Wild South Holdings Limited v QBE Insurance (International) Limited
[2013] NZHC 2781
•23 October 2013
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2013-409-758 [2013] NZHC 2781
BETWEEN WILD SOUTH HOLDINGS LIMITED Plaintiff
ANDQBE INSURANCE (INTERNATIONAL) LIMITED
Defendant
CIV 2013-409-898
BETWEEN MAXIMS FASHIONS LIMITED Plaintiff
ANDQBE INSURANCE (INTERNATIONAL) LIMITED
Defendant
Hearing: 7 and 8 October 2013
Appearances: S P Rennie and J E Bayley for Plaintiffs
M Ring QC and F W Rose for Defendant
Judgment: 23 October 2013
JUDGMENT OF FOGARTY J
WILD SOUTH HOLDINGS LIMITED & MAXIMS FASHIONS LIMITED v QBE INSURANCE (INTERNATIONAL) LIMITED [2013] NZHC 2781 [23 October 2013]
Contents
Introduction ..........................................................................................................[1] Agreed Facts .........................................................................................................[5] The preliminary questions.................................................................................[13] The respective proposed answers to the preliminary questions.....................[13]
Question 1 - What is the basis and measure of indemnity under the policies
and when is it payable? [13]
Insureds’ answer to question 1 [13]
QBE’s answer to question 1 [13]
Question 2 - What is the proper interpretation and application of the
automatic reinstatement clauses in the policies? [13]
Insureds’ answer [13]
QBE’s answer [13]
Question 3 – What are the limitations (if any) on QBE’s liability under
the policies and the effects of any limitation? [14]
Special conditions (3)(b) and (3)(c) [14] Insureds’ answer [15] QBE’s answer [15]
Question 4 - Is the insurer liable for the insureds’ reasonable and
actual claim preparation costs incurred and, if so, up to what is
maximum amount? [15]
Insureds’ answer [15]
QBE’s answer [15]
Question 5 - What is the proper application of any excess or deductible
under the policies? [15]
Insureds’ answer [15] QBE’s answer [15] Central Issue .......................................................................................................[16] The insurer’s argument [17] The insureds’ argument [19] The interpretation problem [20] General principles of interpretation of insurance policies .............................[23] Distinguishing regulatory case law [25] Analysis ...............................................................................................................[44] Resolution of interpretation of the automatic reinstatement clauses ............[84] Cancelled by loss [90] Conclusion...........................................................................................................[99]
Question 1 – What is the basis and measure of indemnity under the
policies and when is it payable? ......................................................................[101]
Question 3 – What are the limitations (if any) on QBE’s liability
under the policies and the effects of any limitation?.....................................[107]
3(c) - Average [108]
Question 4 – Is the insurer liable for the insureds’ reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount?.............................................................................................................[126]
Analysis [130]
Question 5 – What is the proper application of any excess or deductible
under the policies?............................................................................................[136]
Summary ...........................................................................................................[145]
Question 1 - What is the basis and measure of indemnity under the
policies and when is it payable? [145]
Question 2 - What is the proper interpretation and application of the
automatic reinstatement clauses in the policies? [147]
Question 3 - What are the limitations (if any) on the insurer’s liability
under the policies imposed by: (a) any stated sum insured;
(b) Special Conditions 3(b) and 3(c); (c) any average condition; and
what is the effect of each? [148]
Question 4 - Is the insurer liable for the insureds’ reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount? [150]
Question 5 - What is the proper application of any excess or deductible
under the policies? [152]
Costs ..................................................................................................................[154]
Introduction
[1] These proceedings concern earthquake claims in respect of two large commercial buildings. The two owners deliberately under insured each building, but purchased an insurance policy with an automatic reinstatement cover provision, subject to notice by either party, including the ability of the insurer to adjust the premium.
[2] In a practical effort to avoid the costs of a full trial, the parties have agreed five preliminary questions for submission to the Court, all going to the construction of the two policies. The policies are not identical, but are similar.
[3] This judgment answers most but not all of the questions, leave being reserved for the parties to apply to the Court for answers to the questions put to one side.
[4] The judgment begins with the questions and each party’s answers. The judgment ends with the questions and the Court’s answers to them.
Agreed Facts
[5] Wild South Holdings Limited (Wild South) and Maxims Fashions Limited (Maxims) each own a commercial building in Christchurch. Both of the buildings were damaged in the earthquakes that occurred in Christchurch. These were the significant earthquakes on 4 September 2010, 22 February 2011 and 13 June 2011. Both the owners, as “insureds” hold an insurance policy with QBE Insurance (International) Limited (QBE), the “insurer”.
[6] The Maxims policy indemnity provision provides:
The insured will be indemnified by payment or at QBE’s option, by repair or by replacement of the lost or damaged property and by payment of the insured costs.
The policy period is one year, 1 July 2010 to 1 July 2011. The sum insured is
$3,610,000. Maxims’ policy is expressed to be subject to average. It is common ground that the replacement cost of the whole of the building was more than $8 million.
[7] The Wild South policy indemnifies the insured (for damage or loss to the property). The period was from 1 September 2010 to 1 September 2011, the sum insured being $3,035,700. It is common ground that Wild South’s replacement cost for the whole building is in excess of $8 million.
[8] The insurer accepts coverage under the policies for damage caused by the earthquake events, but disputes the application of an automatic reinstatement clause.
[9] The two relevant reinstatement provisions are:
(a) Maxims:
5. Reinstatement of Amount of Insurance
In the event of a loss for which a claim is payable under Part 1, and in the absence of written notice by QBE or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss. The Insured undertakes to pay such pro-rata premium at the rate applicable to the item(s) concerned as may be required for the reinstatement.
(b) Wild South:
Reinstatement of Amount
In the absence of written notice by the Insurers or the Insured to the contrary, the amount of insurance cancelled by loss or damage is automatically reinstated as from the date of loss or damage. 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.
...
[10] To date, no party has given written notice which would preclude the operation of these clauses.
[11] Both Wild South and Maxims have made claims under the policies, and
provided the insurer with experts’ reports, costings and invoices.
[12] The insurer has made payments to the insureds. Wild South has received
$1,502,475. Maxims has received $1,523,420. There are factual disputes, not resolved by this judgment, as to whether these are settlements.
The preliminary questions
[13] The parties have agreed five preliminary questions. These are:
Preliminary Questions
1What is the basis and measure of indemnity under the policies and when is it payable?
2What is the proper interpretation and application of the automatic reinstatement clauses in the policies?
3 What are the limitations (if any) on the insurer’s liability under the
policies imposed by:
a. any stated sum insured;
b. Special Conditions 3(b) and 3(c);
c. any average condition; and what is the effect of each?
4Is the insurer liable for the insureds’ reasonable and actual claim preparation costs incurred and, if so, up to what is the maximum amount?
5What is the proper application of any excess or deductible under the policies?
The respective proposed answers to the preliminary questions
Question 1 - What is the basis and measure of indemnity under the policies and when is it payable?
Insureds’ answer to question 1:
QBE immediately owes as indemnity the estimated total cost of replacement/repair less appropriate depreciation up to the sum insured per event (with the cost of replacement/repair less appropriate depreciation apportioned on a percentage basis per event).
QBE owes a further amount to bring the cover up to full cost of Reinstatement (as defined) payable up to the sum insured per event (with the cost of Reinstatement apportioned on a percentage basis per event):
(a) upon the conditions within SP 4 being met as appropriate; and
(b) subject to any limitations within SP 3.
QBE’s answer to question 1
(1) If the building is damaged by an insured event, the insured is entitled to a payment calculated on an indemnity basis, as soon as this can be reasonably and practically assessed.
(2) Indemnity basis is the actual value of the building to the insured at the time of the loss, having regard to its age and condition, and the insured’s current purpose for owing [sic] the building, its current use and future intentions. This may be market value less salvage, or the cost of repair or rebuilding less betterment. The appropriate basis depends on the evidence.
(3) Because each building is insured for its replacement value, if the insured elects to reinstate the damage, by repair or rebuilding, it is entitled to the reasonable costs of the reinstatement actually incurred, once these exceed the indemnity payment in (1) above and up to the policy limits, provided the reinstatement work is commenced and carried out with reasonable despatch.
Question 2 - What is the proper interpretation and application of the automatic reinstatement clauses in the policies?
Insureds’ answer
QBE is now precluded from giving any written notice under the reinstatement of insurance clause and the insurance [is] automatically reinstated upon each event of loss.
QBE’s answer
(1) The effect of the automatic reinstatement clause in each policy is to override the annual aggregate limit on QBE’s liability for damage to the building to the sum insured, unless QBE (or the insured) gives notice to the contrary.
