Morrison and Cross v Vero Insurance New Zealand Ltd

• Jurisdiction: New Zealand
• Judge: Whata J
• Judgment Date: 25 September 2014
• Neutral Citation: [2014] NZHC 2344
• Docket Number: CIV 2013-409-000792
• Court: High Court
• Date: 25 September 2014

BETWEEN

Anthony Brendon Morrison and Gail Cross

Plaintiffs

and

Vero Insurance New Zealand Limited

Defendant

[2014] NZHC 2344

CIV 2013-409-000792

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

Claim for $13.1 million dollars in respect of insurance policy — indemnity value under the policy was capped at $3,482,000 per event of loss — plaintiff claimed there were five earthquake events causing loss to its building — defendant argued it was only liable to indemnify for damage caused by two earthquakes — plaintiff used new modelling technique (measuring the ground shaking intensity of the specified earthquakes and their corresponding relative impact on the resilience of the building over time) as evidence for material damage caused by subsequent events — experts could not agree on reliability of evidence — issues related to the involvement of the defendant's solicitor in actively managing the drafting a joint statement — late addition of expert witnesses — whether the indemnity value was limited to the repair costs associated with the first two events — whether the modelling used by the plaintiff was reliable (and substantially helpful) in allocating damage and repair cost to events of loss — whether construction of new foundations was subject to depreciation — whether the doctrine of merger applied — comments on the caucusing of expert witnesses.

Counsel:

S P Rennie and J E Bayley for Plaintiffs

M Ring QC and P Hunt for Defendant

JUDGMENT OF Whata J

Table of Contents

Introduction	[1]
Summary of findings	[6]
Approach to Assessment	[14]
PART 1 — Context	[15]
The Building	[15]
The effects of the earthquakes on use	[17]
The claims process	[18]
The policy	[20]
PART 2 — The nature, scale and timing of earthquake damage	[54]
The investigations and reports	[54]
The Richardson reports	[55]
The BMC reports	[67]
Dr Ma's review of Weidlinger Associates Inc report	[75]
MWH Recovery Ltd report	[76]
The Weidlinger reports	[79]
Pre hearing expert caucusing	[94]
The evidence	[98]
Allocation assessment	[110]
The modelling	[111]
The criticisms	[121]
The evidence as a whole	[137]
Conclusion	[145]
PART 3 — The indemnity	[146]
Material Damage	[146]
Economic repair and feasibility / destroyed	[156]
Notice	[158]
The deductible	[163]
Depreciation	[168]
Merger	[173]
Quantum	[177]
The problem(s) with caucusing	[178]
Result	[181]
Process from here	[185]

Introduction

1 The Tony Morrison Trust (TMT) 1 owns a building in Woolston, Christchurch. It was severely damaged by the Christchurch earthquakes. Vero Insurance New Zealand Limited (Vero) agreed to indemnify for damage to the building, capped at $3,482,000 per event of loss. TMT claims there were five earthquake events causing loss to the building, namely on 4 September and 26 December 2010, and on 22 February, 6 April and 13 June 2011. If correct, the total amount payable under the policy is estimated by TMT at about $13,100,000. Vero denies it is liable to indemnify five events of loss. Rather it says it was only liable to indemnify for damage caused by the September and February earthquakes. It says that the total amount payable (and in fact paid) for these events is about $3,985,000.

2 TMT employed modelling to identify five major events of loss and then to quantify the extent of the damage caused by those events. Vero rejects this modelling as unreliable. It also contends that most if not all major elements of the building required replacement after the February event so that subsequent damage to the same elements was not material damage for the purpose of an indemnity payment.

3 The central issue to resolve therefore is whether the indemnity value is limited to the repair cost associated with the damage caused by the September 2010 and February 2011 earthquakes. This then raises the following key questions:

• (a) Is the modelling used by TMT reliable and substantially helpful in allocating damage and repair cost to events of loss?

• (b) What was the nature, scale and type of damage, if any, caused by each of the September, December, February, April and June earthquakes?

• (c) Was any material damage caused by earthquakes after the February earthquake for the purpose of an indemnity payment?

4 There are other relatively minor issues relating to the notice requirements, the application of the deductible, and whether the cost of new piles should be included in the indemnity value.

