs. IAG also paid temporary accommodation and pet-care costs to Short and costs of loss adjusters and project managers.

[10]   By an agreement dated 22 May 2016, Toosim purchased Jacob Street at auction with settlement and possession occurring on 25 July 2016. The purchase price was

$985,000. The agreement recorded that Short had no outstanding claims with EQC for damage resulting from the Christchurch earthquakes and that the earthquake- repairs had been completed. Short agreed to assign “any residual entitlement under the claims” to Toosim on settlement.

[11]   On settlement, Short executed a deed of assignment. The recitals record that both EQC and insurance claims made in respect of earthquake-damage had been settled. It stated (cl 1) that Short “assigns absolutely” to Toosim:

… all of [Short’s] residual right, interest and title to the EQC Claim and Insurance Claim, and any other claims that may arise under the policy in relation to the earthquakes, and the resulting proceeds …

[12]   In June 2017, Toosim received a report from Underfoot Services Ltd identifying that Jacob Street had suffered previously undiagnosed earthquake-damage, including to its foundations, piles, bearers and floor levels (the Underfoot damage).

[13]   In March 2018, EQC accepted the 2013 works were scoped inadequately and were defective and cash settled its liability for this newly discovered damage, subject to statutory limits.

[14]   Toosim also gave notice to IAG of the Underfoot damage, but IAG denies that it is liable to pay any of the costs of repair.

IAG’s applications

[15]   There are two applications before the Court. The first application is for strike out of the statement of claim under r 15.1 High Court Rules. Rule 15.1 of the High Court Rules 2016 provides:

The court may strike out all or part of a pleading if it –

(a)     discloses no reasonably arguable cause of action, defence, or case

appropriate to the nature of the pleading…

[16]   The principles that apply to strike out applications are not in dispute. The pleaded facts, whether admitted or not (except those that are entirely speculative and without foundation), are assumed to be true. The applicant must show that the pleaded cause of action is plainly untenable and cannot succeed.2 The discretion to strike out should be used sparingly and only in a clear case where the court is satisfied that it has the requisite material and the necessary assistance from the parties to reach a definite and certain conclusion.3

[17]   In the alternative, IAG seeks summary judgment. IAG needs leave to pursue that application out of time but the granting of leave is not opposed and is granted. To obtain summary judgment, IAG must show that on the undisputed and/or undisputable material facts, Toosim will not, and cannot, succeed.

[18]   At this juncture, I will deal with one area of difference between counsel as to the appropriate scope of the arguments on these applications. Mr Ring argued that Toosim’s claim must necessarily fail whether the relief sought is for reinstatement costs or the costs of repairs up to the level of indemnity. Mr Johnstone objected on the basis that a challenge to Toosim’s right to an indemnity value payment had not been raised in the applications. I do not accept Mr Johnstone’s submission. The statement of claim does not plead any claim for an indemnity value loss. It alleges an entitlement to the reinstatement costs. In making his submission, Mr Ring was responding to a draft amended statement of claim presented with Mr Johnstone’s submissions that seeks, in the alternative, an indemnity value payment. Mr Ring’s

2      Attorney General v Prince [1998] 1 NZLR 262.

3      Couch v Attorney General [2008] NZSC 45; [2008] 3 NZLR 725 at [33].

point was that regardless of how it presents its case, the deficiencies in Toosim’s statement of claim cannot be remedied by amendment. That is a point he was clearly entitled to advance.

The issue

[19]   The issue is whether Toosim could ever succeed at trial in proving that it is entitled to a payment from IAG pursuant to the reinstatement benefit, if it proceeds to incur the cost of repairing the Underfoot damage. IAG argues that this issue has been authoritatively determined in Xu, upholding the Court of Appeal’s judgment in Bryant v Primary Industries Insurance Co Ltd.4