(2) QBE is entitled to give a valid notice up to and including the time of payment for Loss #1. In the absence of notice, the amount of the sum insured available to meet Loss #2 is not depleted by the amount of the payment for Loss #1. If QBE gives a valid notice, the amount of the sum insured available to meet Loss #2 is depleted by the amount of the payment for Loss #1.
(3) The same applies in respect of payment for Loss #2.
Question 3 – What are the limitations (if any) on QBE’s liability under the policies
and the effects of any limitation?
Special conditions (3)(b) and (3)(c)
[14] Special condition (3)(b) of the reinstatement memoranda states (in both policies):
Where the Property insured is damaged but not Destroyed, the Insurer’s liability will not exceed the amount the Insurers could have been called upon to pay for Reinstatement if the property had not been Destroyed.1
[15] Special condition (3)(c) of the reinstatement memorandum within Maxims’
policy provides:
QBE’s liability under this extension in respect of any item of Insured
Property will not exceed the sum insured in respect of that item.
Insureds’ answer
7.2.2The purpose of this clause [(3)(b)] is to limit recovery to the actual replacement cost for a new building i.e. repair costs are capped at replacement cost. The clause otherwise does not affect assessment on a per event basis with insurance automatically reinstating upon each event of loss.
...
7.3.2The clause [(3)(c)] does not impose a limit the [sic] total coverage for loss in multiple events to one sum insured for the same reasons in
7.1.3 above.
...
(a) The Sum Insured?
Coverage for loss arising from each event up to the sum insured per event is available i.e. the total coverage for loss in multiple events is not limited to one sum insured.
(b) Special Condition 3(b) of the Reinstatement Memoranda?
WSHL and MFL are not entitled to payment greater than that to “replace” their respective buildings as defined under paragraph (a)(1) of the definition of “Reinstatement”.
(c) Special Condition 3(c) of the MFL Reinstatement Memorandum
(MFL Only)?
1 This is from Wild South’s policy. Maxims’ is not materially different.
As above, coverage for loss arising from each event up to the sum insured per event is available i.e. the total coverage for loss in multiple events is not limited to one sum insured.
(d) The Average Condition (MFL Only)?
The average condition is of no effect.
QBE’s answer
(1) Sum insured – WSHL policy, $3,035,700; MFL policy, $3.61m (subject to average). This is maximum amount that QBE is required to pay in respect of loss or damage to the building during the policy period, subject to the automatic reinstatement clause and GST.
(2) Average condition (MFL policy) – based on MFL’s estimate to rebuild the whole building of $8,544,960, the sum insured representing QBE’s maximum liability for the cumulative costs of repairing the building is 42.2% of $3.61m, namely, $1,523,420 – again subject to the automatic reinstatement clause and GST.
(3) Special conditions 3(b)/special conditions (3)(b) and (3)(c):
(a) SP 3(b)/SP (3)(b) – if the building is repairable, SP 3(b)/SP (3)(b) limits QBE’s maximum liability for the repair costs to the most that it would have been required to pay for rebuilding costs if the building had been destroyed.
(b) SP 3(c) (MFL policy) - this also limits QBE’s maximum liability for repair costs or rebuilding costs for the building to its designated sum insured.
Question 4 - Is the insurer liable for the insureds’ reasonable and actual claim
preparation costs incurred and, if so, up to what is maximum amount?
Insureds’ answer
WSHL is entitled to all costs (including but not limited to the cost of services performed by the WSHL’s employees, third party fees), reasonably incurred for the preparation and presentation of the claim made under the material damage section of the policy.
MFL is entitled to such reasonable professional fees, and such other reasonable expenses necessarily incurred by MFL for the preparation of its claim up to the sum insured of $10,000.
QBE’s answer
(1) WSHL policy – WSHL has no cover for “Claim Preparation Costs” in respect of its Section One (material damage) claim for the building.
(2) MFL policy – MFL has cover for “Claim Preparation Costs” of up to $10,000 plus GST in respect of its material damage claim for the building.
Question 5 - What is the proper application of any excess or deductible under the policies?
Insureds’ answer
The excess or deductible is subtracted from the loss per event regardless of whether the loss exceeds the sum insured.
QBE’s answer
(1) WSHL policy – the deductible is subtracted from the “adjusted loss”, which is the amount of WSHL’s insured loss after the application of the sum insured limit.
(2) MFL policy – the excess is subtracted from the “Loss Amount”, which is the amount of MFL’s actual loss before the application of the sum insured limit.
Central Issue
[16] As demonstrated by two days of intensive oral argument, the dispute over the automatic reinstatement clause is at the heart of this dispute. The answer to question
2 affects the answers to questions 1 and 3. Therefore I begin the analysis with question 2.
The insurer’s argument
[17] The insurer, QBE, contends that the effect of both clauses is the same. QBE argues that the automatic reinstatement occurs only when the amount of insurance arising out of the loss or damage is paid. It interprets the phrase “the amount of insurance cancelled by loss or damage” as referring to the date of payment.
[18] Accordingly, QBE says that if the insured gives written notice to the contrary on the date of payment, then the policy will not be reinstated as from the date of the event of loss or damage, so that any subsequent loss or damage will not be covered by the policy. It says that this consequence will not adversely affect an insured person who is fully insured for the total amount of reinstatement. It will only affect
insured persons who are underinsured (as here). Such a person has run that risk when entering into this policy.
The insureds’ argument
[19] The competing argument is that both policies provide indemnity. The liability to indemnify occurs on the loss. The consequence of that liability cannot be deferred by the time taken to settle and pay the amount of the loss. It is argued that the amount of reinsurance is automatically reinstated on the date of loss or damage, and can sensibly only be set aside by the grant of written notice before the next date of loss or damage. In the absence of notice by the insureds, the insureds from the date of a loss generating a claim undertake to pay such pro-rata premium as may be required for the reinstatement.
The interpretation problem
[20] This dispute is generated by the lack of linkage between:
(a) the clear intention that the policy be reinstated as from the date of loss or damage.
(b) the lack of a timetable for the notices.
(c) the absence of a definition or link to the concept of “cancelled”.
[21] The insurer’s argument depends on giving weight to the words “amount” and “cancelled”. It is inevitable that it will take time to identify the amount, and so cancel part of the cover. Between those dates, further loss or damage may occur. By the terms of the policies, the insureds take that risk, not the insurer. The risk to the insureds will only be there if the insureds have elected a total cover less than the replacement cost of the building, and so are underinsured.
[22] The insureds’ argument relies upon giving weight to the “automatic” function of the term, and argues that the intent of the term is “to operate from the date of loss or damage”. It opposes construction of the notice clause or the concept of
cancellation by loss, which would deny the benefit to the insured person of automatic reinstatement as from the date of loss or damage, by reason of a delay on the part of the insurance company settling the amount of money actually payable by reason of a loss or damage. It submits that it would be an absurd result if QBE could give notice cancelling insurance when there have been subsequent events causing loss for which the insured could reasonably assume it was covered.
General principles of interpretation of insurance policies
[23] There was no dispute between counsel as to the general principles of interpretation of insurance policies where it is necessary to resolve problems of meaning and application. I note these principles briefly. These two policies are contracts which are made in New Zealand and are subject to New Zealand contract law. The New Zealand common law on the interpretation of commercial contracts is essentially the same as the United Kingdom law, and certainly for the purposes of this dispute there is no suggestion that there is any New Zealand common law which differs from the United Kingdom common law.
[24] In a recent decision on product liability, I have had occasion to refer to both the United Kingdom and New Zealand authorities, which emphasise the need to read these policies as commercial contracts made in a commercial setting.2 Both counsel took the general principles from two UK texts.3 In the context of this particular problem of interpretation, it is useful to cite the fourth principle set out in Colinvaux
from Lord Hoffmann’s speech in Investors Compensation Scheme Ltd v West
Bromwich Building Society:4
(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.
2 Body Corporate 83501 & Ors (Bealey) v Christchurch City Council & Ors [2013] NZHC 2472.
3 Clarke, Malcolm A; Burling, Julian M; Purves, Robert L (eds) The law of insurance contracts (6th ed, Informa, London, 2009); Merkin, R and Summer, Judith P (eds) Colinvaux’s law of insurance (9th ed, Sweet and Maxwell, London, 2010).
4 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] All ER 98 (HL)
at 115. See Trustees Executors Ltd v QBE Insurance (International) Limited [2010] NZCA 608.
Distinguishing regulatory case law
[25] Under the Earthquake and War Damage Act 1944, the Earthquake Commission was funded by levies on fire insurance premiums. In 1989/1991, there was litigation brought, Earthquake and War Damage Commission v Waitaki International Ltd (Waitaki), 5 contending that EQC was not receiving the appropriate level of levies, because of the way the insurance for the Waitaki group was structured.
