Earthquake Commission v Insurance Council of New Zealand Incorporated

JurisdictionNew Zealand
CourtHigh Court
JudgeHeath,Gilbert
Judgment Date10 December 2014
Neutral Citation[2014] NZHC 3138
Docket NumberCIV 2014-485-5698
Date10 December 2014

[2014] NZHC 3138

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

Court:

Heath, KÓS and Gilbert JJ

CIV 2014-485-5698

Between
Earthquake Commission
Plaintiff

And

and
Insurance Council Of New Zealand Incorporated
First Defendant
Christchurch City Council
Second Defendant
Southern Response Earthquake Services Ltd
Third Defendant
Counsel:

J E Hodder QC, B A Scott, T D Smith and G K Rippingale for Plaintiff

D J Goddard QC, J D Every-Palmer and S K Swinerd for First Defendant

D A Ward for Second Defendant

D J Friar and M Powell for Third Defendant

D A Webb and S Goodwin for Flockton Cluster Group (Intervener)

G D R Shand and J A Glucina for Ms D Culf (Intervener) T C Weston QC and K L Clark QC, amici curiae

Catchline: Application by the Earthquake Commission for declarations giving effect to a Policy it had developed for resolving claims relating to increased flooding vulnerability (IFV) — Commission sought sanction of the Policy in advance of its implementation — proceeding concerned damage to residential land caused by the Canterbury earthquakes — whether “natural disaster damage” in the Earthquake Commission Act 1993 included IFV — whether that extended to residential buildings on damaged land which were not themselves independently damaged — whether the Commission could adopt standardised methodologies for calculating the payment of settlements based on an indemnity basis rather than reinstatement — whether it was appropriate to grant anticipatory relief as to the legitimacy of the Policy either by way of judicial review or under the Declaratory Judgments Act 1908 — whether the Policy was valid — whether claimants were limited to judicial review proceedings when challenging the Commission over incorrect determinations as to cover.

The issues were: (1) whether “natural disaster damage” in the ECA included IFV; (2) whether that extended to residential buildings on damaged land which were not themselves independently damaged; (3) whether ILV was natural disaster damage; (4) whether the Commission could adopt standardised methodologies for calculating the payment of settlements and whether the Commission was required to assess claims on a reinstatement basis rather than an indemnity basis; (5) whether it was appropriate to grant anticipatory relief as to the legitimacy of the Policy either by way of judicial review or under the Declaratory Judgments Act 1908 (DCJ); (6) whether the Policy was valid; and (7) whether claimants were limited to judicial review proceedings when challenging the Commission over incorrect determinations as to cover.

Held: (1) whether IFV was natural disaster damage to residential land: The Commission defined IFV as a physical change to residential land as a result of an earthquake which adversely affected the uses and amenities that could otherwise be associated with the land by increasing the vulnerability of that land to flooding events. The physical change to the land was the reduction in the height or level of the land relative to sea level or, in some cases, relative to nearby land, directly resulting from one or more of the earthquakes.

There was no dispute that physical changes to residential land had been caused by a natural disaster; namely, one or more of the earthquakes. These physical changes had resulted in the reduction in height of many areas of residential land. The critical question was whether these physical changes were properly characterised as physical loss or damage to the property for the purposes of the ECA.

The definition of physical loss in s2(1) ECA stated that “physical loss or damage, in relation to property, includes any physical loss or damage to the property that (in the opinion of the Commission) is imminent as the direct result of a natural disaster which has occurred”. The meaning of “physical loss or damage” was not otherwise defined in the Act but it was a commonly used expression in the context of material damage insurance. “Physical damage” required some type of disturbance of the physical integrity of the materials and structures that constituted the body of the house ( O'Loughlin v Tower Insurance). The authorities showed that the word “loss” in the context of building insurance generally meant physical loss, not economic loss.

Natural disaster damage to residential land for the purposes of the ECA required a physical change or loss to the body of the land that had occurred, or was imminent, as the direct result of the earthquakes, and which affected the use or amenity of the land. In this case there had been physical damage to residential land that had been caused by a natural disaster; an earthquake. Thus, the qualifying criterion of “physical … damage” was met and a loss in market value consequent on that damage was covered ( cf: Kraal v Earthquake Commission).