[20]   The facts of Xu were that the Barlows were the owners of a house in Christchurch that was damaged in the Christchurch earthquakes. They held insurance against loss caused by such damage under a policy underwritten by IAG. The policy provided claims would be settled based on either an indemnity payment or by IAG meeting reinstatement costs in the event the insured elected to restore the home. The Barlows made a claim under the policy but then sold the property before the claim was settled. They assigned to the purchasers their rights in respect of their claim under the policy. At issue was whether the reinstatement benefits were assignable to entitle the purchasers to reinstate and be reimbursed.5 It was common ground that as at the date of the assignment the Barlows “had not restored, and did not intend to restore, their home and had not incurred, and would not incur, any actual costs of reinstatement of their home.”6

[21]   A majority of the Supreme Court held that under the terms of the policy the entitlement to the reinstatement benefits was conditional on reinstatement by the Barlows. It followed that when the Barlows sold the property without personally incurring the cost of repairs, it did not matter what rights in respect of the reinstatement benefit they purported to assign because the purchasers could not recover costs

4      Bryant v Primary Industries Insurance Co Ltd [1990] 2 NZLR 142 (CA).

5      Xu v IAG New Zealand Ltd, above, n 1, at [4].

6 At [4].

personally incurred to repair the home, only the costs of repair incurred by the Barlows.

[22]   The minority considered that whilst the reinstatement benefit was conditional upon reinstatement being effected, the right to payment for the loss arose at the time of the earthquakes and could be assigned, even though the basis for calculation of the payment depended on whether the property was reinstated or not. On this basis, it did not matter whether reinstatement was undertaken by the Barlows or the purchasers.

[23]   The majority rejected the minority view, holding that the “right” of the Barlows to reinstatement benefits was “highly contingent (as subject to a condition which might never be satisfied).” It was therefore not apt to describe this as an “already accrued right.”7

Toosim’s argument

[24]   Toosim accepts that the BNZ 2010 policy wording is “caught” by the Supreme Court’s ruling in Xu. This is clearly correct as the key provisions required to engage Xu are:

(a)The insured’s entitlement to the reinstatement benefit is conditional upon

reinstatement by the insured; and

(b)If the insured does not reinstate the property, indemnity cover is available.

[25]   Toosim also accepts that under the BNZ 2010 policy wording the reinstatement benefit cannot be assigned in the absence of reinstatement by Short. However, it says, Short satisfied the condition and triggered the reinstatement benefit by acting to reinstate the property in 2013 or 2014, or both. Toosim argues that once the reinstatement benefit was triggered, it did not then matter whether the reinstatement costs were incurred by Short or Toosim. The matter to be decided, Toosim says, is

7      At [45]-[46].

how the conditional requirement for the payment of the reinstatement benefit can be satisfied and whether that contingency has been met in this case.

[26]   Xu, Toosim argues, does not deal with a case of partial or incomplete reinstatement, as occurred in this case, and it was central to the court’s reasoning that no building work of any kind had been undertaken to repair damage. Toosim relies upon [45] of the majority’s judgment, where it was said:

… we think Bryant is still correct to the extent that it stands for the proposition that the entitlement to replacement benefit conditional upon reinstatement by the insured cannot be assigned where no such reinstatement has occurred.

[27]   The phrase “no such reinstatement” can only mean, Toosim argues, that no building work of any type, whether to rebuild or repair, has been undertaken, and this is consistent with the decision in Bryant, where the vendor had done no work to reinstate fire damage prior to the sale of the property.

[28]   Toosim also argues that IAG was aware of Short’s election to reinstate and that the repairs that IAG paid for to the patio, paths, and driveway constitute reinstatement under the policy. As IAG cash-settled Short’s claims for the actual cost of repair it cannot now deny the reinstatement benefit was triggered.

[29]   Mr Johnstone submitted that it was relevant that there was no policy stipulation that all damage must be repaired before IAG will make payment of the reinstatement benefit nor is there a requirement that the build costs be paid in full by the policy- holder. He referred to earthquake-list case law in Medical Assurance Society v East8 and Parkin v Vero Insurance New Zealand Ltd,9 which does not require building works to have been completed, invoiced and paid by the policy-holder before reimbursement.