[26] As the Privy Council explained:6
Broadly the [EQC] scheme involves the no doubt justifiable assumption that at least the vast majority of property owners, whether commercial or domestic, insure their properties against loss or damage by fire. Insurance against earthquake damage is then linked to fire insurance by providing that where any property is insured against fire it is deemed to be insured to the same amount against earthquake damage and war damage, but subject to the limitation that such insurance extends only to the amount of the indemnity and not the replacement value. Premiums at a rate fixed by regulation and calculated on the indemnity value of the property are then made payable to the commission in the first instance by the insurers with a right of recovery against the insured.
[27] Waitaki at the time operated nine freezing works across New Zealand. They received advice from brokers that the company should enter into a policy which would set a maximum loss limit for any single occurrence. This is partly on the basis that since the plants were widely spread geographically across New Zealand the prospect of a loss in excess of this amount as a result of a single event was exceedingly unlikely.
[28] It can be seen immediately that the result of this scheme would defeat the assumption in the regulatory scheme that all properties would have fire cover. It had the result of reducing significantly the expected cash flow from Waitaki into EQC.
[29] Even though the replacement value of all the assets was in excess of $300 million, the fire cover was $50 million of any one loss or series of losses arising out
of any one event.
5 Earthquake and War Damage Commission v Waitaki International Ltd [1992] 1 NZLR 513 (PC).
6 At 514-515.
[30] On this basis, as the Privy Council observed:
... The amount so prescribed is not an overall limit of liability but merely the limit for the payment of any one claim, so that payment of the limited amount in respect of a claim arising out of one event leaves the cover of the insured’s property against further claims up to the same limit in respect of other events occurring during the period of insurance entirely unaffected.
The only difficulty in the way of this simple and natural construction, which gives full effect to a familiar and perfectly well understood limitation of liability, lies in a subsequent clause in the contract. This is contained in the policy conditions, cl 10 of which reads as follows:
“Reinstatement
“In the event of a claim or claims under this policy in respect of loss, damage or destruction to property insured or business interruption and in the absence of written notice by the Insured to the contrary the sum insured shall be automatically reinstated in full from the time of the occurrence, the Insured undertaking to pay such premium as may be required for such reinstatement.”
It is extremely difficult to see how this can be made to fit with the provisions of the policy which have gone before. The terms of the contract clearly place upon the insurers the obligation of providing the replacement value of all or any of the insured’s property which is destroyed or damaged during the period of insurance, subject to only one limitation, that is to say, that in no case can the insurer be compelled to expend more than the sum of $50 million on a single claim or a series of claims from a single event. Subject to that limitation the insurers’ liability is limited only by the value of whatever property of the insured may be destroyed or damaged during the period and to speak of the “sum insured” being “automatically reinstated in full” is quite meaningless. That would have a clear and perfectly intelligible meaning if the limitation of liability were an overall limitation so that, on each claim being met, the amount of cover was pro tanto reduced. But the “sum insured” clause, which contains the only limitation on the insurers’ ex facie liability to replace, repair or indemnify, can be read in that way only if the words “any one loss or series of losses arising out of any one event” are omitted altogether, for they can have only one meaning.
As they stand it is difficult to see how the two clauses can live together and the only way in which any sensible meaning can be given to cl 10 without turning the limitation of liability clause into something which it quite plainly is not is to treat it as a not altogether dissimilar clause was treated in Pennsylvania Co for Insurances on Lives and Granting Annuities v Mumford [1920] 2 KB 537, 547 and as imposing an obligation on the insured, as each claim is made, to pay an additional premium at the contract rate computed on the amount at which the claim is settled.
[31] Given that conflict as thus expressed, and the regulatory setting of the case, I did not hear either counsel before me indicating that the Waitaki litigation resolved the problem in this case. On my reading, the Law Lords essentially reduce the effect of cl 10 to simply apply by imposing an obligation to pay an additional
premium. The decision is of no assistance in this case, for that reason, and because essentially this litigation was dealing with a set of policies which had the effect of defeating the regulatory assumption in the Earthquake and War Damage Act 1944.
[32] In my view, one should be careful before relying upon the interpretation of private contracts which are examined not in a lawsuit between the parties to the contracts, but rather, collaterally, in a regulatory context, where the presence or effect of those contracts can disturb statutory goals. For the main goal of the regulatory proceeding is to achieve the purpose of the statute; it is not to resolve a dispute between the parties to the contract.
[33] Similar problems arose with the funding of the New Zealand Fire Service
Commission.
[34] Like the Waitaki case, these cases had as part of their subject matter policies with automatic reinstatement clauses of some similarity to this case. These are the decisions of New Zealand Fire Service Commission v Terrace Insurances Ltd and Earthquake Commission & New Zealand Fire Service Commission v Cigna Insurance New Zealand Ltd .7
[35] In 1997, New Zealand Fire Service was entitled to receive levies calculated on the amount for which a property is insured under any contract of fire insurance. In Terrace Insurances, the New Zealand Fire Service Commission was claiming that it was not receiving the full amount of levies that should have been paid by the Fletcher Challenge Limited group of companies (FCL). FCL had a complicated structure of insurance, entered into by a wholly owned subsidiary, Terrace Insurances Limited (Terrace).
[36] Only part of the insurance cover was for the fire risk. It was intended fire risk should be limited to $250 million, which sum substantially exceeded the reinstatement cost of FCL’s most valuable collection of properties in one location.
Overall, the assets insured were valued in the order of $2.8 billion. The Fire Service
7 New Zealand Fire Service Commission v Terrace Insurances Ltd HC Auckland CL 43-94, 25
February 1997 (Tompkins J); Earthquake Commission & New Zealand Fire Service Commission v Cigna Insurance New Zealand Ltd HC Auckland CP460/94, 15 October 1998 (Giles J).
Commission was concerned that the insurance structure entered into by FCL had the effect of reducing the levies that it should have obtained, intended to cover the provision of fire services over all of the properties of FCL. The Fire Service Commission was pursuing a levy based on the indemnity component of the total cover of $2.8 billion, being approximately $1.5 billion.
[37] In a second cause of action, which Tompkins J did not consider it necessary for him to decide, the Fire Service Commission contended that, even if the contract of insurance limited liability to fire to $250 million, the amount that the properties were insured could be fixed at a much higher sum, with a resultant higher levy. This was by relying upon the reinstatement clause in one of the relevant property’s policies, which was in these terms:
In the event of loss or damage to The Property and in the absence of written notice by the Insurers or the Insured to the contrary the amount of insurance reduced by the loss is to be automatically reinstated as and from the date of the loss, the Insured undertaking to pay such premium as may be required for such reinstatement from that date.
For the purpose of this Clause each loss or series of losses arising out of one event shall be adjusted separately and any loss of or damage to the property insured happening during any one period of seventy two consecutive hours which arises out of any one cause shall be deemed to be a single event and therefore shall constitute one loss for the purpose of this Clause.
This clause was in the same terms in all the relevant policies.
[38] Tompkins J said:
On the clause I have three comments. First, I agree with Mr Asher’s submission that any written notice by the insurers or the insured to the contrary would need to be given before the occurrence of a loss to be effective in respect of that loss. That is because the clause provides that the loss is to be automatically reinstated “as and from the date of the loss”. When a loss occurs the reinstatement automatically and immediately occurs.
Secondly, the clause does not specify how any premium for the reinstatement is to be assessed. Presumably it will be assessed at the same rates as the sum insured in the policy.
Thirdly, I accept Mr Asher’s submission that separate adjustment for each loss for which provision is made in the second paragraph of the clause, makes it clear that without express notice to the contrary, the automatic adjustment of cover applies in respect of each item of property insured in each of the perils insured against, subject to any overall limit expressed.
[39] Giles J followed Tompkins J in Earthquake Commission & New Zealand Fire Service Commission v Cigna Insurance New Zealand Ltd. Cigna was the insurer of a group of companies we can call Cavalier. Against the risk of Cavalier insuring offshore, Cigna in New Zealand through brokers negotiated a single material damage policy covering buildings, plant and stock in New Zealand and Australia to reinstatement value of approximately $140 million, but limited to a sum insured for fire of $50 million.
[40] From Waitaki and Terrace, one can understand immediately the impact of that on the revenue of EQC and the Fire Service Commission. This policy had an automatic reinstatement clause of the sum insured after a claim. The clause in the Cigna claim was exactly the same as the clause in the Terrace case.
