The Court of Appeal has upheld the High Court’s decision in Southern Response v Dodds, which found that Southern Response induced the Dodds to settle their earthquake insurance claim by misrepresentations as to the cost to reinstate their home.

This decision is significant for Southern Response insureds – many of whom settled their earthquake claims on abridged cost estimates provided to them by Southern Response. It is also significant for the Ross v Southern Response class action, which represents some 3,000-odd such customers. 

Background

At the heart of this case is Southern Response’s practice of preparing two versions of its reinstatement cost estimates, which Southern Response termed “detailed rebuild / repair analyses” or “DRAs”. One version of the DRA was disclosed to insureds (the Abridged DRA), while another version of the DRA that included additional costs allowances was held internally (Complete DRA).

In this case, the Dodds’ home was damaged beyond economic repair as a result of the Canterbury earthquakes. In 2011, the Dodds made insurance claims with EQC and Southern Response.

The Dodds’ policy entitled them to choose between four settlement options in the event that their home was damaged beyond economic repair. One of these options provided for Southern Response to pay the cost of buying another house, together with legal and associated fees, provided that the cost of doing so is not “greater than rebuilding your house on its present site” (the Buy Another House Option).

The Dodds were provided with a copy of an Abridged DRA and settled their insurance claim with Southern Response based on that document. Years later, they obtained a copy of the Complete DRA in relation to their home following a request to Southern Response under the Privacy Act 1993.

The Complete DRA included additional costs allowances (amounting to approximately $217,000) that had not been included in the Abridged DRA. Following this, the Dodds issued proceedings against Southern Response on the basis that they had been misled into settling for a sum that did not reflect the true cost of rebuilding their house.

High Court’s findings

In the High Court, the Dodds sought $217,000 (being the difference between the Abridged and Complete DRAs), plus interest and general damages, on three grounds:

1. Misrepresentation: the Dodds argued, successfully, that they were induced to settle their insurance claims by a misrepresentation that the cost of rebuilding their house was $895,000 when, in fact, it was more.
2. Misleading and deceptive conduct: the Dodds also alleged that Southern Response’s conduct was misleading and deceptive and breached section 9 of the Fair Trading Act 1986. This was accepted by the Court.
3. Implied duty of good faith: finally, the Dodds claimed that Southern Response breached an implied duty of good faith by failing to disclose its actual assessed cost of rebuilding the house and by withholding material information. The Court did not need to decide this point but noted that it would have found for the Dodds under this alternative cause of action had it been required to do so.

In defending the claim, Southern Response argued that, even if the Dodds’ claims in misrepresentation, misleading conduct or breach of good faith were made out, they could not recover any damages because they had signed a settlement agreement that recorded that Southern Response was making payment in full and final settlement of their insurance claims. The High Court rejected this, noting that settlements induced by misrepresentation can be set aside. Even a well drafted settlement clause may be avoided if there is a positive misrepresentation.

With respect to damages, the High Court held that the Dodds were entitled to receive the value of Southern Response’s contingency allowance, architects and design fees, as well as the costs of its contractor, Arrow International Limited (Arrow), entering into construction contracts and supervising construction. The Dodds were not entitled to receive the value of Southern Response’s demolition cost allowance (as Southern Response had carried out demolition itself), nor were they entitled to Arrow’s administration costs. The Dodds were awarded $178,894.30 plus interest. The High Court did not award general damages – the high threshold applying to general damages having not been met.

Southern Response appealed the High Court’s findings, and the Dodds’ cross-appealed against the High Court’s decision to decline general damages.

Court of Appeal’s findings

The Court of Appeal upheld the High Court’s findings that the Dodds had been induced to settle their insurance claims by misrepresentations made by Southern Response, and that by these misrepresentations, Southern Response had also breached section 9 of the Fair Trading Act.

In drawing this conclusion, the Court discussed three false representations made by Southern Response. These comprised two representations as to fact – namely, that the cost of rebuilding the house on its present site was $895,000 and that the Abridged DRA was the only relevant estimate of costs received from Arrow – and a related representation as to the Dodds’ maximum policy entitlement under the Buy Another House Option.

In relation to Southern Response’s statements as to the Dodds’ policy entitlements, the Court held that the context of those statements (which were communications from an insurance company with relevant knowledge and expertise to consumer insureds) and the unqualified nature of the statements combined to convey a definitive statement of the Dodds’ entitlements under the policy. A reasonable recipient of those statements would not have understood them as merely setting out Southern Response’s opinion as to the Dodds’ policy entitlement. Importantly, the Court held that:

“[If] an insurer dealing with consumers takes it on itself to make absolute statements about matters which are in fact open to doubt, in circumstances in which it is reasonable for the insured to rely on the insurer’s statements, a subsequent finding that the insurer was wrong may expose the insurer to liability. Context is everything”.

The Court also upheld the High Court’s approach to damages, noting that the Dodds were entitled to recover the difference between the true value of their rights under the policy, and the sum they were paid in exchange for a surrender of those rights.

As the High Court’s approach to damages was upheld, the Court of Appeal was not required to consider making an order to set aside the settlement agreement. It was also not required to consider the alternative basis on which the Dodds’ claim was advanced – i.e. their claim for breach of the implied duty of good faith. The Court nevertheless observed that it does not follow from the fact that a contract of insurance is a contract of good faith that there is an implied term of good faith in every insurance contract that applies to all aspects of the parties’ dealings. Rather, the authorities suggest these obligations are context-specific.

Southern Response’s appeal was therefore dismissed, except to the limited extent of reducing the sum awarded to the Dodds in the High Court by $11,000 to account for calculation errors. The Dodds’ cross appeal was also dismissed.

Southern Response has confirmed that it does not intend to appeal this decision.

Implications for insurers

This decision reinforces the message delivered in the High Court – that insurers must deal transparently with insureds. Insurers should not make absolute statements on matters that could be up for debate where it would be reasonable for the insured to rely on such statements. If an insurer makes a settlement offer based merely on its opinion of a customer’s policy entitlement, this should be made clear to the customer.

Further, it is important for claims management and settlement processes to be designed with this in mind, to avoid the adoption of processes which might be called into question by not one, but many, insureds.'

Read Cover to Cover: Issue 21