[30]   In any case, Toosim argues, if it has no entitlement to the reinstatement benefit it has a claim for indemnity based on present value and that alternative level of cover cannot be dismissed as untenable.

8      Medical Assurance Society v East [2015] NZCA 250.

9      Parkin v Vero Insurance New Zealand Ltd [2015] NZHC 1675.

Application of Xu

[31]   I consider the facts of this case are indistinguishable in any relevant respect from the facts in Xu. The essential facts in both cases involve:

·A home insured for replacement value where payment of the reinstatement benefit was payable when restoration costs were incurred by the insured, otherwise indemnity cover was available;

·The home was damaged by an insured peril;

·The home was sold with an assignment of the right to the proceeds of claims made, or entitled to be made, on the insurer;

·The insured did not and will not incur the costs to reinstate the damage existing as at the date of the assignment; and

·The assignee had made a claim on the insurer under the reinstatement benefit for payment of reinstatement costs to repair the home if and when they (and not the insured) personally incurs them to repair the home.

[32]   As in Xu, the policy wording in this case provides that the insured loss for which the reinstatement benefit is payable is the cost of repairing or rebuilding (to its when-new condition) the home if, and when, personally incurred by the insured. Unless and until Short incurred this cost, the insured loss is not an “already accrued right”, but “highly contingent,” being subject to a condition “which might never be satisfied.”10

[33]   The assignment of the reinstatement benefit entitled Toosim to receive from IAG any payment due to Short to the extent that Short had incurred reinstatement costs but did not entitle Toosim to be reimbursed or indemnified by IAG for costs that it incurred.

10     Xu v IAG New Zealand Ltd, above n 1, at [46].

[34]   This has nothing to do with whether the damage being repaired was known or unknown when Short sold Jacob Street and granted the assignment to Toosim. It has nothing to do with whether there had been a partial or incomplete reinstatement. When Jacob Street was sold by Short to Toosim without incurring the cost of restoring the home, it did not matter what rights in respect of the reinstatement benefit Short purported to assign to Toosim. By selling Jacob Street, Short irrevocably “put an end to the possibility of invoking the excess of indemnity insurance.”11 As an assignee of Short’s rights, Toosim could be in no better position than Short.12

[35]   The issue that arises in this case can be simply resolved by asking whether Toosim is claiming for reinstatement costs that were incurred by Short. It plainly is not. Mr Johnstone made the submission that had the Underfoot damage been known prior to the sale to Toosim, Short would have been entitled to payment for the costs of repairing the damage. The answer to that is, if Short had made such a claim to IAG it would not have been paid unless Short had elected to reinstate and had incurred the costs of doing so. None of that happened. Short never incurred liability to repair the Underfoot damage and will not do so. Mr Johnstone’s submission highlights that what Toosim is seeking are costs that it will incur, which is not a financial loss covered by the policy.

[36]   I do not consider that the Supreme Court’s judgment in Xu, at [45], supports Toosim’s position that the reinstatement benefit will be triggered when any repair works are done by the insured. The words “no such reinstatement has occurred” are referring to works for which the insured has not incurred a cost entitling it to payment under the policy. This is plain when one considers the court’s view, at [10](b), that Bryant was decided on the basis that the entitlement to “be reimbursed” was personal to the insured.

[37]   Mr Johnstone relied on recent earthquake list cases, but these do not support Toosim’s position. In Medical Assurance Society of New Zealand Ltd v East, the Easts’ home had suffered earthquake damage and they were in dispute with their

11     Bryant v Primary Industries Insurance Co Ltd, above n 4.

12     Robert Merkin, Ian Enright Sutton on Insurance Law (4th ed, LawBook Co (Thomson Reuters) Sydney, 2015) vol 1 at [11.740].

insurer.13 One of the issues was whether the insurer was obliged to pay the costs of rebuilding or restoring the dwelling irrespective of whether liability to incur those costs had been, or would ever be, incurred. The policy wording provided that, “if you elect not to rebuild or restore the building” the insurer would make a cash settlement not exceeding indemnity value.

