Case updates: The Canterbury Earthquakes Insurance Tribunal and Earthquake List
In this article we provide an update on some of the recent earthquake insurance decisions that have come out of the High Court and the Canterbury Earthquakes Insurance Tribunal.
Inicio Ltd v Tower Insurance Ltd:1 High Court issues decision on limitation periods
In its first Earthquake List decision on limitations defences, the High Court has held that an insurer’s offer to settle a claim amounted to an acknowledgment of liability under section 47 of the Limitation Act 2010, giving the policyholder a “fresh claim” and effectively re-starting the limitations clock.
In this case, the policyholder insured its house with Tower, for its full replacement value. The house was damaged beyond repair in the earthquakes. Tower assessed the full replacement value of the house at $321,797, and contributed that sum towards the building of two new units on the same property under a construction contract dated 18 September 2012. The policyholder was not required to sign a full and final settlement agreement.
The policyholder then wrote to Tower some five years later, in August 2017, claiming that Tower had undervalued its insurance claim.
Tower responded in February 2018, offering a further $55,030 to settle the policyholder’s claim. In its letter, Tower advised that “Based on the legal advice we have received, this represents the extent of Tower’s outstanding liability with your claim.” It also noted that the offer included a professional fees allowance that Tower considered the policyholder was not entitled to.
Tower extended the time for accepting its offer three times, but it was not accepted. Tower withdrew the offer in March 2018, and replaced it with a lower offer of $28,216 – i.e. $55,030 less the professional fees that Tower considered were not payable.
This offer was also refused. The policyholder alleged it was owed $882,221 for Tower’s alleged failure to correctly assess the full replacement value of the house. Tower replied by advising of its position that the limitation period for the making of a claim expired on 17 September 2018 – being six years from the date on which the construction contract was executed. The policyholder commenced proceedings, and Tower applied for summary judgment.
In its decision, the Court agreed with Tower that the time on the “limitation clock” ran from 18 September 2012, when the construction contract was signed. However, the policyholder argued that Tower’s February 2018 settlement offer was an acknowledgement of liability for the purposes of section 47 of the Limitation Act 2010. Section 47 of the Limitation Act applies where a claimant proves that the defendant “acknowledged to the claimant in writing a liability to, or the right or title of, the claimant” or made a part payment in respect of that liability. If proven, the claimant is deemed to have a fresh claim on the day after the date on which the acknowledgment or part payment was given or made.
Tower argued that the February 2018 settlement offer was not an acknowledgement of liability to pay $55,030 “come what may” but rather a pragmatic offer to settle a disputed claim for damages. The insurer had not relinquished its right to defend the policyholder’s claim either as to the $55,030 or generally and, indeed, the offer was for a greater sum than what the insurer believed the policyholder could possibly be entitled to.
The Court rejected all of these points. It held that the February 2018 settlement offer was an acknowledgement of liability and declined to grant summary judgment on the basis that:
(a) Tower offered pay $55,030 in full settlement of the earthquake related damage to the policyholder’s house, and as such the letter was an acknowledgement of liability.
(b) Regardless of whether Tower’s letter was an acknowledgement of liability for $55,030 or for a lesser sum, the letter was an acknowledgement in writing of a liability to the policyholder. If some liability is acknowledged, it is immaterial that the amount at issue is disputed.
This case highlights the need to take care when making settlement offers where the claimant is running up against the applicable limitation period. Settlement offers may be interpreted as acknowledgements of liability, and have the effect of re-starting the limitation clock. If a settlement offer is to be made, careful thought should be given to how it is presented to ensure that section 47 is not triggered.
E and E v IAG New Zealand Limited:2 referral of question of law on insurer’s obligations to remedy defective repair work
This case involves a successful application in the Tribunal to refer a question of law to the High Court. The question – which will have implications for many earthquake insurance cases – was:
Does an insurer’s policy obligation to pay the cost of repairing the house to the policy standard, as and when incurred by the insured, include an obligation to also pay for the reasonable cost subsequently required to remedy defective repair work?
