Firm PI 1 Ltd v Zurich Australian Insurance Ltd T/A Zurich New Zealand

• Jurisdiction: New Zealand
• Judge: Elias CJ,William Young J,McGrath,Glazebrook,Arnold JJ,Arnold J
• Judgment Date: 15 October 2014
• Neutral Citation: [2014] NZSC 147
• Docket Number: SC 141/2013
• Court: Supreme Court
• Date: 15 October 2014

Between

Firm PI 1 Limited

Appellant

and

Zurich Australian Insurance Limited T/A Zurich New Zealand

First Respondent

Body Corporate 398983

Second Respondent

[2014] NZSC 147

Court:

Elias CJ, McGrath, William Young, Glazebrook and Arnold JJ

SC 141/2013

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from a Court of Appeal decision while held that a clause in an insurance policy meant that first respondent insurer's liability was limited to the amount of loss in excess of the statutory cover provided under the Earthquake Commission Act 1993 (“EQC Act”) — apartment building damaged in the Christchurch earthquakes and was a total loss — insurance policy provided that where the statutory cover applied, the insurer's liability was limited to the amount of loss in excess of the statutory cover — application of s30(1) Earthquake Commission Act 1993 (“EQC Act”) (insurance under the Act deemed to be in respect of so much of natural disaster damage as exceeded the sum of the total amount payable under contract in respect of that natural disaster damage…) and s30(3) EQC Act (where the property was also insured against that natural disaster damage, the contract to have effect in all respects as if the property had never been insured under the Act) — use of “commercial absurdity” when interpreting policy — whether the sum insured under the insurance contract for earthquake damage was inclusive or exclusive of the amount payable by the EQC.

Counsel:

M G Ring QC and C R Langstone for Appellant

D J Goddard QC and W A Holden for First Respondent

R G S Hay for Second Respondent

• A The appeal is dismissed.

• B The appellant must pay the first respondent costs of $25,000 plus reasonable disbursements. We certify for two counsel.

JUDGMENT OF THE COURT

REASONS

	Para No
Elias CJ and William Young J	[1]
McGrath, Glazebrook and Arnold JJ	[17]

Elias CJ and William Young J

(Given by Elias CJ)

1 The appeal arises out of the determination of a question stated by agreement of the parties on which the High Court 1 and Court of Appeal 2 have reached different conclusions. The question stated was whether insurance for the replacement value of an apartment complex to a limit of $12.95 million was inclusive or exclusive of statutory insurance under the Earthquake Commission Act 1993. The apartment complex was badly damaged in the Christchurch earthquake of February 2011. The insurer, Zurich Australian Insurance Ltd, argued, unsuccessfully in the High Court but successfully in the Court of Appeal, that the sum for which it may be responsible (should the alternative claim of Body Corporate 398983, which owned the complex, that the replacement value cover limit had been lifted to $100 million fail at trial) is limited to $6.1 million, being the difference between the cover limit of $12.95 million and the $6.8 million paid to the Body Corporate by the Earthquake Commission under the statutory insurance scheme. On appeal to this Court, the firm of brokers which arranged the insurance on behalf of the Body Corporate contends that Zurich is liable to a limit of $12.95 million. The dispute arises because the replacement valuation on which the cover and its limit was based is well short of the $25 million now expected for replacement of the buildings.

2 The appeal turns on the effect of the contract of insurance, objectively assessed in the context of the statutory insurance provisions of the Earthquake Commission Act. The Court of Appeal was of the view that the High Court had approached the question of interpretation on the correct basis. 3 It simply took a different view of the effect of the provisions. On further appeal to this Court, we consider that the general approach to construction taken in the Court of Appeal and in the High Court provides no occasion to traverse again the authorities since Prenn v Simmonds. 4 No novel point of general principle arises. In those circumstances we wish to reserve our positions upon matters of some controversy in this area of law,

which do not arise here but which are touched on in the reasons delivered by Arnold J, which we have had the advantage of reading in draft. Although we do not think discussion of general principles of contractual interpretation is called for here, that is not to say that we have found their application in the present case to be easy. In the end, we have come to a different conclusion from the majority in this Court. We would allow the appeal

