Crystal Imports Ltd v Certain Underwriters at Lloyds of London

JurisdictionNew Zealand
CourtHigh Court
JudgeCooper J
Judgment Date19 December 2013
Neutral Citation[2013] NZHC 3513
Docket NumberCIV-2012-404-1539
Date19 December 2013

[2013] NZHC 3513




Crystal Imports Limited
Certain Underwriters at Lloyds of London
First Defendants
Sirius International Insurance Group Limited
Second Defendant

Z G Kennedy and I Rosic for Plaintiff

B D Gray QC and K R Pengelley for First and Second Defendants

Determination of disputed issue in advance of trial — plaintiff sought under an insurance policy to recover losses suffered as a result of the September 2010 and the February 2011 earthquakes in Christchurch — plaintiff was the owner of five properties in Christchurch, three of which had been demolished as a result of earthquake damage — whether the defendants were liable to indemnify plaintiff for the separate damage caused to plaintiff's insured properties by the September earthquake — interpretation of the reinstatement of sum insured clause — whether the doctrine of merger applied.

Held: It was clear that under a material damage clause, the Certificate provided indemnity in respect of the loss or damage caused to the insured properties by the September earthquake. It was also clear the September earthquake was an “event” in terms of the definition at the outset of the Certificate (being “an event or series of events originating from one source or original cause”).

The RSI clause had the effect that to the extent that there was cover as a result of damage caused by the September earthquake, the “amount of insurance cancelled by loss” was automatically reinstated from the date of loss. There were no express words in the policy referring to indemnity on the basis that it was “per event” or for “any one happening”.

However that was implicit in the RSI clause given that a loss for which a claim was payable under the Certificate (and in the absence of written notice to the contrary), the amount of insurance “cancelled by loss” was to be automatically reinstated from the date of the loss. There would be no point in providing for such automatic reinstatement unless it was contemplated that there might be a further claim during the period of the policy. The intent was to ensure that in the event of such a further event causing loss the full amount of cover would be available for each property in accordance with the sums set out in the Schedule. Otherwise there would be no need for reinstatement of the sum insured. The entitlement for each event would simply reduce the balance available for a future event, until such events had used up the full amount.

The statement at the outset of the Certificate, that the underwriter's liability would not exceed the sum insured, did not mean that during the period of the policy the insured's claims were limited to the applicable sum insured. This too would have the effect of robbing the RSI clause of its evidently intended effect that the sum insured was available per event.

There was no reason why an effective notice to cancel the automatic reinstatement could not be given under the RSI clause after the first loss causing event, and before a second such event. The fact that reinstatement occurred automatically did not mean that the “notice to the contrary” provided for by the clause needed to be given prior to the automatic reinstatement. The notice could still be effective if given after the reinstatement, and once given would mean that the reinstatement would not be effective. In such circumstances there would have been notice to the contrary at the time of any subsequent covered loss.

However, if there were to be a second event for which cover was available prior to notice being given, that would have occurred in the absence of written notice to the contrary, and a subsequent notice would then be too late to prevent the availability of cover up to the full amount of the sum insured. The two prerequisites to automatic reinstatement would then exist: the “loss” would have occurred in the absence of notice to the contrary, and there would be nothing to prevent the automatic reinstatement. Automatic reinstatement would occur.

On this approach, to be effective, the “notice to the contrary” had to be given before the second loss causing event. The second event then would only be indemnified as to the available remainder of the sum insured. This approach was available on the language of the RSI clause, and enabled that clause to be read and applied in a manner that was consistent with the other key provisions of the Certificate.

This approach was also appropriate as a matter of commercial reality. If a notice to the contrary was given as contemplated by the RSI clause, it would enable the parties to consider their position and, if appropriate, make appropriate adjustments.

The words “the amount of the insurance cancelled by loss will be automatically reinstated from the date of the loss” had to be construed as referring only to a loss for which a claim had been paid. The Material Damage clause referred to accidental physical loss or damage happening to the insured property. The drafting was only apt to refer to the actual physical damage that was sustained. Similarly, under the Natural Disaster memorandum, cover was for loss or damage directly or indirectly caused by an earthquake. Such loss or damage occurred when the earthquake struck.