5 After the close of case, the Supreme Court delivered its judgment in Ridgecrest NZ Ltd v IAG New Zealand Ltd 2 and the Court of Appeal delivered its judgment on three related appeals QBE Insurance (International Ltd) v Wild South Holdings Ltd (and Anor), Marriot v Vero Insurance New Zealand Limited and Crystal Imports Limited v Certain Underwriters at Lloyds of London 3 ( QBE et al judgment). These judgments provide guidance on various issues of principle. As will become apparent, the full import of the principles established by these cases is ultimately coloured by their application to the specific policy and the facts of this case. 4

Summary of findings

6 The modelling is reliable and substantially helpful for the purpose of quantifying the capacity for earthquake events to cause damage to the building and as an input for the assessment of the allocation of damage per event of loss. But I do not adopt the essentially arithmetic approach to allocation used by TMT to quantify the indemnity value (that is to multiply the modelled percentage impacts per event into the scope of total repairs). Rather a judgment is needed based on both qualitative and quantitative evidence as to the likely apportionment of damage and repair cost across the events.

7 The majority of the damage to the building was caused by the February event and the remainder of the damage was caused by the September and June events. There is insufficient evidence to be able to conclude that material additional damage was caused by the December and April events.

8 I am unable to apportion the damage or scope of repair in a precise way. But I think that a reasonable allocation of damage and repair cost, in light of the evidence as a whole, should be as follows:

• (a) As per the Vero assessment for the purposes of the September event;

• (b) As per the repair recommendations of the Weidlinger report (March 2014) for the February event;

• (c) As per the repair recommendations of the Weidlinger report (March 2014) for the June event.

9 Indemnity value is capped at the replacement value of an element, so that subsequent damage to an element that already needs to be replaced will not normally be material damage for the purpose of the policy. But, I find that on the balance of probabilities additional material damage requiring repair was caused by the June earthquake.

10 Vero has not been materially prejudiced by the delay in receiving notice of the June event.

11 The application of the “deductible” must be determined in accordance with evidence about the meaning of the term in insurance practice.

12 The cost of new piles should not be included in the assessment of indemnity value. The cost of the new piles should however be included in the reinstatement value for the purposes of the Reinstatement memorandum.

13 I propose to make declarations in terms of my findings.

Approach to Assessment

14 I approach the claim in three parts:

• (a) First, I will describe the context for the assessment;

• (b) Second, I will examine the nature, scale and timing of the damage caused by the earthquakes;

• (c) Third, in light of my factual findings, I will examine the extent of the indemnity liability under the policy to repair the damage.

PART 1 — Context

The Building

15 The building is located at 23 Heathcote Street, Woolston, Christchurch. It is a two-storey industrial/commercial building constructed in the first half of the 20th century. 5 It was originally a wool scouring facility but has since been subdivided into multiple commercial workshop and storage type tenancies. As at November 2012 the building and tenants included among others, Canary Automotive, Affordable LockUp Storage, Furniture Recover Specialists, and InSitu.

16 The site of the building is a gently sloping one from the front (north) down to the Heathcote River at the rear. The riverbank is approximately 15 metres from the rear of the building. The building is accessed via a downwards sloping driveway on the west side to the lower level ground floor and a relatively new suspended concrete ramp provides vehicular access to the upper floor on the east side. The building consists of cast-in-place concrete reinforced frames with concrete masonry unit infill walls at the perimeter of the structure. The first floor is a composite floor with a reinforced concrete slab supported on either an interspan flooring system which consists of precast concrete ribs and timber infills or in some areas a metal deck spanning between the beams of the concrete frame. The mezzanine floor in the ground storey has metal decks supported on steel frames. The mezzanine floor on the

first storey is timber framed. Interior walls are timber framed partition walls with plasterboard. The building is supported on top of cast in-place reinforced concrete slab-on-ground and footings. The sawtooth and gabled roof of the building has corrugated asbestos cement panels or in some areas corrugated metal panels on timber framing

The effects of the earthquakes on use

17 Prior to the earthquakes, Mr Morrison divided the building into ten tenancies and several common areas. Each of the tenancies was rented and he regularly collected rent from the tenants up to the beginning of the earthquake sequence. After the...