Earthquake Commission v Insurance Council of New Zealand Incorporated

• Jurisdiction: New Zealand
• Judge: Heath,Gilbert
• Judgment Date: 10 December 2014
• Neutral Citation: [2014] NZHC 3138
• Docket Number: CIV 2014-485-5698
• Court: High Court
• Date: 10 December 2014

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

[2014] NZHC 3138

Court:

Heath, KÓS and Gilbert JJ

CIV 2014-485-5698

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

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.

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

JUDGMENT OF THE COURT

This judgment was delivered by me on 10 December 2014 at 9.30am pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

CONTENTS

PART 1: INTRODUCTION
The proceeding	[1]
The scheme of the Earthquake Commission Act 1993	[11]
Agreed facts
(a) The Canterbury earthquakes	[22]
(b) The relevant land	[27]
(c) Land classification in Christchurch since the earthquakes	[31]
(d) Flooding Vulnerability	[35]
The Commission's Increased Flooding Vulnerability Policy
(a) Development of the Policy	[39]
(b) The Policy in outline	[45]
(c) Assessment of Increased Flooding Vulnerability	[46]
(d) Settlement of Increased Flooding Vulnerability claims	[49]
(e) A proposed claims review process	[51]
PART 2: THE PROPOSED DECLARATIONS	[53]
PART 3: INTERPRETATION
Is Increased Flooding Vulnerability natural disaster damage to residential land
(a) Background	[58]
(b) Analysis	[63]
(c) Declaration	[80]
Is Increased Flooding Vulnerability natural disaster damage to residential buildings?
(a) Background	[81]
(b) Analysis	[82]
(c) Declaration	[88]
Is Increased Liquefaction Vulnerability natural disaster damage?
(a) Background	[89]
(b) Analysis	[91]
(c) Declaration	[93]
Assessment of indemnity value
(a) Background	[94]
(b) Issue	[100]
(c) Analysis	[105]
(d) Declarations	[125]

PART 4: ANTICIPATORY RELIEF

Declaratory judgments: jurisdiction and discretion
(a) Is judicial review available?	[126]
(b) The Declaratory Judgments Act 1908	[129]
The legitimacy of the Commission's policy
(a) The Commission's statutory obligations	[140]
(b) Consultation on the terms of the Policy	[142]
(c) Issue	[144]
(d) Is the Policy legally valid?	[147]
(e) Can declarations be made?	[152]
(f) Declarations	[160]

PART 5: ENFORCEMENT

Enforcement of the Commission's statutory obligations
(a) The issue	[163]
(b) Analysis	[169]

PART 6: OUTCOME

Costs	[200]
Result	[202]

PART 1: INTRODUCTION

The proceeding

1 In New Zealand, insurance for natural disaster damage is provided by a statutory regime. It is administered by the Earthquake Commission (the Commission) under the terms of the Earthquake Commission Act 1993 (the Act). 1

2 This proceeding concerns damage to residential land 2 that was caused by a series of earthquakes that struck in the Canterbury region, in 2010 and 2011. 3 In particular, it relates to (what has been called) Increased Flooding Vulnerability; a phenomenon when, as a result of a natural disaster (in this case an earthquake) there have been changes to land levels, which have left the land more prone to flooding than it was beforehand. 4 The Commission seeks declarations to give effect to a policy it has developed (the Policy), by which it contends such claims should be resolved. A number of declarations are sought. Some are anticipatory in nature.

3 The questions raised include:

• (a) Is the Commission liable for damage to residential land that results in Increased Flooding Vulnerability?

• (b) If so, how may the Commission settle claims?

• (c) Can a claimant challenge the Commission's determination through court proceedings as an ordinary action or an application for judicial review?

• (d) Can the Commission use standardised methodologies to calculate the appropriate settlement, provided the methodologies comply with the Act and public law principles?

4 Assuming the above questions are resolved in the Commission's favour, it seeks an advance sanction of its Policy to declare its lawfulness, so as to avoid public law challenges to its implementation. Further, it seeks a declaration that claims that it has already settled pursuant to it are lawful.

5 The Commission joined the Insurance Council, Christchurch City Council (the City Council) and Southern Response Earthquake Services Ltd (Southern Response) as defendants to the proceeding. The Insurance Council represents the interests of private insurance companies in New Zealand. The City Council is a territorial authority with responsibility for much of the area affected by the earthquakes. Southern Response is a Crown-owned company which formerly carried on business as a private insurer, under the name of AMI Insurance Ltd. Many affected properties were insured under private insurance policies with that company.

6 Two parties were given leave to intervene. Both Ms Byrne and Ms McMeeking represent what is known as the Flockton Cluster Group. It comprises many homeowners in the Flockton Basin who contend that they have an

Increased Flooding Vulnerability as a result of the earthquakes. The other is Ms D M Culf. She continues to live in an affected property in the Red Zone. 5 Those properties are subject to Increased Flooding Vulnerability. In addition, they are prone to Increased Liquefaction Vulnerability, a topic with which we deal separately at the request of the Insurance Council. 6

7 KÓS J was responsible for pre-trial case management. He appointed two amici curiae:

• (a) Mr Weston QC was appointed to represent homeowners affected by the earthquakes, to ensure that issues relevant to them were ventilated before the Court. While some of those people had chosen to remain living within the Red Zone, Mr Weston advised us that “the vast majority of [Red Zone] properties … have been acquired by the

  Crown reserving rights against private insurers”. 7

• (b) Ms Clark QC was appointed as a contradictor, in relation to questions about whether this Court could properly invoke its declaratory jurisdiction in the circumstances of this case and whether Increased Flooding Vulnerability and Increased Liquefaction Vulnerability constitutes “natural disaster damage”, as that term is defined in s 2(1)of the Act. 8

8 Initially, the City Council also counterclaimed, seeking independent declarations. While shortly before the hearing, the City Council discontinued, it was represented at the hearing by counsel, on a “watching brief”. That caused one problem in relation to a declaration it had sought that Increased Flooding

Vulnerability was a form of “natural disaster damage” that applied not only to residential land, 9 but also residential buildings. 10 As a result of debate during the hearing, the Commission subsequently elected to seek a declaration that Increased Flooding Vulnerability was not natural disaster damage in respect of residential buildings.

9 The Insurance Council filed a counterclaim to seek declarations in respect of a separate (but related) phenomenon; namely, Increased Liquefaction Vulnerability. 11

In the same way that movements in the land create a greater vulnerability to flooding, so it is said that vulnerability to liquefaction damage is also increased.

10 Although the proceeding was filed in the Wellington Registry of this Court, the hearing took place in Christchurch. That change in venue enabled local residents who will be affected by the outcome of the proceeding to attend. Many did. We acknowledge their presence at the hearing.

The scheme of the Earthquake Commission Act 1993

11 The Earthquake and War Damage Act 1944 was the first statute to provide a statutory insurance regime to respond to earthquake damage. At that time, private contracts of fire insurance were coupled with compulsory public cover for earthquake and war damage. 12 The 1944 Act applied to both residential and commercial properties. 13 The statutory insurance scheme was funded by a fire levy imposed under the predecessor of the Fire Service Act 1975. 14

12 In 1951, amendments were made to the 1944 Act to recognise the distinction between indemnity insurance and replacement cover. The need for replacement cover arose out of changes within the private insurance market. In Farmers Mutual Insurance Co Ltd v Bay Milk Products Ltd, Richardson J, delivering the judgment of the Court of Appeal said: 15

The 1944 Act was the first statutory...