In this case, IAG had accepted the plaintiffs’ insurance claim. The plaintiffs entered into a building contract to carry out the repairs, and this contract was project managed by a third party. Both the builder and the project manager are now in liquidation.
When the contract works were completed, IAG paid the full contract price of $347,464.07. However, the plaintiffs were not satisfied with the work and commissioned various reports. From these investigations, they concluded that the repairs had been inadequately scoped and failed to address all of the earthquake damage. The house had been left damaged and it was not weathertight.
The plaintiffs considered that it would now cost $1,161,770 to reinstate their house to the policy standard and sought to recover that sum from IAG. IAG’s position was that the plaintiffs should instead pursue those responsible for completing the defective repairs.
The Tribunal considered IAG’s application to refer the question above to the High Court and agreed that a referral was appropriate. It was a question of law that required determination in the proceedings, and it had become a roadblock in this case – and others.
Insurers should keep an eye out for the High Court’s decision on this question as, if it is answered positively, it may have the effect of extending their obligations to include remedying defective repair work carried out by others.
M and M v IAG New Zealand Limited3 and Mathieson v Tower Insurance Ltd:4 Tribunal and High Court issue decision on matters of policy interpretation
The Tribunal and the High Court have both recently issued decisions on the interpretation of important insurance policy obligations.
M and M v IAG
M and M related to a dispute as to scope of works. IAG had accepted liability to repair earthquake damage to the house, and was willing to pay the reasonable cost of the necessary repairs. However, when the plaintiffs submitted plans, specifications and estimates to IAG for approval, IAG declined to approve six items in the scope of works on the basis that they were not necessary. The parties agreed to submit their dispute as to these six items for a preliminary ruling.
The plaintiff’s policy provided, in relevant part, that:
- You must ask for our permission before you:
- incur any expenses in connection with a claim under this policy, or
- negotiate, pay, settle, or admit any allegation that you are legally liable, or
- do anything that may prejudice our rights of recovery.
It is best that you allow us to manage your claim on your behalf. We’ll let you know how you can help us when we talk to you about your claim.
The policy did not place any qualifications on the insurer’s right to refuse permission for the policyholder to incur repair expenses.
However, the Tribunal considered that the insurer’s decision-making powers did not exist in a vacuum and commented that it would be unconscionable to allow an insurer with an obligation to act with the utmost good faith to wield unbridled power over the repair or rebuild process.
The Tribunal held that it was appropriate to require the insurer to act reasonably, and that the best method of ensuring this was by implying a condition to that effect into the insurance policy.
The Tribunal held that the permission clause set out above was to be amended as follows:
You must ask for our permission before you:
- Incur any expenses in connection with a claim under this policy, or
- Negotiate, pay, settle, or admit any allegation that you are legally liable, or
- Do anything that may prejudice our rights of recovery
Provided however that we will always have due regard to your interests and will not unreasonably withhold our permission.
In respect of the six disputed items in the plaintiffs’ scope of works, the Tribunal found that in five out of the six repair items, IAG had acted unreasonably in withholding permission.
This decision may be cause for concern amongst insurers. The usual rule provides that a term will not be implied into a contract unless it is necessary to give business efficacy to the contract or “goes without saying”.5 In this case, the Tribunal qualified a key policy term without reference to this rule – and it is not clear what it means to require an insurer to have “due regard” to policyholder interests.
Mathieson v Tower Insurance Ltd6
Mathieson, a case before the High Court, also concerned the interpretation of an insurance policy.
In this case, the Tribunal referred three questions of law to the High Court for determination. The primary question was:
The policy contained a warranty that the “maximum sum insured is $455,000”. Was the $455,000 cap (less EQC payments) an overall cap on the amount that the policyholders could recover under the policy or did it apply as a cap per earthquake event?
This case concerned an indemnity policy, which insured the present day value of the plaintiff’s home. “Present Day Value” was defined to mean “the cost at the time of the loss or damage of rebuilding, replacing or repairing your house to a condition no better than new and up to the same area as shown in the certificate of insurance … but limited to the market value of the property less the value of the land as an unoccupied site”.