[41] Giles J adopted this reasoning of Tompkins J:
On a plain reading of the policy the liability of Terrace shall not exceed
$250,000,000. At any one time that is the amount for which Fletcher’s
property was insured. Save in respect of changes necessary because there was more than one insurer, the FCL policy current at 30 June 1991 contained the same operative clause, although of course the sum insured was
$1,212,574,000. I do not consider that my conclusion that the amount for which the company was insured was $250,000,000 is affected by the
reinstatement clause. Its only effect is that the amount for which the property is insured, which in the absence of the reinstatement clause would fall below $250,000,000 in the event of a claim, does not do so. It is
maintained at that figure as a result of the amount of the insurance being automatically reinstated from the date of the loss...
[42] Mr Ring QC argued that the interpretation in Terrace was not being relied upon in this case, by the insured. I do not think that is so. In Mr Rennie’s written note of his oral argument, he submitted that the policies of Wild South and Maxims maintain a continuity of cover at the level insured by reinstating the sum insured from the date of the loss – in other words, the Reinstatement of Amount (ROA) in this case has the same object as the ROA in Terrace and Cigna.
[43] In none of these three cases was there any analysis of or argument on the predicament akin to the parties in this case as to when there would be a notice given to stop the automatic reinstatement. On the contrary, the schemes in Waitaki, Terrace and Cigna were all intent on maintaining at all times a particular level of
insurance, less than the total replacement value, or indeed indemnity value of the assets of the corporate entity, but premised on the assumption that fire would not break out on all the assets distributed over a large geographical region in the same event. None of the Judges in these three cases had to grapple with the issues that now face this Court.
Analysis
[44] It is common ground that in respect of both policies the cover extends to more than one event of loss or damage, but subject to not exceeding the sum insured and, in the case of Maxims, is expressed to be subject to average. (There is a dispute as to whether this provision applies.) Accordingly, the amount of annual cover on each policy extends over the period of the policy, applicable to more than one event. This annual aggregation of losses is subject to the automatic reinstatement clause. Both automatic reinstatement clauses allow either party to negate the effect of the clause by giving written notice to the contrary.
[45] The insureds have insured their properties for full replacement value, except that the total amount of cover is less than the full replacement value. In that sense, they are underinsured, subject only to the application of the automatic reinstatement. Mr Ring QC for QBE gave the following example to illustrate the point:
(a) The sum insured is $3 million.
Ÿ On day 1 - part of the building is damaged by fire to the extent of
$0.5 million QBE pays for the repairs which are completed.
Ÿ On day 180 – part of the building is damaged by impact to the extent of $0.5 million QBE pays for the repairs which are completed.
Ÿ On day 360 – the whole building is destroyed by earthquake to the extent of $3 million.
In this example, without automatic reinstatement, the insured would only be entitled to $2 million to the cost of rebuilding. (This example assumes average does not apply.)
[46] The factual setting of this problem is that Christchurch suffered three major quakes causing damage between September 2010 and June 2011. On the insureds’ argument, the insurer can only give valid notice disapplying the automatic reinstatement of cover after an earthquake event, if it does so before the date of the second or third earthquake events causing loss. QBE argue this is a misconception of how the clause was intended to operate.
[47] Mr Ring QC invites the Court to follow the full Court of the High Court in Re Earthquake Commission.8 This case concerned the liability of the Earthquake Commission (EQC) as a result of the two largest earthquakes in September 2010 and February 2011. Some 110,000 properties had multiple claims. The earthquake cover was for a maximum of $100,000 for a residential building. The issue for determination by the Court was how EQC cover responded to homeowners who had more than one claim for damage suffered in more than one earthquake, where such damage exceeded $100,000.
[48] EQC argued that s 18 of the Earthquake Commission Act 1993 (the Act) provides insurance to an aggregate amount of $100,000 during the period of insurance, and did not provide for $100,000 of insurance for each occurrence or event of natural disaster damage during the period of insurance. Section 18(1) of the Act provides:
Part 2
Insurance of residential property against natural disaster
Insurance
18 Residential buildings
(1) Subject to any regulations made under this Act and to Schedule 3, where a person enters into a contract of fire insurance with an insurance company in respect of any residential building situated in New Zealand, the residential building shall, while that contract is in force, be deemed to be insured under this Act against natural disaster
8 Re Earthquake Commission [2011] 3 NZLR 695 (HC).
damage for its replacement value to the amount (exclusive of goods and services tax) which is the least of—
(a) if the contract of fire insurance specifies a replacement sum insured for which the building is insured against fire under that contract, the amount of that sum insured:
(b) if the contract of fire insurance does not specify such a replacement sum insured but does specify an amount to which the building is to be insured under this Act, that amount:
(c) the amount arrived at by multiplying the number of dwellings in the building (being the number determined in accordance with subsection (3)) by $100,000 or such higher amount as may be fixed from time to time for the purposes of this paragraph by regulations made under this Act.
[49] That provides cover for the least of the sums in s 18(1)(a), (b) and (c); (c)
being the effective common least amount of $100,000.
[50] Clause 6 of Schedule 3 of the Act provides:
6 Reinstatement of insurance on payment of claim
Subject to clauses 4 and 5, on the payment by the Commission of any amount for any natural disaster damage to any property, the insurance under this Act shall continue to the same extent as before the natural disaster damage occurred, but the Commission shall be entitled to charge the insured person (or deduct from that payment) for the continuation of the insurance an amount calculated in accordance with regulations made under this Act.
[51] It will be noticed that cl 6 has some similarities to the QBE automatic reinstatement clauses, but without the option of either party to give notice to the contrary. It may also be noted that another difference is that it defines the continuance of the insurance by reference to the “payment by the Commission of any amount for any natural disaster damage to any property”.
[52] Counsel for QBE rely on [31] of Re Earthquake Commission:
[31] Payment is the appropriate triggering event because until there is payment for some natural disaster damage, the amount of cover continues undiminished. There has been no payment to reduce the cover available. Conversely, until the damage is repaired, there has been no addition to or improvement of the insured property such as to raise the need for additional cover. Clause 6 declares that the insurance “shall continue to the same extent as before the natural disaster damage occurred”. The verb “continues”
indicates that both before and after the natural disaster damage for which payment has now been made there was cover to the full amount of $100,000. That is the plain meaning of the operative words. As Mr Goddard submits:
… Continuity is the necessary result, where something continues. Cover cannot continue unless cover is continuous throughout the period. And if cover is continuous to the same extent as before the damage occurred, then it cannot have been absent (or set at a lower level) for some intervening period.
[53] I do not gain assistance from [31]. This is because of the differences in texts between cl 6 of Schedule 3 to the Act and the automatic reinstatement clauses in these two policies.
[54] There is no common law of automatic reinstatement, which informs the Court, or enables it to interpret the language used in a particular policy in respect of reinstatement. Every insurance policy is a contract in its own right.
[55] The policy is to be interpreted in its commercial context. That includes a reasonable understanding by the parties of the commercial function of the insurance policies. The liability of the insurer and the rights of the insured have to be derived from the particular policy, schedule and terms, that they are party to, against the relevant background at the time they entered into them.
[56] The two automatic reinstatement clauses are different, but have a common deployment of the concept of:9
“the amount of insurance cancelled by loss [or damage]”
and with slightly varying words, that phrase is immediately linked with automatic reinstatement. In the case of Wild South:
“is automatically reinstated as from the date of loss or damage”
In the case of Maxims:
“will be automatically reinstated from the date of loss.”
9 In the case of Wild South “it is loss or damage”, in the case of Maxims it is just “loss”.
[57] Mr Ring QC submits that the clause has two prerequisites: loss or damage + no notice. The argument of Mr Rennie is to the contrary. He separates “automatically reinstated” from the requirement of notice.
[58] Both policies preface the automatic reinstatement clause by the “absence of notice to the contrary”. The wording in Wild South is:
“In the absence of written notice by the Insurers or the Insured to the
contrary.”
And in respect of Maxims:
“In the absence of written notice by QBE or the Insured to the contrary.”
[59] Mr Ring argues that QBE’s basic obligation under these policies is to indemnify the insured. This obligation continues in the event of successive losses, up to the policy limits and during the policy period; together called “an annual aggregate”. However, this limit is expressly subject to the reinstatement of amount condition. The effect of the automatic reinstatement clause is to override the annual aggregate limit, unless QBE (or the insured) gives notice to the contrary. The purpose of the policy containing a limit on the sum insured is to set a limit on the indemnity obligation of the insurer.