The contract of insurance

3 The contract of insurance in issue was concluded in July 2009 by the Body Corporate through its brokers, ACM. 5 The contract, confirmed by ACM in a letter to Zurich, adopted the terms of the “Brokernet” policy (used by ACM) and attached a “Brokernet Policy Certificate”. The Brokernet Policy Certificate was defined to be part of the policy and to constitute, with the policy, “one contract”. The Brokernet policy was a generic document. The Brokernet Policy Certificate identified the particular parties, the property and sum insured, the period of insurance, and excesses. The policy covered “all Loss or Damage to the Property Insured during the Period of Cover due to an Event”. The documents treat the cover for natural disaster damage as an “extension” to cover. That is terminology familiar in policies which do not cover natural disaster except by extension. In connection with natural disaster cover, the policy and the Policy Certificate refer to and cannot be sensibly understood except in the light of the Earthquake Commission Act and the cover it provides for natural disaster damage. “Natural Disaster Damage” is given in the policy the meaning defined in the Act and the cover provided is expressed to be limited to loss which exceeds that covered by the Act.

4 So, cl MD15 of the policy provides what is to happen when the insurance relates to residential property covered by the compulsory cover under the Earthquake Commission Act:

MD15 NATURAL DISASTER DAMAGE

In the event of the Insured having insured residential property for which compulsory Natural Disaster Damage cover under the Earthquake Commission Act 1993 applies then in the event of such property suffering

Natural Disaster Damage during the Period of Cover and covered by Natural Disaster Damage cover, then the Insurer[‘]s liability will be limited to the amount of loss in excess of the Natural Disaster Damage cover.

5 The purpose of cl MD15 cannot be understood without reference to s 30 of the Earthquake Commission Act, itself enacted against the scheme of compulsory insurance provided by the Act in ss 18 to 22. By s 18, residential buildings insured for fire are deemed to be insured under the Act against natural disaster damage (including earthquake damage). The statutory insurance is for replacement value limited to whichever is the least of the amount of fire insurance taken or the amount arrived at by multiplying the number of dwellings in a building by $100,000. 6 In the present case, it is the $100,000 formula that yielded the statutory cover of $6.8 million paid by the Commission. In addition to compulsory insurance piggybacking on fire insurance, s 22 provides that those with insurable interests may enter into contracts of insurance against natural disaster damage with the Commission on a similar basis. Premiums in respect of both compulsory and voluntary insurance with the Commission are set by regulation and s 23 provides for their collection, in the case of compulsory insurance, by the insurer. The premiums at the relevant time were set by regulation at 5 cents plus GST per $100 of cover. 7

6 Against that statutory background, s 30 provides what is to happen where property is also insured “otherwise than under this Act”:

30 Insurance otherwise than under this Act

• (1) Where on the occurrence to any property of natural disaster damage against which it is insured under any of sections 18 to 20, or section 22, the property is also insured against that damage under any contract or contracts made otherwise than under this Act, the insurance of the property under this Act (to the amount to which it is so insured) shall be deemed to be in respect of so much of that natural disaster damage as exceeds the sum of—

  • (a) the total amount payable under that contract or those contracts in respect of that natural disaster damage; and

  • (b) the proportion of the natural disaster damage to be borne by the insured person under the conditions applying to the insurance of the property under this Act.

• (2) Subsection (1) shall not apply with respect to any contract of insurance made otherwise than under this Act to the extent that the contract provides for cover in excess of the amount to which cover is provided under this Act.

• (3) Notwithstanding anything to the contrary in any contract whereby any property is insured against natural disaster damage otherwise than under this Act, where the property is or has at any time also been insured against that natural disaster damage under any of sections 18 to 20, or section 22, the contract shall have effect in all respects as if the property were not and had never been insured under this Act.

7 The effect of these provisions seems to be as follows:

• (a) Subsection (3) counters clauses, common in insurance contracts (and included in the policy here), that there must be recourse first to other insurance before a claim is made under the policy. Because of such provisions, s 30(3) is necessary to ensure the efficacy of subs (1). Notwithstanding such contractual provision, s 30(3) provides that the other insurance contract is to have effect as if the property were not insured under the Act.

• (b) Subsection (1) establishes the general statutory rule that, where property is insured against natural disaster damage privately, the statutory insurance is available only for any excess not covered by the private insurance and...