Court of Appeal clarifies the effect of aggregation clauses
In Moore v IAG New Zealand Limited, the Court of Appeal provides helpful guidance on how aggregation clauses in insurance policies are to be interpreted and applied.
This case concerned the plaintiff’s home, which was damaged in the February 2011 and June 2011 Christchurch earthquakes. Approximately $2.08 million of damage was caused by the February earthquake and $2.77 million of damage was caused by the June earthquake.
The home was insured during the relevant period by IAG New Zealand Limited (IAG), with a per event sum insured of $2.5 million. While the sum insured ordinarily applies to each successive insured loss occurring within the policy period, this policy contained an aggregation clause, allowing separate losses to be treated as a single loss in certain circumstances for the purpose of determining the limit of cover. The aggregation clause in the policy provided:
The most that we pay for any loss (or any series of losses caused by one event) is the sum insured.
“One event” was defined in the policy to mean “a single event or a series of events which have the same cause”.
The key issue between the parties was the proper interpretation of this clause. They accordingly sought a determination from the High Court as to IAG’s maximum liability for the losses caused by the February and June 2011 earthquakes.
High Court decision
In the first instance, the High Court held that IAG’s liability was capped at the sum insured for both earthquake events. The Court concluded that the losses resulting from the February and June earthquakes were a series of losses caused by a series of events, which had the same cause, being the first earthquake in September 2010. They were therefore “one event” for the purposes of the aggregation clause, entitling the insured to payment of one multiple of the sum insured.
Court of Appeal decision
The insured successfully appealed the High Court’s decision, contending that the two losses, which were four months apart, did not constitute a “series of losses” and that the two earthquakes were not a “series of events”.
In overturning the High Court’s decision, the Court of Appeal held that two separate and distinct occurrences of sudden accidental physical damage occurring four months apart cannot properly be regarded as a series of losses in terms of the aggregation clause.
In reaching this conclusion, the Court of Appeal held that the High Court did not give any weight to the words “series of” in the policy wording – which had been included for a reason and were intended to mean something. The Court considered that these words, according to their ordinary and natural meaning, convey to the reasonable reader some form of linkage and temporal proximity. Two separate and distinct occurrences of sudden accidental physical damage occurring four months apart in the February and June earthquakes could not, the Court held, properly be regarded as a series of losses in terms of the aggregation clause.
Similarly, the February and June 2011 earthquakes could not be considered a series of events. An event means something “which happens at a particular time, at a particular place, in a particular way”, and refers to something specific having happened rather than the reason or underlying cause for what happened. The earthquakes, occurring four months apart, were separate events for the purposes of the aggregation clause.
Given the Court’s finding that the separate losses did not constitute a “series of losses” caused by a “series of events” for the purposes of the aggregation clause, it was not necessary for it to determine whether the losses had the same cause (i.e. the September 2010 earthquake). However, the Court addressed the issue for completeness.
A series of events causing a series of losses (temporally proximate and linked) will have the same cause only if they have the same proximate cause in the usual sense – i.e. if they share a direct, dominant or immediate cause.
After hearing expert evidence on the point, the Court held that the September 2010 earthquake was not the proximate cause of either the February or the June 2011 earthquakes. Although the three earthquakes could be regarded as part of a series of events caused by the accumulation over thousands of years of stresses resulting from the relative movement of the Pacific and Australian plates, the Court held that this causal link did not satisfy the proximate causation test.
This decision highlights that the courts will take a common sense approach to the interpretation of insurance policies, focusing on the meaning that a clause would convey to a reasonable person, reading it as a whole and in context. It will not take an overly technical approach to aggregation clauses, where doing so would result in a strained interpretation.
The decision also highlights the importance of ensuring that insured parties have an appropriate level of cover for a single event, because where losses are sufficiently linked, an aggregation clause might apply to limit cover to a level below the total reinstatement costs.