[60] QBE argues that the annual aggregation and automatic reinstatement clauses cannot coexist in the same policy. One clause has to prevail over the other. As a result, each policy expressly provides that the annual aggregation of loss is subject to the automatic reinstatement clause. However, the automatic reinstatement clause in each policy entitles QBE, or the insured, to negate the effect of the clause by giving written notice to the contrary. So the notice is the switch, available to either party, to turn the clause off, allowing the annual aggregation clause to apply.
[61] QBE’s position is that where there have been successive losses, each loss is adjusted in the order in which it has occurred. So, when the first loss has been paid, the automatic reinstatement of the sum insured by the amount of payment for the first loss takes effect retrospectively back to the date of this loss. The latest time to give valid notice to applying the automatic reinstatement clause is when this
payment is made, because that is when the reducing effect of the payment would otherwise have occurred. However, the notice has no effect on that loss; it simply results in less of the sum insured being left for the next loss. So long as the insured is not underinsured this will not cause any unfairness.
[62] The commercial consequence of the insurer’s interpretation is that the insureds in these policies are woefully uninsured in the event of successive severe earthquakes before the amount of the loss from the first event has been settled by the loss adjustment process. On this interpretation, the insured, aware of the risk of further major shocks, has to go out into the marketplace to try to buy more cover, as the automatic reinstatement clause is effectively of no benefit to the insured, in an earthquake aftershocks context.
[63] QBE argues that this is just an inevitable consequence of selecting a sum insured maximum which is well below the likely cost of reinstatement of the whole building.
[64] Underinsurance, or being underinsured, is a well-known commercial concept. It is referred to in Maxims’ policy, when advising the policy may be subject to average. Mr Ring QC argues that had the insureds selected a sum equivalent to the likely cost of reinstatement, there would not have been a problem on the insureds’ construction of these automatic reinstatement clauses.
[65] Mr Ring QC argued that the automatic reinstatement clauses contemplate the following sequence of events, with and without notice:
In each case, it does not matter whether loss #2 happens immediately after loss #1, or at any subsequent stage:
Ÿ No notice: loss #1 (loss #2) adjustment of loss #1 payment of loss #1 automatic reinstatement of sum insured by amount of payment of loss #1 (alternatively, loss #2) adjustment of loss #2 payment of loss #2 (up to sum insured)
Ÿ Notice: loss #1 (loss #2) adjustment of loss #1 noticepayment of loss #1 no automatic reinstatement, sum insured reduced
by amount of payment of loss #1 (alternatively, loss #2) adjustment of loss #2 payment of loss #2 (up to sum insured less amount of payment of loss #1)
[66] These are both policies for 12 month periods. As is normal. Placing the formation of these contracts in this commercial setting, the Court is asked to examine the commerciality of an automatic reinstatement insurance clause were it only to apply:
after the loss adjustment process is completed and after payment has been made;
versus automatically on loss or damage;
or at the latest before the next loss or damage.
[67] I was troubled during oral argument by the deployment of the counterfactual of the “fully insured” to assist a reasonable interpretation of a policy which deliberately provides for the underinsured, by providing the benefit of “automatic reinstatement”, albeit subject to conditions.
[68] There is no suggestion that these automatic reinstatement clauses were proposed by the insureds. In these two cases, the policy schedules demonstrate that brokers were involved, but they were two different firms of brokers. The wording of these two clauses show common concepts. There is nothing to displace the normal presumption that the Court is looking at general provisions drafted by the insurer, offering cover to persons who want to underinsure.
[69] In this commercial context, underinsurance is relevant, but should not be taken into account in the exercise of interpretation in any pejorative sense. Rather it should be approached as a commercial policy of insurance which, among other things, seeks to include as customers for the policy, insurers who do not want to take out policies for a sum insured which matches the likely cost of total reinstatement. The question becomes, what is the meaning of the policy as the parties to the policy would reasonably have understood against the background, when they entered into the policy?
[70] Both counsel agreed that the essential enquiry is into what the parties must be objectively presumed to have intended by the automatic reinstatement clauses,
having regard to what makes commercial commonsense and/or avoids commercial absurdity.10
[71] Mr Ring focussed on what he described as “the deadline” for QBE to give a valid notice to the contrary. He argued, objective commercial factors reinforce that this deadline was intended to coincide with the payment that would deplete or cancel the sum insured in the absence of notice. He argued that commercially the initiative of giving notice was almost always going to lie with the insurer. There is no particular incentive in the insured not to want the automatic reinstatement clause. The insurer, he argued, has three options:
(a) Give written notice automatic reinstatement rendered ineffective.
(b) Not give notice, and require additional premium automatic reinstatement effective, unless the insured gives notice if so, insured is relieved from paying additional premium, but automatic reinstatement rendered ineffective.
(c) Do nothing automatic reinstatement effective.
[72] Mr Ring argued that in choosing between the available options, the insurer has to make an underwriting assessment similar to that made in granting or renewing the cover, but now also with the benefit of the latest claim experience, whether to replenish the total cover insured, either without charge or, at the most, in consideration for a premium calculated on the same basis as the existing cover. Faced with the up to date loss history, and this premium ceiling, its other option is to enable the total sum insured to be reduced by the amount of its payment.
[73] He described the more usual situation as one where there are not already successive losses. I agree and would go further and say that the more usual commercial expectation in Christchurch, at the same time these contracts were made, was that commercial buildings are unlikely to suffer significant loss or damage more
than once a year. Christchurch was not regarded to be one of those parts of New
10 Mr Ring QC citing Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC) at [8].
Zealand at immediate significant earthquake risk, say like Wellington. In an earthquake risk environment multiple damage in one year is a likely consequence of a major rupture of a fault, generating a sequence of quakes.
[74] I think there is a distinction between making an underwriting assessment and completing a loss adjustment process. Neither counsel mentioned making provision for payment, before the payment is made. This Court takes judicial notice of the prudent practice of an insurer to provision for loss, after a loss event, and often before liability is conceded, let alone before the loss and adjustment process is completed. On many occasions the scale of damage or loss can be grasped reasonably soon after an event.
[75] Mr Rennie for the insured emphasises clear intent of both clauses to reinstate
cover “from the date of loss”. He submits:
It would be an absurd result if QBE could give notice cancelling insurance where there have been subsequent events causing loss for which the insured could reasonably assume it was covered. That would effectively mean that, at the retrospective and self-serving election of QBE, there would be periods for which there would be no insurance (despite the Insured paying a premium for such periods). That interpretation lacks commerciality and would render the object of the policy illusory.
Thus, in order to avoid the default application of the reinstatement of insurance clause, QBE would at least have to give written notice before the occurrence of any later event causing loss for which there is coverage.
...
Having not given written notice before the subsequent events causing loss, it is submitted that the insurance must be treated to have automatically reinstated upon each event of loss and QBE is now precluded from giving any written notice under the clause.
[76] Mr Ring QC’s reply is that the clauses do not refer to any loss except the loss giving rise to the payment. There is nothing in the language of the clauses which would advance a common intention to remove QBE’s entitlement to give notice if a second loss has occurred by the date of payment, but to retain the entitlement if the next loss has not yet occurred.
[77] As Mr Ring QC also argued: “[in] the perhaps more usual situation, where
there are not already successive losses” the insured would have time to weigh the
cost of paying an additional premium against carrying the risk until the end of the policy period. So, for example, if the loss did not occur until the eleventh month of the policy, the insured may elect to run the risk for a month. But this is not the usual situation. This is another example of a problem of interpretation, likely occasioned by the parties not anticipating this factual setting: a series of events causing damage and loss in quick succession.
[78] Mr Ring QC argued that Mr Rennie’s argument does not make commercial
commonsense. That it must be assumed:
Ÿ The parties would not have agreed to a mutual notice regime unless, by the deadline to give the notice, each party had a reasonable opportunity to make an assessment of whether to do so...
Ÿ As well as being able to decide to give notice, each party is entitled to make the decision that serves its own best interests...
Ÿ The way in which the party stands to become better off is that it will pay less, or receive more, as the case may be, than if it does not give notice...
Ÿ Because the options of giving notice, not giving notice and charging an additional pro rata premium for the top up cover, and simply not giving notice, are equally available to QBE, the parties entered into the original contract on the basis that, for the premium charged, the most that the insured would be entitled to receive from QBE for all loss during the policy period would be the specified sum insured of about $3m in each case, with QBE having the sole initial discretion whether to provide top up cover during the term at the same charged rate. In other words, there could be no reasonable expectation on the insured’s part that it would be able to get more than the $3m unless QBE chose to confer this benefit, with or without charging an additional premium.
[79] I accept that all these are valid points, particularly the first. But they seem to leave out of account the predicament of the insured who is underinsured but has the contingent benefit of an automatic reinstatement clause. The insured needs to make a decision, whether to rely on the automatic reinstatement clause or go to the market and seek further insurance. It is unlikely that an insured would have entered into the policy thinking that the “automatic reinstatement” might not occur until after the policy expired, rather than during its term.