The policy schedule recorded that the plaintiffs had warranted that the market value of the house was $455,000. The plaintiffs had obtained a cost estimate which indicated that it would cost more than $3 million to repair the insured damage.
The policyholder argued, relying on Ridgecrest NZ Ltd v IAG New Zealand Ltd7 and QBE Insurance (International) Ltd v Wild South Holdings Ltd8, that the $455,000 cap could be claimed for each earthquake event on the basis that the sum insured automatically reinstated after each event.
The insurer disputed this. It said that it was only required to make one payment of $455,000, because the $455,000 cap was an overall cap on the amount that the policyholders could recover under the policy. The insurer argued that it would be contrary to the indemnity principle if the policyholder received more than the market value of the dwelling.
The Court accepted the insurer’s submissions and distinguished Ridgecrest and Wild South.
In Ridgecrest, the sum insured was described as “the maximum amount you can claim under any Part [of the policy] in respect of one happening” – or, in other words, per event. This was interpreted to allow for successive claims up to replacement value. By contrast, in Mathieson, there was nothing in the policy to suggest that the $455,000 cap was a per event cap. Rather, it was expressed to be a limit on the sum insured, to indemnity value only.
Wild South was also distinguished. In that case, the policy said that the sum insured reinstated “from the date of loss or damage”, while in Mathieson, the policy provided for reinstatement of the sum insured “after we [Tower] meet any claim”. The Court considered that because of this, the parties intended for reinstatement to occur when the policyholder’s first claim was settled, and after the parties had an opportunity to consider whether to cancel or reinstate the policy.
For these reasons, the only way that the policyholder could make a second claim within the term of the policy was if the damage for the first claim was repaired before a second claim was made, or where the value of repairing the damage from the first claim was less than $445,000.
Bolstad v The Earthquake Commission and Tower Insurance Limited:9 unsuccessful application to transfer High Court proceedings to the Tribunal
In issue 18 of Cover to Cover, we discussed a number of High Court cases which suggest that, in general, the courts will take a broad approach in favour of applications to transfer proceedings to the Tribunal.
However, the plaintiff’s application to transfer proceedings to the Tribunal in Bolstad v The Earthquake Commission and Tower Insurance Limited was unsuccessful.
In that case, the application was made at a relatively late stage. The parties’ experts had completed a joint expert report, and the next step in the proceeding was for the parties to exchange briefs of evidence.
However, the outcome of the joint expert process made it difficult for the plaintiff to maintain its claim, as the parties’ experts had agreed that the insured dwelling had not suffered any earthquake damage. The plaintiff did not accept that conclusion and, indeed, its claim could proceed without a new expert.
Rather than engage a new expert, however, the plaintiff applied for the proceeding to be transferred to the Tribunal, on the basis that the Tribunal has an inquisitorial function and could appoint its own expert to facilitate an expert conference. The cost of this expert would be met by the Tribunal.
The insurer opposed the application on the basis that it was not in the interests of justice:
(a) First, the application was an attempt to challenge the conclusions of the joint expert report at the Tribunal’s cost. This does not reflect the purpose for which the Tribunal was established.
(b) Second, the Court should not be seen to assist the plaintiff in undermining the joint expert process by ordering a transfer to the Tribunal.
Associate Judge Lester accepted the insurer’s submissions, further commenting that he doubted that the Tribunal would fund a further report aimed a contradicting a joint expert report.
- Inicio Ltd v Tower Insurance Ltd  NZHC 90.
- E and E v IAG New Zealand Ltd  CEIT 0013.
- M and M v IAG New Zealand Ltd  CEIT 0013.
- Mathieson v Tower Insurance Ltd  NZHC 136.
- BP Refinery (Westernport) Pty Limited v Shire of Hastings (1977) 16 ALR 363.3. M and M v IAG New Zealand Ltd  CEIT 0013.
- Mathieson v Tower Insurance Ltd  NZHC 136.
- Ridgecrest NZ Ltd v IAG New Zealand Ltd  NZSC 117.
- QBE Insurance (International) Ltd v Wild South Holdings Ltd  NZCA 447;  2 NZLR 24.
- Bolstad v The Earthquake Commission  NZHC 3283.