It was necessary to differentiate between the physical loss or damage to the insured land that had occurred as a direct result of the earthquakes and the physical loss or damage that might occur in the future as a result of a flood. Only the former could amount to natural disaster damage caused by the earthquakes. While a later flood might cause natural disaster damage to residential land, the physical damage that it might cause was attributable to that subsequent event.

As a direct result of the earthquakes, there had been a disturbance to the physical integrity of the land, reducing it in volume and leaving the body of the land in a changed physical state. This changed physical state resulted in the land being more vulnerable to flooding, thereby adversely affecting its use and amenity. The primary use of residential land was as a platform for building. Land that was materially more prone to flooding was plainly less suitable for this purpose and was less habitable. The criteria for physical loss or damage were satisfied. IFV constituted natural disaster damage to insured residential land for the purposes of the ECA.

(2) Whether IFV was natural disaster damage to residential buildings: The ECA dealt separately with the insurance against natural disaster damage of residential buildings, residential land and personal property. This emphasised the need to differentiate between physical loss or damage to a residential building and physical loss or damage to the residential land on which it was erected. Where there had been physical damage to land resulting in subsidence, but there had been no change to the physical state or integrity of the structure or materials that comprised the body of the house erected on the land including its foundations, this was to be regarded as damage to the residential land, not to the residential building.

(3) Whether ILV was natural disaster damage: The analysis of whether IFV constituted natural disaster damage under the ECA was equally applicable in relation to ILV. Residential land that was materially more prone to liquefaction damage in a future earthquake because of changes to its physical state as the direct result of one or more of the Canterbury earthquakes, had sustained natural disaster damage in terms of the ECA. These physical changes reduced the use and amenity of the land such that it was now less suitable for use as a building platform and for the other purposes usually associated with residential land.

(4) Methodology for assessment of the claims: The Commission's Policy contemplated that many IFV claims would need to be settled by way of a payment. This was expressly authorised by s29(2) ECA which provided that the Commission was to settle any claim (by payment, replacement, or reinstatement, at the option of the Commission) to the extent to which it was liable under this Act”. The Commission's option to settle claims by paying the amount of the damage was also confirmed in sch 3 ECA which set out the conditions applying to the insurance. Clause 9(1) sch 3 relevantly stated: “The Commission may at its option replace or reinstate any property that suffers natural disaster damage, or any part thereof, instead of paying the amount of the damage”.

The Commission's proposed approach was based on its contention that residential land was insured under the ECA on an indemnity basis and that the amount payable was to be determined by assessing the amount of money required to restore the claimant to the position he or she would have been in if the damage had not occurred. In the case of indemnity insurance, the emphasis was on the actual loss suffered by the claimant as a result of the insured fortuity.

Section 19 set a limit of indemnity based on the value of the residential land, calculated in the prescribed manner, plus the indemnity value of any associated retaining walls, bridges and culverts. The words “to the amount” made it clear that this is the limit of the Commission's liability for such damage. Whereas residential land was insured for its indemnity value, residential buildings and personal property were separately insured against natural disaster damage, under s18 and s20 respectively, for replacement value. Parliament drew a distinction between the indemnity available under the ECA in respect of residential land and that provided for residential buildings and personal property.

The ECA contemplated that the Commission could settle claims for natural disaster damage to residential land by meeting repair or reinstatement costs in appropriate cases. However, repair or reinstatement would not always be an available or appropriate response, particularly with IFV claims in respect of residential land. The Commission had flexibility under the ECA to tailor the indemnity response to meet the particular circumstances of any given case. The Commission's Policy providing for settlement of claims on a diminution of value basis in appropriate cases was consistent with its obligations under the ECA.

(5) Anticipatory nature of relief: Despite the fact that there was no application by a third...

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4 cases
  • Taylor v Attorney-General of New Zealand
    • New Zealand
    • High Court
    • 24 July 2015
    ...members of the Supreme Court expressed agreement at para [82]). See also Earthquake Commission v Insurance Council of New Zealand Inc [2014] NZHC 3138, [2015] 2 NZLR 381 at paras [133] and 113 R v Gordon-Smith (on appeal from R v King) [2008] NZSC 56, [2009] 1 NZLR 721. 114 Ibid, at paras ......
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    ...accrued unconditionally before cancellation, whether or not for debt.” Earthquake Commission v Insurance Council of New Zealand Inc [2014] NZHC 3138, [2015] NZLR 381. action to enforce payment for a sum of money pursuant to a statutory obligation – but discussed whether an action for debt c......

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