[80] On the other hand, Mr Ring QC argues that QBE is inherently unlikely to have shared a common intention that, if there was underinsurance, it would have to confer on the insured the double advantage of paying less premium than it should
have for the risk assumed, and of then also getting access to a greater aggregate sum insured than it otherwise would have if the risk materialises in reality. He argued from the phrasing of Tipping J in Vector Gas v Bay of Plenty Energy Ltd:11
... a meaning that flouts business commonsense must yield to one that accords with business commonsense.
[81] Mr Ring QC also argues that Wild South and Maxims could have had no reasonable expectation of getting the benefit from the automatic reinstatement clause, because that only occurs if QBE specifically chooses to confer this benefit.
[82] I have problems with this argument. Neither of the two reinstatement clauses say, in as many words, that the cover will be reinstated if QBE gives notice and the insured agrees to pay any additional premium required. If it was as simple as that, that really just amounts to preserving the opportunity of QBE to sell another insurance policy to the insureds who have just used up, or appear likely to have just used up their total cover. If that was the commercial bargain, why use the term “automatic”? “Automatic” is part of the insurer’s covenant.
[83] In a commercial environment, the term “automatic” means something will happen without the need to do anything positive by way of triggering it. This is reinforced by the fact that either of two parties can give notice, or no party can give notice. There is no doubt, and both parties agree on this, that if no party gives notice, that at some stage the cover is “automatically” reinstated. So notice is not the trigger. The problem is the clause does not provide a time for the trigger. It does, however, provide a time at which the reinstatement takes effect: the date of the original damage and loss. “Automatic”, linked with the date it takes effect, suggests either immediate reinstatement subject to notice, or prompt reinstatement subject to notice. Either way, where does the concept of cancellation fit in?
Resolution of interpretation of the automatic reinstatement clauses
[84] As repeatedly noted, both counsel appeal to an interpretation that makes commercial sense and is reasonable. I have referred to the fourth principle, cited
above, from West Bromwich, which is that the meaning of the document is what the
11 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] 2 NZLR 444 (SC) at [22].
parties using the words against the relevant background would reasonably have been understood to mean. The relevant background drives reasonableness.
[85] The concept of reasonable conduct by the parties is anticipated in the policies. The general conditions of the Wild South Policy, under the heading “CLAIMS”, impose a duty on the insured: “[to] notify the insurers within a reasonable time”, and “to give the insurers all such proof and information with respect to the claim as may be reasonably required.” The Maxims policy has a general condition 6, Duties in the Event of Claim:
If anything occurs which could give rise to a claim under any Policy the
Insured must:
(a) notify QBE as soon as possible...
[86] As to the relevant background, it needs to be included that the subject matter of these policies are two office buildings, each tenanted. The policies for both include not only damage to the buildings but business interruption. Upon an event of loss or damage of any significance, the parties to the policy can be expected to be engaged in dialogue very shortly thereafter and for some time, if only because of the immediate loss of rental income.
[87] In the nature of things there will be a very prompt scoping of the scale of damage, by both the insured and the insurer. For example, a fire in part of the building may not only render that part of the building unusable but affect access and egress to other parts of the building, rendering occupancy in the undamaged parts of the building interrupted. In most events of loss or damage there will not only be damage to property but loss of rental income.
[88] In the ordinary course of business the scale of the liability of the insurer will become clear tolerably soon, even though the amount to be paid will be unascertainable.
[89] It is my view that it is in this context, after a significant event causing damage or loss, of inevitable ongoing interaction between representatives of the
insured and the insurer, that one examines the intended application of these
“reinstatement” of amount of insurance clauses.
Cancelled by loss
[90] In the Maxims policy it will be recalled that the opening phrase of the
Reinstatement Amount of Insurance clause is:
In the event of a loss for which a claim is payable...
[91] That phrasing is consistent with the context that I have just described immediately after the damage or loss. Shortly after the event, the insurer knows there is damage or loss for which a claim is payable, which will reduce or extinguish the cover. In that sense, the cover has gone by reason of the loss event.
[92] The insurer will likely make provision for it and/or inform the reinsurers. In this context the insurer is also in the position to consider the ramifications of not giving notice under the reinstatement of amount of insurance clause, or adjusting a pro-rata premium.
[93] To give the automatic reinstatement clause in the Maxims policy business efficacy a reasonable amount of time has to be allowed by QBE to analyse these implications. But by no stretch does that analysis need reasonably to extend to the completion of the loss adjustment process and payment of the claim. What is reasonable will depend upon the context of the loss event. Here the examination is not predicated upon the expectation of the parties when the contract of insurance was made. The application of the reasonableness standard is based on the circumstances pertaining at the time the conduct is to be judged.
[94] For these reasons, I reject in the case of Maxims the argument for QBE that
QBE has until payment of the claim the option of giving notice or not.
[95] The second clause in the Maxims policy (cl 5, Reinstatement) reads:
...and in the absence of written notice by QBE or the Insured to the contrary, the amount of insurance cancelled by loss will be automatically reinstated from the date of loss.
I do not think it is necessary now, possibly never, to decide whether notice enables or disables the automatic reinstatement. This is because in the normal commercial context both parties will be considering their position as they are examining the scale of the fiscal cost of the damage or loss. It will be reasonably quickly ascertainable whether the loss runs to millions, and roughly how many millions. In normal circumstances there will be time to make a decision as to whether cover is exhausted or likely exhausted, running a short risk on the part of the insured of not having enough cover. However, after the elapse of a reasonable amount of time it will be too late for either QBE or the insured to give written notice to the contrary. For the clause carries with it the necessary implication that both the insured and the insurers will exercise their powers to give notice, and adjust the premium (in the case of the insurer), in a reasonable time.
[96] The wording of the Wild South clause is different. It does not have the preface clause:
In the event of a loss for which a claim is payable under Part 1, ...
Otherwise, the clause is the same.
[97] I do not think that the absence of the preface clause in the Wild South reinstatement provision is a material difference in this respect. Again, I think read as a whole there are economic considerations and legal obligations coming to bear on both the insured and the insurers, placing them in dialogue likely very soon after an event of damage or loss. For this reason, I think in respect of the Wild South clause as well, both the insurer and the insured have only a reasonable period of time to give notice.
[98] Whether or not there was automatic reinstatement of cover, before the February quake and thereafter before the June quake, depends upon the knowledge and conduct of the parties after each quake. Evidence is required before a Court can judge whether the reasonable time for giving notice to the contrary has passed.
Conclusion
[99] For these reasons, the Court’s answer to question 2 differs from both the insureds’ answer and QBE’s answer.
[100] The Court’s answer is:
(a) The insurer and the insureds have a reasonable period of time to give written notice to the contrary. If they do not give written notice within a reasonable period of time, it will be too late for either the insurer or the insureds to dispute automatic reinstatement.
(b)Whether or not there was automatic reinstatement of cover, before the February quake and thereafter before the June quake, depends upon the knowledge and conduct of the parties to the policies after each quake. Evidence is required before a Court can judge whether the reasonable time for giving notice to the contrary has passed.
Question 1 – What is the basis and measure of indemnity under the policies and when is it payable?
[101] At the hearing, I expressed some reluctance to answer this question. I was concerned that it invited the Court to write a textbook on these policies, independent of the fact that QBE has in fact made payments on what it considers to be an indemnity basis pending resolution of the claims. There is already an unresolved question as to whether those claims have been accepted as a discharge of at least part of the obligation of QBE to the insureds.
[102] Question 1 was agreed by counsel (apparently with some reluctance by
Mr Ring QC). It was not settled by the Court.
[103] The reader can readily compare the insureds’ and the insurer’s answers to question 1 set out above in [13]. The only significant difference that I could discern between the parties’ positions, during the course of oral argument, was QBE’s emphasis on the indemnity value being judged at the time of loss. That the indemnity value may depend upon the owners’ intentions at the time of loss.
[104] One example given in argument was of the owner of a building, with a plan for its demolition and the construction of a new building on the site; another was an owner who had entered a contract for sale of the land to a third party. There are obviously two different values capable of being placed on the building, depending on either of those situations. The concept of indemnity is to put a person back in the position they would have been but for damage or loss.
[105] I agree with QBE’s proposition that the indemnity value will depend upon the particular circumstances of the case. I do not propose to take the discussion any further. The indemnity value in each case is a factual enquiry.
[106] Leave is reserved to apply for a more complete answer to question 1.