[38]   At first instance, Whata J held that the policy did not require that the cost of rebuilding or restoring the dwelling had to be incurred, or about to be incurred, before the insurer was liable to pay the replacement value. The Court of Appeal overturned this finding and held:14

What is plain is that [the insurer’s] reinstatement clause reflects an insurer’s orthodox obligation to indemnify against a liability where the insured party elects to rebuild, not to pay out money where the insured has not incurred and may never incur a liability to meet the cost of restoration. It agrees to cover the cost, not an estimate of it, and the cost is not and will not be known until, at least, liability to pay for the work is incurred.

[39]And at [29] the Court said:

We should add that, contrary to the Judge’s conclusion, we are not satisfied that [the insurer’s] approach – that its liability to cover the cost only arises when those costs are actually or about to be incurred – “place[s …] a strict and cumbersome fetter on the prima facie right to replacement value compensation”. The Easts’ right to settlement on that basis is absolute once they incur a contractual obligation for the purpose of restoring the building: it has no bearing upon the timing of and basis for liability.

[40]   In Parkin v Vero Insurance New Zealand Ltd, the insured argued that the insurer was obliged to pay him the cost to rebuild his house in accordance with the assessment of damage and scope of works provided by his experts.15 Mander J found that the policy required the insured to incur the costs of remediating his property before the insurer’s obligation to pay the replacement sum was triggered.

[41]   After referring to the Court of Appeal’s decision in Medical Assurance Society v East, Mander J said:16

13     Medical Assurance Society of New Zealand Ltd v East, above n 8.

14 At [21].

15     Parkin v Vero Insurance New Zealand Ltd, above n 9.

16 At [46].

While Mr Parkin must actually incur costs, that does not equate to a requirement that he expend his own money. Rather, a legal obligation to pay on his part is required to have been created. The incurring of costs does not cap the insurance company’s liability. As Vero itself acknowledged, should further damage be uncovered in the course of repairs covered by the policy, Vero’s contractual obligations continue to oblige it to meet the costs necessary to repair that damage.

[42]   These cases stand as authority that, subject to words of the policy, a reinstatement benefit will become payable only once the insured has incurred at least a contractual obligation to pay the costs of undertaking the rebuild or repairs. In the present case, at the time of the sale to Toosim, Short had no knowledge of, and had not incurred any liability to undertake, any of the repairs in respect of the Underfoot damage.17

[43]   This Court is bound by Xu and, as noted above, I consider there is no proper basis to distinguish it. To do so, I would need, at least, to be satisfied that such an approach was not inconsistent with the principles that underpin Xu. Those principles are set out in [18]-[21] of the majority’s judgment and are, first, the indemnity principle (albeit the court expressed reservations about this) and, second, the moral hazard that replacement insurance creates. Those principles are equally engaged in this case as they were in Xu.

[44]   For these reasons, I find that Toosim does not have an arguable entitlement to reinstatement benefits under the policy.

Indemnity value claim

[45]   I turn now to consider whether Toosim has an arguable claim that Short suffered an indemnity value loss that was assigned to it and which it may recover in this proceeding. I again note that this issue was raised in the context of whether, if Toosim has no arguable entitlement to reinstatement benefits, it might nevertheless be possible to remedy deficiencies in its statement of claim.

17     See also Brkich & Brkich Enterprises Ltd v American Home Assurance Co (1995) 8 BCLR (3d).

[46]   The Supreme Court in Xu recognised that rights under an insurance policy to payments calculated on an indemnity basis are assignable, since such rights are in the nature of an existing debt.18

[47]   Under the 2010 BNZ policy wording, if Short did not repair or rebuild the home IAG agreed to pay “the value of the loss, based on the present value of the home.” The term “present value” was defined in the policy as, “the market value of the situation shown in the schedule less the value of the land.”

[48]   IAG accepts, for present purposes, that Short qualified for an indemnity value benefit as an insured who “do(es) not repair or rebuild the home.” It argues, however, that Short suffered no financial loss arising from the fact of the Underfoot damage and that any claim by Toosim to recover an indemnity payment is precluded by the application of the following essential controlling principles of insurance law.

