[2014] NZCA 446, (2014) 18 ANZ Insurance Cases 62-038
Islington Park Ltd owns a complex of 32 buildings which were the Islington Freezing Works. The defendants, ACE Insurance Ltd, IAG New Zealand Ltd, QBE Insurance (International) Ltd, and The New India Assurance Co Ltd, insured the buildings. Seven of the 32 buildings were damaged in the September 2010 and February 2011 earthquakes.
It is common ground between the parties that the functional replacement cost for all of the buildings is in excess of $40 million, while the depreciated replacement cost is in excess of $20 million.The insured arranged cover with an agreed value for the sum insured of $9 million. Both the insured and the insurers knew that the property was being underinsured. Because of the underinsurance, the insurers raised the possibility of including a condition that the policy would be subject to average. Instead of an average clause, the parties agreed to a "Basis of Settlement" clause.
The issue in this case was whether the cost of building improvements required to comply with current building regulations should be taken into account when determining the cost of repair. The cost of repair is important for determining whether the buildings are a total loss or only a partial loss.
The terms of the policy
The relevant terms of the policy are the Basis of Settlement clause in the Schedule, and the policy's standard Basis of Loss Settlement clause. These provide:
"Basis of Settlement
The basis of settlement in the event of a total loss is Agreed Value. Agreed Value is the sum insured nominated by the Insured at the beginning of the period.
If following loss or damage to any building the estimated cost of repair exceeds 80% of the nominated Agreed Value, or the Insured is prevented from reinstating such loss or damage through the operation of any Act of Parliament or of any Regulations under or framed in pursuance of any such Act or By-Laws of any Municipal or Local Authority or Ad Hoc Bodies, the building shall be deemed to be a total loss.
Partial losses are settled in accordance with Basis of Settlement clause 1.2.1."
and
"1.2 Basis of Loss Settlement
(Other than Specific Property Itemised under Clause 1.3)
1.2.1 Indemnity
It is the Insurers option to either reinstate or replace the property damaged or destroyed, or any part, or incur any expense insured, instead of paying the amount of the loss or damage provided that:
- The Insurers shall not be bound to reinstate exactly or completely, but only as circumstances permit and in a reasonably sufficient manner, and in no case shall the Insurers be bound to expend more in reinstatement, and the insured costs and expenses associated with such reinstatement, than it would have cost to reinstate such property as it was at the time of the occurrence of such loss or damage.
- Proviso (a) does not apply to property which is subject to the provisions of Clause 1.2.2." Clause 1.2.1 was described by the parties as an "old for old" clause. Clause 1.2.2 provided for the reinstatement of specified property, but was not applicable in this case, as there was no specified property.
The High Court
Justice Fogarty decided that the "cost of repair" in the Basis of Settlement clause in the schedules to the policies means the cost of repair of the buildings to their pre-earthquake conditions, excluding any additional cost to meet the requirement of building regulations and statute and the Christchurch City Council.
He also decided that in the Basis of Settlement clause in the Schedules to the policies, after "or", "reinstating such loss or damage" means reinstating the buildings to a condition that is in accordance with building regulations and statute and the Christchurch City Council (rather than reinstating to the same condition as prior to the earthquakes).
The Court of Appeal
The question to be determined in the Court of Appeal was:
In the Basis of Settlement clause in the schedules to the policies, does "cost of repair" mean:
- Cost of repair of the buildings that complies with the requirements of building regulations and statute and the Christchurch City Council; or
- Cost of repair of the buildings that is a functional replacement of the buildings, and that complies with the requirements of building regulations and statute and the Christchurch City Council; or
- Cost of repair of the buildings to their pre-earthquake condition, excluding any additional costs to meet the requirements of building regulations and statute and the Christchurch City Council?
The Court of Appeal upheld the decisions of Justice Fogarty.
They said that:
"Under cl 1.2.1 the insurer indemnifies on an "old for old" basis. The insurer may commission the repair work, which must meet current building regulations, but that does not alter the indemnity... Where repairs are commissioned, the insured must contribute to the extent of any necessary regulatory upgrade costs or betterment.
The policy does not insure any item on a "new for old" basis; reinstatement applies only to specified items and none were specified. But if Islington Park were correct, the policy would have the effect of providing a degree of reinstatement cover where, as in the present example, repairs are estimated to cost more than $7.2M on a "new for old" basis but less than that sum on an "old for old" basis. As Fogarty J held, it would be anomalous if in this one respect only the policy were to provide cover on a reinstatement basis."
They went on to say that:
"the basis of settlement clause calls for comparison between two measures of indemnity: the cost of repairs under cl 1.2.1, and the amount of a deemed total loss ($7.2M) under the schedule. The property is a total loss when the cost of repairs matches or exceeds $7.2M. Comparison of these two measures is the whole point. The cost of repairs must be estimated in the same way under the basis of settlement clause as it is under cl 1.2.1. It would make no sense to do otherwise."
The appeal was accordingly dismissed.
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