Question 3 – What are the limitations (if any) on QBE’s liability under the
policies and the effects of any limitation?
[107] The Court’s answer to question 2 depends on evidence not yet before the Court. I think that there is no utility, given the Court’s answer to question 2, to pursuing discussion of question 3(a) and (b). Leave is reserved to the parties to apply for answers to these questions.
3(c) - Average
[108] The live question is the application of average, which is question 3(c).
[109] Maxims’ building has been demolished and removed. QBE’s answer to the average condition reveals that it has applied average to the sum insured of $3.61 million to identify the amount that it has paid out of $1,523,420.
[110] SP6 of the reinstatement memorandum within Maxims’ policy states:
If, at the time of loss or damage, the sum insured is less than 90% of the cost which would be reincurred by Reinstatement of the whole of the property to which the sum insured applies were Destroyed, then the Insured will be considered as an insurer for the difference between the sum insured and the sum representing the cost of Reinstatement of the whole of that property, and must bear a rateable proportion of the loss accordingly.
[111] Section 16 of the Insurance Law Reform Act 1985 provides:
16 Disclosure of pro rata condition of average
(1) Where a contract of insurance (not being a contract to which section
15 of this Act applies or a contract of marine insurance within the meaning of section 3 of the Marine Insurance Act 1908) contains a
pro rata condition of average, the condition shall be of no effect
unless, before that contract is entered into, the insurer clearly informs the insured in writing of the nature and effect of the condition.
(2) Notwithstanding subsection (1), where it is not reasonably practicable for the information required by that subsection to be given to the insured in writing before the contract is entered into, that subsection shall be deemed to be complied with if the insurer—
(a) gives the information orally before the contract is entered into; and
(b) gives the information in writing as soon as it is reasonably practicable to do so.
(3) Without limiting the means by which the requirements of subsections (1) and (2) may be satisfied, it is hereby declared that any requirement which is imposed by any provision of those subsections and which requires information in writing of the nature and effect of a pro rata condition of average to be given shall be satisfied if that information is given in writing in the following form:
“The meaning of subject to average
(1) Your insurance policy contains a provision making it subject to average.
(2) That provision will have effect only if the property insured under the policy is underinsured at the time of loss.
(3) If the property insured under the policy is underinsured at the time of loss, the following rules apply:
(a) if you suffer a total loss, the provision will have no effect:
(b) if you suffer a partial loss, the maximum amount that you may recover will bear the same proportion to your actual loss as the amount for which the property is insured bears to the full value of the property:
(c) whatever your loss, in no case will you be entitled to recover more than the amount for which the property is insured.
Example: Your property is worth $20,000. You insure it for
$10,000. You suffer a loss of $5,000. If your policy is subject to average, the maximum amount that you may
recover will be $2,500.”
(4) This section does not apply in respect of a contract of insurance entered into before the commencement of this Act.
[112] There is no doubt that SP6 is an average condition. The plaintiffs’ argument is that s 16 of the Insurance Law Reform Act requires, in subsection 2, separate notice in writing to the insured before the contract is entered into. That it is not sufficient for the notice to be in the policy. This argument responds to the fact that the Maxims policy contains the notice.
[113] The first page of Maxims’ policy contains a notice, written plainly from s 16(1) as the template:
1.The insurance you have selected may contain a provision making it subject to average.
2.That provision will have effect only if the property insured under that Policy is underinsured at the time of loss.
3.If the property insured is underinsured at the time of loss, the following rules apply:
(a) If you suffer a total loss the provision will have no effect;
(b) If you suffer a partial loss, the maximum amount you may recover will bear the same proportion to your actual loss as the amount for which the property is insured bears to the full value of the property;
(c) Regardless of the amount of your loss, in no case will you be entitled to recover more than the amount for which the property is insured.
Example: Full value of Property $40,000
You insure Property for $20,000
You suffer a loss of $10,000
The maximum amount you may recover will be $5,000.
[114] The Maxims policy provides for average in the general terms detailing the reinstatement entitlements. There is no evidence before the Court that these terms were provided separately by the insurer to Maxims before the contract was entered
into. Accordingly, Mr Rennie submits, pursuant to s 16(1), the average clause is of no effect.
[115] The argument for Mr Ring QC relies on the function of the broker. He submitted:
QBE has been insuring MFL in respect of the building for consecutive policy periods since 2005 under the same policy wording. At all times, MFL dealt with QBE through the agency of a broker. By industry convention, all insurer-to-insured communications must go via the placing broker; and QBE was not permitted to communicate direct with MFL. When the insurance incepted in 2005, QBE sent the broker a copy of the wording. (An affidavit by Mr J V Soest has been filed for the purposes of this argument, and is not disputed.) The wording contains the statutory form of notice.
[116] Mr Van Soest advises that the first schedules for Maxims were produced on
14 July 2005, and at that point he believes that QBE would have sent these schedules and the applicable policy wording, here the NBI 0204 Material Damage and Business Interruption Policy to the insured’s broker, Argent Insurance Brokers Limited.
[117] He confirms that in the New Zealand market the convention is that the underwriter does not deal directly with the insured under any circumstances, but deals only with the insurance broker.
[118] It is probable that the Maxims’ broker would have appreciated that the policy was subject to average. I say probable and not for certain, as brokers’ offices have a number of staff, and one cannot presume as to the experience and competence of the particular employee handling the transaction.
[119] On the probabilities that the brokers knew, the question becomes whether or not that satisfies the requirement of s 16 of the Insurance Law Reform Act. The material words are:
The condition shall be of no effect unless, before that contract is entered into, the insurer clearly informs the insured in writing of the nature and effect of the condition.
Within that phrase, the Court notices the words “before”, “clearly” and “in writing”.
[120] There is no evidence that the insurer asked Maxims’ broker to clearly inform the insured before the insured entered into the contract of the nature and effect of the condition, and to give a separate statutory notice in writing to the insured.
[121] This Court takes judicial notice of the fact that clients of brokers do not always see the general policy wording.
[122] There are a number of possibilities. The broker may have told the insured
orally of the “average” condition.
[123] Section 16 clearly places this obligation on the insurer. This obligation can be discharged by the insurer consistent with the convention, in the manner indicated above, by ensuring the broker carries out this task.
[124] An enquiry into the facts of this case may confirm that the insured’s broker did before the contract was entered into clearly inform the insurer in writing of the nature and effect of the condition. It would be a question of fact as to whether passing on the policy term was sufficient. It might depend on whether there was any oral explanation drawing attention to the average explanation. Certainly, the average material in the policy has to be found among a lengthy text of the policy terms.
[125] For these reasons, I do not think it is possible to answer question 3(c) on the limited information before me, other than to rule that the probability of QBE sending the schedules and policy wording to the broker in 2005 is not sufficient to discharge the precondition that the insurer clearly informs the insured in writing of the nature and effect of the condition before that contract is entered into.
Question 4 – Is the insurer liable for the insureds’ reasonable and actual claim
preparation costs incurred and, if so, up to what is the maximum amount?
[126] The difference between the parties is in respect of the Wild South policy. QBE’s argument is that the only policy provision in Wild South’s policy that would give any claim for preparation costs coverage is in Section Two, which is the business interruption section. But Wild South is not insured at all under Section Two. The “total sum insured” for Section Two in the policy is “nil”.
[127] The Wild South argument relies on the second paragraph under the heading
“Claim Preparation Costs” in Section Two, which reads:
The insurance on Claim Preparation Costs covers all costs (including but not limited to the costs of services performed by the Insured’s employees, third party fees), reasonably incurred for the preparation and presentation of any claim made on this Policy as a result of Damage.
[128] Mr Rennie argues that this second paragraph contemplates there is coverage for the costs of claim made as a result of the damage. Damage is defined as:
“Damage” means such loss or damage as is covered under Section One of this Policy...
[129] Accordingly, he submits there is coverage for the costs of preparing a claim under Section One of the policy (material damage). He acknowledged that there is no sum insured specified in schedule A for claim preparation costs. However, he submits it is arguable that cl 8(1) in Section Two is for the purpose of ensuring that a “sum insured” need only be specified where the insured requires coverage for preparing costs of a claim made under Section Two, rather than costs of a claim under Section One, which are already covered. He acknowledges there is an ambiguity and says it should be resolved in favour of the insured.
Analysis
[130] The schedule of the Wild South policy, being part of the “placing slip”, under the heading “Covering”, distinguishes Section One and Section Two. Section One has total sum insured of $3,035,700 and Section Two nil. The policy terms persistently distinguish between Section One and Section Two. The opening two paragraphs of the general terms are as follows:
IN CONSIDERATION of the Insured paying or agreeing to pay the premium to the Insurers named below, the Insurers agree to indemnify the Insured in the manner and to the extent set out in this Policy.