[49]   First, under the indemnity principle, in the case of a loss against which the policy has been made, an insured is to be fully indemnified but, “shall never be more than fully indemnified” for its loss.19

[50]   Second, when an insured assigns his or her right to be indemnified for a past event, what is assigned is the insured’s accrued right to payment from the insurer indemnifying the insured for his or her personal insured loss – i.e. payment by the insurer of an existing debt owing to the insured.

[51]   Third, as an assignment can only be in respect of existing rights of the insured, the insurer may, as against an assignee, rely on any defences which would, at the time of the assignment have been available against the insured.20

[52]   It follows from these principles, IAG argues, that if, after an earthquake causing damage against which the owner is insured, a property (including a home in damaged condition) is sold in an arms-length transaction, the insured’s financial loss

18     Xu v IAG New Zealand Ltd, above n 1, at [13].

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

20     AW Welford & WW Otter-Barry The Law Relating to Fire Insurance, (4th ed, Butterworth & Co, London, 1948) at 234.

caused by the earthquake will be the difference between the pre-earthquake market- value of the property and the actual post-earthquake selling price obtained.21 If, however, the insured sells the property in an arms-length transaction not knowing that it has suffered damage and for market-value, the insured has suffered no financial loss.22

[53]   Mr Ring drew support from Invercargill City Council v Hamlin which concerned a local authority’s liability for a building inspector’s negligence and when the homeowner had suffered loss.23 In the course of its judgment, the Privy Council said:24

Once it is appreciated that the loss in respect of which the plaintiff in the present case is suing is loss to his pocket, and not for physical damage to the house or foundations, then most, if not all the difficulties surrounding the limitation question fall away. The plaintiff’s loss occurs when the market value of the house is depreciated by reason of the defective foundations, and not before. If he resells the house at full value before the defect is discovered, he has suffered no loss. …

[54]   Applied to this case, IAG submits that Short no longer owns Jacob Street and, at the time of sale to Toosim, was unaware of the Underfoot damage. The house was sold at auction in an arms-length transaction without any reduction in price because of the Underfoot damage (that is, at full-value before the damage was discovered), and it follows that Short has not and could not have suffered any loss because of the Underfoot damage. There was nothing for Short to assign to Toosim, and, accordingly, nothing that Toosim can recover from IAG.

[55]   Turning to the evidence, in his affidavit Mr Toomey, one of Toosim’s trustees, confirms that in entering into the agreement to purchase Jacob Street, Short and Toosim shared a mutual understanding the earthquake repairs to the property had been completed and there was nothing to suggest that the repair work was inadequate. I have noted earlier the terms of the agreement for sale and purchase and the assignment, which are consistent with this. While Short purported to assign any residual rights it may have had under any insurance claim to Toosim, Toosim did not make any claim

21     Bryant v Primary Industries Insurance Co Ltd, above n 4.

22     Castellain v Preston, above, n 19.

23     Invercargill City Council v Hamlin [1996] 1 NZLR 513.

24     At 526.

for any loss until the discovery of the Underfoot damage, reflecting the fact that it understood all repairs were complete and all claims were settled.

[56]   Mr Johnstone argued that the court does not have before it all the information that it needs to make a finding that Short suffered no loss. He argues that the court cannot equate the sale price to the measure of present value under the policy. I do not agree. Where the sale has occurred at auction and is at arms-length, and where the parties share a common belief that the earthquake repairs have been completed with all claims in respect of them settled, it is an unavoidable conclusion that the sale price was at full market-value. Short suffered no loss arising from the fact of the Underfoot damage.

Result

[57]   IAG has satisfied me that Toosim’s statement of claim discloses no arguable cause of action. I am satisfied that the deficiencies in Toosim’s statement of claim cannot be remedied by allowing it to amend its pleadings. Accordingly, Toosim’s claim is struck out.

[58]   If any party seeks costs, I will receive submissions by memorandum within 14 days, with any reply to be filed 14 days thereafter.

O G Paulsen Associate Judge