The RSI clause referred to a “loss for which a claim is payable”. That language envisaged a loss which was or would be the subject of a claim properly payable, at the stage before the claim was met by the underwriter (insurer had obligation in respect of a claim at the point a relevant event occurred).

The policy was to be construed on the basis for which Crystal contended. It was not necessary to invoke the contra proferentem rule because the effect of the relevant terms of the policy were clear when read together. There was nothing in the recent Court of Appeal judgment in Ridgecrest New Zealand Ltd v IAG New Zealand Ltd that suggested Crystal's argument about the interpretation of the policy was incorrect.

There were no reported cases in which the doctrine of merger had been applied to insurance claims, other than those arising in the context of marine insurance. The question however was whether the doctrine was necessarily confined to that context by reason of the inherent nature of its subject matter. The doctrine of merger had not been applied to marine insurance policies solely because the underwriters would not be liable for unrepaired damage to a vessel until the expiry of the policy – that seemed more likely to be the result of the settled approach, rather than the reason for it ( Ridgecrest). The considerations in those cases did not create a substantial reason for drawing a bright line between marine and other insurance policies with respect to the application of the doctrine of merger.

It was not clear why it was significant that the fact that a replacement for a building that was a total loss could theoretically be insured under the same policy as the destroyed building. The merger doctrine applied in relation to two sets of damage and the implications of the fact that the replacement building was a “new insurance prospect” could be adequately dealt with by mechanisms such as the RSI clause.

The fact some policies created liability as soon as the damage arose (as here) was not a reason counting against the application of the merger doctrine. While it had been said that the crucial question was whether the total loss happened before the underwriter's liability for the unrepaired damage accrued, the question of when the underwriter's liability for damage arose was one which could receive different answers according to the wording of particular policies. This should not be decisive as to the application or non-application of the merger doctrine.

In a contract of indemnity the insurer undertook, as in this case, to indemnify the insured for the loss or damage. Where a building was damaged in one event and totally lost as a consequence of a second event, there was an inherent logic in the proposition that the insured could no longer assert that indemnity involved both payment for the destroyed building and the same building in its previously damaged state. It was illogical to characterise as an indemnity, payment for the cost of repairs that would never be carried out because the building had been destroyed. It made “good sense” to apply the doctrine of merger in this setting ( Kastor Navigation Co Ltd v AXA Global Risks (UK) Ltd (The Kastor Too)). The effect of the RSI clause would have been to reinstate the sum insured in respect of the amounts paid, otherwise the doctrine of merger should apply.

No first instance decision of the HC could be authoritative other than in relation to the facts on which the decision was based. It was important to emphasise in this case the wording of the Material Damage clause, the specified sums insured, and the wording at the outset of the certificate that the insurer's liability would not exceed the sum insured. It made “good sense” to apply the doctrine of merger in this setting.

Frustration could not properly be advance in the context of the present policy, and for the same reasons the CA considered that it was unavailable in Ridgecrest. Having determined that the policy in the present case provided cover for damage arising from both the September and February earthquakes, there could be no proper basis for implying a term to negative that conclusion. Nor would doing so be necessary to give the contract business efficacy.

The value of the insured clause for the purposes of the Average clause would reflect the basis or recovery elected by Crystal in respect of covered damage to that property.

The defendants' liability to indemnify Crystal...

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1 cases
  • Qbe Insurance (International) Ltd v Wild South Holdings Ltd and Maxims Fashions Ltd
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    ...purposes that each of the three earthquakes was a separate event. 5 Crystal Imports Ltd v Certain Underwriters at Lloyds of London [2013] NZHC 3513 at [7] and 6Ridgecrest NZ Ltd v IAG New Zealand Ltd [2014] NZSC 117 [ Ridgecrest]. 7Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [......

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