Each Section of the Policy is to be interpreted as if issued as a separate Policy and, unless the context requires otherwise, the word “Policy” is to be read accordingly.
Thereafter various terms sometimes refer to Section One and sometimes to Section
Two.
[131] In the placing slip there is provision for the total sum insured and a number of sublimits under various headings (for example, electric current damage) and no reference to costs. Under Section Two, because total sum insured is nil, there are no sublimits. The policy has a section headed “General Conditions Applicable to Sections One and Two”.
[132] Section Two of the policy deals with business interruption costs (for example, to replace records, costs of moving to and from temporary premises, additional costs of lighting, heating and so on). It does make sense that claim preparation costs need to be separately identified under Section Two, because these are business costs closely identified and perhaps inextricably linked to the business costs of adapting to the damage.
[133] The second paragraph relied upon by Mr Rennie appears under the heading
of Section Two “Insured Interests” and amidst other Section Two provisions.
[134] I do not think it can be presumed that policies normally provide for claim preparation costs. For example, the Maxims cover allows reasonable professional and clerk of work fees, salaries and costs issued or incurred in reinstating damages, but excludes fees for preparing claims. Unlike Wild South’s policy, there is no clause saying that headings are to be disregarded in Maxims’ policy. For this reason, I think that the second paragraph relied upon by Mr Rennie is confined to Section Two.
[135] It follows that the answer to question 4, in respect of Wild South, is that there is no liability on QBE for the insured’s costs of preparing the claim, when made under Section One.
Question 5 – What is the proper application of any excess or deductible under the policies?
[136] A comparison with the insured’s answer and QBE’s answer shows that there
is no agreement.
[137] The Wild South policy provides:
Each Event will be adjusted separately. The adjusted loss will be net of salvage and other recoveries. From each adjusted loss the amount stated in Schedule A will be deducted.
The schedule describes the deductible in relation to earthquake as
2.5% of the loss with a minimum of $2,500
[138] Mr Rennie notes that the policy does not state that a deductible be subtracted from the payment made by the insurer. He submits that the deductible is a percentage of the loss. He invites the Court to follow Australian Consolidated Press Holdings Pty Ltd v Royal Insurance (Global):12
[O]ne commence[s] by determining the value of the property lost, which [is] the amount of the Insured’s claim, deduct[s] from that sum any deductibles, and thereafter applie[s] the monetary cap provision.
[139] Mr Ring QC submits that in insurance terminology and practice “adjustment” is the process of applying the relevant terms of the policy to the insured’s claimed loss caused by an insured event to determine the amount that the insurer has to pay. This reflects the historic use of the term, “adjusting the policy”, which is now referred to as settling the claim. In earlier times, the word “settled” was stamped on the policy, and the percentage of the loss underwritten by a particular insurer was recorded after the stamp, which the insured then initialled. This showed how much of the cover was left. Mr Ring QC submits that it is clear the parties intended that loss “in schedule A” and “adjusted loss” in the deductible condition would refer to the same thing. This must be correct because the deductible has to be adjusted from “each adjusted loss”. The “adjusted loss” referred to in this context is the amount assessed as payable by QBE for the particular earthquake as a result of that “... Event... (having been) adjusted separately”. This infers that the deducting the deductible is the last step in the adjustment process – that is after applying any upper limit imposed by the sum insured. This is also consistent with
the strict insurance meaning of “deductible”.
12 Australian Consolidated Press Holdings Pty Ltd v Royal Insurance (Global) (1997) 9 ANZ Insurance Cases 61-351 at 76897 per Cole J A.
[140] I agree with Mr Ring QC’s analysis. Moreover, his argument is consistent with a line in schedule A of the Wild South policy, under “Covering”. As a note at the end of Section One, after the list of the sublimits, there is a line:
The Sub Limits stated above are understood to be in excess of the relevant
Deductibles.
In my view, the clarifying comment to sublimits confirms the intent that these deductibles be deducted from the adjusted loss to be made by the insurer to the insured.
[141] In the Australian Consolidated Press case, a quantity of gold bullion had been stored in a strong room of the premises of ACP. It was stolen after a break-in. There was a policy limit for gold bullion of $A5 million. There was provision for an “aggregate deductible” of $1 million for each 12 month insurance period. The cost of replacement of gold bullion was plainly its value at the date of loss. It was agreed that the value of bullion stolen exceeded $A5 million. The Court of Appeal reversed the Supreme Court and, by a majority, held that the natural reading of the primary obligation clause in the policy was that the insurers were obliged to pay to the insured the value of goods lost. That obligation was then qualified by subsequent stated limits. Going down that logic in this policy, the basis of settlement starts with the cost of replacement, which in this case of course exceeded $A5 million. Essentially, the insurer started by treating the gold bullion claim at $A5 million, whereas the insured started by treating the value of the gold at $5.4 million. There was a much more complicated deductible clause in this policy. There was a distinction between first deductibles and aggregate deductible. The terms of the policy are so different that I do not think this case can be relied upon by this Court.
[142] It does not make any commercial commonsense for there to be a limit on the sum insured agreed by the insurer, but with the deductible coming off a much larger sum which was never going to be payable by the insurer. That interpretation is supported by the clarification of the sublimits. Clarification of the sublimits can be read as a precaution to make it clear that the sublimits were themselves subject to being deductible. As the sublimits are part of the whole, it follows the assumption is that there is a deductible on the whole of the total sum insured, not on the total loss.
[143] The answer to question 5, in respect of Wild South, is that the deductible applies to the adjusted loss.
[144] It is my reading of the insureds’ and insurer’s answer to the application of excess in respect of the Maxims policy that it is subtracted from the gross loss amount, Maxims’ actual loss, before the application of the sum insured. In that respect, although the wording of their answers differ, the substance is the same. Therefore, I do not answer the question in respect of Maxims. If I am mistaken there is leave to apply for an answer to be given, but I would require further submissions to clarify the difference between the parties.
Summary
Question 1 - What is the basis and measure of indemnity under the policies and when is it payable?
[145] I agree with QBE’s proposition that the indemnity value will depend upon the particular circumstances of the case. I do not propose to take the discussion any further. The indemnity value in each case is a factual enquiry.
[146] Leave is reserved to apply for a more complete answer to question 1.
Question 2 - What is the proper interpretation and application of the automatic reinstatement clauses in the policies?
[147] The Court’s answer is:
(a) The insurer and the insureds have a reasonable period of time to give written notice to the contrary. If they do not give written notice within a reasonable period of time, it will be too late for either the insurer or the insureds to dispute automatic reinstatement.
(b)Whether or not there was automatic reinstatement of cover, before the February quake and thereafter before the June quake, depends upon the knowledge and conduct of the parties to the policies after each
quake. Evidence is required before a Court can judge whether the reasonable time for giving notice to the contrary has passed.
Question 3 - What are the limitations (if any) on the insurer’s liability under the
policies imposed by:
(a) any stated sum insured;
(b) Special Conditions 3(b) and 3(c); (c) any average condition; and
what is the effect of each?
[148] I think that there is no utility, given the Court’s answer to question 2, to pursuing discussion of question 3(a) and (b). Leave is reserved to the parties to apply for answers to these questions.
[149] I do not think it is possible to answer question 3(c) on the limited information before me, other than to rule that the probability of QBE sending the schedules and policy wording to the broker in 2005 is not sufficient to discharge the precondition that the insurer clearly informs the insured in writing of the nature and effect of the condition before that contract is entered into.
Question 4 - Is the insurer liable for the insureds’ reasonable and actual claim
preparation costs incurred and, if so, up to what is the maximum amount?
[150] It will be noted that the insureds and QBE agree on the answer in respect of the Maxims policy. I therefore do not propose to answer question 4 in respect of Maxims.
[151] The answer to question 4, in respect of Wild South, is that there is no liability on QBE for the insured’s costs of preparing the claim, when made under Section One.
Question 5 - What is the proper application of any excess or deductible under the policies?
[152] The answer to question 5, in respect of Wild South, is that the deductible applies to the adjusted loss.
[153] It is my reading of the insureds’ and insurer’s answer to the application of excess in respect of the Maxims policy that it is subtracted from the gross loss amount, Maxims’ actual loss, before the application of the sum insured. In that respect, although the wording of their answers differ, the substance is the same. Therefore, I do not answer the question in respect of Maxims. If I am mistaken there is leave to apply for an answer to be given, but I would require further submissions to clarify the difference between the parties.
Costs
[154] Costs are reserved.
Solicitors:
Rhodes & Co, Christchurch
Keegan Alexander, Auckland
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